Whether you are saving surplus cash for a rainy-day fund or planning for retirement, a Tax-Free Savings Account (TFSA) provides an easy option for Canadian investors to consider. Any Canadian who is 18 years or older and has a valid social insurance number (SIN) can open a TFSA.
All capital gains, interest, and dividend income you earn in this tax savings account are tax-free, as well as withdrawals. With a small but regular contribution to a TFSA, you can create an alternative revenue stream to achieve your goals.
For those looking to do just that, here’s one top way to utilize a TFSA to earn $250 in monthly passive income over time.
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Contribute the maximum amount possible over time
In order to generate $250 per month in passive income with relatively high-yielding assets (such as equities) yielding, say, 5%, investors will need to have around $60,000 invested to generate this kind of monthly income.
Accordingly, investing the maximum amount each year (or at least having an account open and letting one’s annual contribution room roll over) is an important part of bundling up to a $60,000 account (or larger) over time.
It’s also worth noting that not all dividend-paying stocks or fixed-income securities pay out monthly distributions. Thus, in order to achieve a true monthly income stream of $250/month that isn’t lumpy (quarterly or semi-annual distributions can mean big payouts on some months and other months with no income), looking at dividend-paying securities that offer monthly distributions could be the way to go.
A number of top real estate investment trusts (REITs) offer monthly distributions. Additionally, these investment vehicles are generally highly regulated and required to pay out a certain percentage of their cash flows (typically around 90%) to investors. Thus, for those looking to utilize their TFSAs to generate tax-free income streams, REITs can be a great way to go.
Other factors to consider
In addition to investing regularly (which is commonplace advice for most individuals and is worth heeding), there are other factors that investors looking to utilize a TFSA ought to be aware of.
For one, contribution limits change over time (the 2024 limit is $7,000 while the 2023 limit was $6,500, and 2022’s limit came in at $6,000). As inflation continues, investors can expect to be able to contribute more to their TFSA over time. And the good news is that these contribution limits roll over. So, if one year is particularly tight, but an investor has excess funds in the following year, it’s possible to make larger distributions than the yearly limit suggests.
Additionally, choosing the right account is an important step for investors looking to pick their own investments. A number of top Canadian banks provide traditional TFSAs, which are managed by employees and typically utilize the bank’s own mutual funds. The fees with these accounts can be higher than other alternative investments individuals can choose in a self-directed account. This is the route I go, which I think makes sense for the majority of investors (even those who don’t know much about investing) due to the rise of low-cost index funds.
Finally, choosing the assets one wants to put into their TFSA is the last and most important step. Again, I’d encourage most investors to seek passive investments, such as index-tracking ETFs, which can provide incredible diversification at very low management fees. But those looking to pick their own stocks (such as REITs or other passive income-generating investments) can do so in a self-directed account as well.
