How Retired Couples Can Earn an Extra $645 Per Month Without Risking OAS Clawbacks

Here’s how holding dividend stocks such as Inter Pipeline Ltd. (TSX:IPL) inside a TFSA can boost income while protecting your OAS pension.

| More on:
Senior couple at the lake having a picnic

Image source: Getty Images

Canadian retirees get their income from a number of sources, including company pensions, CPP and RRIF payments, as well as Old Age Security.

Some even have sideline gigs that could include rental properties or a part-time job to help pay the bills.

One concern for seniors is letting net world income get beyond the minimum threshold the CRA uses to calculate OAS clawbacks. In the 2019 tax year, this amount is $77,580.

Why?

When net income moves above that amount, the CRA implements a pension recovery tax of 15% on the difference between your earnings and the minimum threshold.

Fortunately, there’s a way around the issue. Seniors can earn extra cash without putting the OAS pension at risk by generating the income inside a TFSA, where it’s protected from the tax authorities and won’t count toward your income calculation.

As of 2019, each Canadian resident has as much as $63,500 in TFSA contribution room.

How to invest?

The best bang for your buck arguably comes from dividend stocks, especially now that GIC rates are back down to about 2%.

Let’s take a look at two companies that might be interesting picks for your TFSA income portfolio.

IPL

Inter Pipeline (TSX:IPL) is a player in the midstream segment of the Canadian energy sector. The company owns oil sands pipelines, conventional oil pipelines, and natural gas extraction facilities in Alberta. IPL also owns a bulk liquids storage business in Europe.

Growth comes from strategic acquisitions and new developments. The company’s $3.5 billion Heartland Petrochemical Complex is on schedule and should be in operation by the end of 2021. The site is expected to generate additional average annual EBITDA of $450-500 million.

This should help support ongoing dividend growth. IPL has raised its payout in each of the past 10 years, and sends out its distribution monthly.

The stock currently provides a yield of 6.9%.

CIBC

Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) recently reported solid fiscal Q3 2019 results and raised its dividend.

The bank relies heavily on business generated in Canada but is also expanding its presence south of the border. In fact, CIBC spent more than US$5 billion in the past couple of years to acquire private and commercial banking operations in the United States.

The American operation is expected to expand in the coming years and should provide a nice revenue hedge against any potential downturn in Canada.

CIBC has a large Canadian residential mortgage portfolio. The plunge in bond yields in 2019 is helping ease pressures on the Canadian housing market, as existing homeowners can renew at favourable rates and new buyers are able to enter the market.

The trend of lower rates is expected to continue for some time, so there shouldn’t be too much concern about CIBC or its peers getting hit by a housing crash.

The stock has bounced off the 2019 low, but still appears attractively priced. Investors who buy today can pick up a 5.3% yield.

The bottom line

A TFSA portfolio split between IPL and CIBC would generate an average yield of 6.1%.

On a combined portfolio of $127,000, a couple could earn an additional $7,747 per year, or about $645 per month, without risking the OAS clawback.

Diversification is important and the TSX Index is home to many stocks that provide similar yields and would be great picks for a balanced TFSA portfolio.

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.

Fool contributor Andrew Walker has no position in any stock mentioned.

More on Dividend Stocks

Canadian dollars in a magnifying glass
Dividend Stocks

3 High-Yield Dividend Stocks That Are Screaming Buys Right Now

Are you looking for great income stocks? Here's a trio of high-yield dividend stocks that pay insane yields right now.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Transform a $5,000 TFSA Into a $50,000 Retirement Nest Egg

The TFSA is a powerful tool that can grow a small investment into a substantial retirement nest egg over time.

Read more »

A meter measures energy use.
Dividend Stocks

Is Fortis Stock a Buy, Sell, or Hold for 2025?

Fortis has increased its dividend annually for the past five decades.

Read more »

analyze data
Dividend Stocks

3 Dividend Stocks That Are Screaming Buys in November

Here are three top dividend stocks long-term investors won't want to ignore during this part of the market cycle.

Read more »

senior relaxes in hammock with e-book
Dividend Stocks

Generate $175/Month in Passive Income With a $30,000 Investment

Dividend aristocrats offer reliability, and many of them also offer generous yields. With sizable enough discounts, these yields can become…

Read more »

dividends can compound over time
Dividend Stocks

Best Dividend Stocks to Buy Now for Canadian Investors

These three stocks would be excellent additions to your portfolios, given their solid underlying businesses, consistent dividend growth, and healthy…

Read more »

data analyze research
Dividend Stocks

3 Undervalued Stocks to Watch in November

Not all undervalued and discounted stocks are destined or poised to make a comeback soon, and a protracted timeline can…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

The Perfect TFSA Stocks for Long-Term Growth

Two industry heavyweights are perfect stock holdings in a TFSA for long-term money growth.

Read more »