TFSA Pension: How Couples Can Earn $9,500 per Year in Tax-Free Passive Income

This investing strategy can reduce risk and boost returns.

| More on:
Hand Protecting Senior Couple

Source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Canadian pensioners are taking advantage of their Tax-Free Savings Account (TFSA) contribution room to build investment portfolios that can generate steady tax-free passive income.

TFSA 101

Canada launched the TFSA in 2009 to give people another option to build savings for financial goals. The TFSA limit in 2024 is $7,000 and will likely be $7,000 again in 2025. Since inception, the cumulative maximum TFSA contribution room per person is currently $95,000. That means a retired couple would have as much as $190,000 in investment space to generate income that doesn’t have to be shared with the government.

All interest, taxes, and dividends earned inside the TFSA on qualifying investments are tax-free and can be removed as income or reinvested. In addition, the CRA does not count TFSA earnings towards the net world income calculation used to determine the Old Age Security (OAS) pension recovery tax. This kicks in when a person who collects OAS has net world income that breaches a minimum threshold. The number to watch in the 2024 tax year is $90,997. Every dollar in income above that amount triggers a $0.15 reduction in the total OAS paid out in the next year. For example, a senior with net world income of $110,997 in 2024 would be hit with an OAS clawback of $3,000 in the July 2025 to June 2026 payment period.

One way to minimize the OAS clawback is to make sure available TFSA contribution room is fully used before holding income-generating investments in a taxable investment account.

Good TFSA investments for income

Rates offered on guaranteed investment certificates (GICs) have dropped considerably over the past year and now range from 3% to 4% depending on the term and the provider. That’s still not bad for investors who want zero risk and don’t need higher yields.

Investors who want better returns and can handle the volatility that comes with owning shares of companies might decide to buy dividend-growth stocks. Share prices can fall below the purchase price, and dividends sometimes get cut if a company gets into financial trouble. However, a number of top Canadian dividend stocks have paid distributions for decades and tend to increase the payouts at a steady pace.

Fortis (TSX:FTS) is a good example of a dividend-growth stock. The board has increased the distribution annually for the past 50 years.

Created with Highcharts 11.4.3Fortis PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

Fortis is working on a five-year $25 billion capital program that is expected to increase the rate base from $37 billion to $49.4 billion by 2028. As new assets go into service, the boost to cash flow should support planned annual dividend increases of 4% to 6%. At the time of writing, Fortis provides a dividend yield of 4.1%.

Enbridge (TSX:ENB) is another stock with good dividend growth. The board increased the dividend in each of the past 29 years. Investors who buy ENB stock at the current level can get a dividend yield of 6.5%.

The bottom line on TFSA passive income

Seniors can quite easily put together a diversified portfolio of GICs and stocks to get an average yield of 5% today. On a TFSA of $95,000, this would generate $4,750 per year per person (or $9,500 per couple) in tax-free passive income that won’t put OAS at risk of a clawback.

Should you invest $1,000 in Manulife right now?

Before you buy stock in Manulife, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Manulife wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends Enbridge and Fortis. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

A plant grows from coins.
Dividend Stocks

Where I’d Invest in Canadian Value Stocks for Long-Term Compounding

When markets plunge, Warren Buffett's wisdom shines: Get greedy when others are fearful. Canadian value stocks like Scotiabank await patient…

Read more »

analyze data
Dividend Stocks

How I’d Invest $28,000 in Canadian Natural Resource Stock to Amass Personal Wealth

Investing in TSX dividend stocks such as Enbridge can help you earn a passive-income stream in 2025.

Read more »

hand stacks coins
Dividend Stocks

Got $400? How I’d Start Building Income With 3 High-Yield Stocks for the Long Term

These high-yield dividend stocks have a solid payout history, making them compelling investments to generate passive income.

Read more »

A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies."
Dividend Stocks

I’d Put $15,000 in These 3 Dividend-Growth Champions for Increasing Income Potential

Want to offset some volatility? Here are three defensive dividend-growth champions that can generate a juicy yield right now.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

Transform Your TFSA Into a Cash-Creating Machine With $7,000

Discover how the Tax-Free Savings Account can be your golden goose for generating cash without losing your investment.

Read more »

monthly desk calendar
Dividend Stocks

How I’d Invest $10,000 in Canadian Value Stocks for Monthly Dividend Income

A $10,000-diversified portfolio of value stocks focusing on dividend safety, yield, growth, and payment schedules can provide a reliable source…

Read more »

a person watches a downward arrow crash through the floor
Dividend Stocks

Is This Correction Your Chance? Top 4 Canadian Dividend Stocks on Sale

Stocks may be down, but now is your chance to get some of these top dividend stocks on sale.

Read more »

Confused person shrugging
Dividend Stocks

Where to Invest $2,500 in the TSX Today

These TSX stocks offer attractive dividends and a shot at decent upside on a rebound.

Read more »