My Plan to Turn a $70,000 TFSA Into $175 a Month, Tax-Free

Did you know that you can legally earn hundreds or thousands of dollars per month tax-free in Canada?

It’s all thanks to the tax-free savings account (TFSA), a tax-sheltered account that lets you earn dividends, interest, and capital gains tax-free.

While it has long been possible for Canadians to defer investment income taxes through registered retirement savings plans (RRSPs), money held in RRSPs becomes taxable on withdrawal. The TFSA is unique in allowing you to withdraw funds tax-free.

So, the TFSA is Canada’s one truly tax-free account.

In the early years of the TFSA, the amounts you could deposit were fairly paltry. But today, you can deposit up to $109,000 provided you meet certain conditions. So, there’s potential to earn hundreds of dollars per month in passive income – thousands if you invest at very high yields (though that’s risky).

All of this is very relevant to me because I’m planning on launching a business venture shortly and will be relying on investment income to get me through the early, not-yet-profitable stages. Having a TFSA that cranks out $175 per month tax-free will be a big help in this regard. With that in mind, here’s my plan to turn a $70,000 TFSA into $175 per month tax-free.

Step 1: Fund the account

The first step to getting any income in your TFSA is to fund the account. In my personal case, I have about $70,000 in TFSAs right now, and $205,000 in total securities spread across RRSPs and TFSAs. I’m not the type of person to go drawing down RRSP funds while still working – that comes with massive taxes. So I’ll have to get my planned “income cushion” from my TFSA alone. That will require substantial yield.

Step 2: Own securities that yield 3% on average with varying payout schedules

The second step in my plan to earn $175 per month in TFSAs is to own securities that yield 3% on average, with varying payout schedules. You could also own just one fund that yields 3% and pays monthly, but most reputable “Canadian high yield” funds I’ve looked at are a little shy of my 3% yield goal. So, I’m looking into a collection of quarterly payers with 3% yields and varying payout schedules.

One example of a stock that meets this description is Fortis Inc (TSX: FTS). I don’t actually own this one, but it yields almost exactly 3%, so it’s good for illustration purposes.

Fortis stock pays a dividend of $0.64 per quarter, or $2.56 per year. At today’s stock price of $82.39, these dividends give the stock a yield of 3.1%. If you invest $70,000 in it, you’ll get about $2,173 back in annual dividend income which, though paid quarterly, averages out to $181 per month.

As you can see, the amounts above add up to $2,173.44 per year, which averages out to $181 per month. This actually overshoots my goal of $175 per month in my personal TFSA, which goes to show that the TFSA is a powerful income-building machine.

Now, I’m not saying you should actually go out and invest all of your money in Fortis. Diversification is important: the Motley Fool generally recommends at least 20 stocks in a portfolio. Still, this is a highly regulated utility with a sensible payout ratio and a CapEx program that will increase its rate base by 6% CAGR over five years. Probably not a bad stock to own.