Retirees and younger investors are using their self-directed Tax-Free Savings Account (TFSA) to hold income-generating investments that can provide a stream of tax-free earnings to complement government pensions and other retirement income.
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TFSA limit 2025
In 2025, the TFSA limit is $7,000. This brings the maximum cumulative contribution space to $102,000 per person for anyone who has qualified every year. The Canadian government created the TFSA in 2009.
Interest, dividends, and capital gains earned inside the TFSA on eligible investments are all tax-free. This means the full value of the earnings can be reinvested or removed as income without worrying about sharing some with the CRA.
Retirees who receive Old Age Security (OAS) pensions should generally consider using their full TFSA contribution space before holding income-generating investments in taxable accounts. Income from a TFSA is not used by the CRA to calculate net world income that determines if a person will be hit by the OAS pension recovery tax, otherwise known as the OAS Clawback. Every dollar in net world income above a minimum threshold triggers a $0.15 reduction in the total OAS to be paid in the following payment period.
The number to keep an eye on in the 2025 income year is $93, 454. For example, a person with 2025 net world income of $103,454 would see their OAS reduced by $1,500 in the July 2026 to June 2027 payment period. When possible, it makes sense to avoid the hit.
TFSA investments
Rates on guaranteed investment certificates (GICs) rose as high as 6% in late 2023 on the back of aggressive rate hikes by the Bank of Canada. Since then, the central bank has reduced interest rates and GIC rates have dropped. That being said, investors can still get non-cashable GICs paying 3% to 3.75% at the time of writing. The rate depends on the issuer and the term of the GIC. This is still comfortably above the current rate of inflation. For capital protection, GICs deserve to be part of the mix for TFSA income investors.
Dividend stocks come with risks. Share prices can fall below the purchase price and dividends can be cut if the company runs into financial problems. That being said, the TSX is home to many top dividend-growth stocks that offer attractive yields and distributions which should be safe.
Enbridge (TSX:ENB) is a good example of a top dividend-growth stock. The board raised the dividend in each of the past 30 years.
Enbridge continues to grow through acquisitions and internal projects. The company spent US$14 billion in 2024 to buy three natural gas utilities in the United States. Enbridge is also working on a $28 billion capital program that will drive earnings and cash flow growth in the next few years. As a result, shareholders should see steady hikes to the dividend.
Investors who buy ENB stock at the current level can get a dividend yield of 6%.
The bottom line on TFSA investing
Retirees can quite easily put together a diversified TFSA portfolio of GICs and top TSX dividend stocks to get an average yield of 4% to 5% today. The strategy reduces overall capital risk while generating returns above the rate of inflation.
