Yahoo Finance Tax-Free Income: How to Earn $3,600 Per Year Inside a TFSA
Written by Andrew Walker at The Motley Fool Canada
Retirees and other investors who are searching for ways to boost their income without being hit by higher taxes can take advantage of their Tax-Free Savings Account (TFSA) contribution space to build a portfolio of investments that currently offer high returns.
TFSA 101
The government created the TFSA in 2009 to give Canadians an extra tool to set cash aside to meet their financial goals. The TFSA limit is $6,500 in 2023 and will be at least that much in 2024. The cumulative maximum TFSA contribution space is currently $88,000.
The government indexes the TFSA limit to inflation and raises the annual contribution limit by $500 increments. Unused contribution space can be carried forward to future years. In addition, any funds removed from the TFSA during the year will open up equivalent new contribution room in the following calendar year.
All interest, dividends, and capital gains generated inside the TFSA are tax-free and can go right into your pocket. This is particularly important for retirees who collect the Old Age Security (OAS) pension.
OAS clawback
The Canada Revenue Agency does not count TFSA earnings when calculating net world income to determine the OAS pension recovery tax, otherwise referred to as the OAS clawback. Net world income above a minimum threshold triggers a 15% OAS clawback on every dollar of earnings. In the 2023 income year, the threshold level is $86,912.
So, a person with a net world income of $96,912 in 2023 would see their OAS reduced by $1,500 for the July 2024 to June 2025 payment period. This is a big hit that should be avoided, if possible. That is why it makes sense to maximize investments inside a TFSA before holding income-generating investments in taxable accounts.
Best TFSA investments for passive income
Investors can now get great rates on Guaranteed Investment Certificates (GICs) and high yields from top TSX dividend stocks. The best mix depends on a person’s tolerance for risk, the desired return on the investment, and the need for access to the invested funds.
GICs from Canada Deposit Insurance Corporation (CDIC) members are safe as long as the amount is within the $100,000 limit. The funds, however, are locked up for the term of the GIC. Dividend stocks carry capital risk, and dividend payments sometimes get cut. However, many top dividend-growth stocks now appear oversold and offer yields that are above GIC rates.
Enbridge, for example, has increased its dividend annually for 28 years. At the current share price, the stock provides a yield of 8%.
As dividends grow, the return on the initial investment increases. Stocks also provide flexibility, as they can be sold at any time.
The bottom line on TFSA passive income
Investors can quite easily put together a diversified portfolio of GICs and top dividend-growth stocks to get an average yield of 6% today. On a TFSA of $60,000, this would generate $3,600 per year in tax-free passive income that won’t bump the investor into a higher tax bracket or put OAS at risk of a clawback.
The post Tax-Free Income: How to Earn $3,600 Per Year Inside a TFSA appeared first on The Motley Fool Canada.
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The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of BCE.
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