Canadian pensioners are getting hit hard by high inflation, so they need to generate as much income as possible from their savings. Maximizing the benefits of the Tax-Free Savings Account (TFSA) is one way retirees can put more money in their pockets.
TFSA rules
The government created the TFSA in 2009 to give Canadians an extra tool to build wealth and create tax-free income streams. TFSA contribution space increases every year, with the TFSA limit at $6,500 for 2023.
Currently, the maximum cumulative TFSA contribution room is $88,000 per person. In 2024, the TFSA limit will increase by at least $6,500.
All capital gains, dividends, and interest accumulate tax-free inside the TFSA and the earnings are not taxed when removed to provide investors with extra income. In addition, the Canada Revenue Agency doesn’t include the TFSA earnings in the net world income calculation used to determine the Old Age Security (OAS) clawback.
Money removed from the TFSA opens up equivalent new contribution space in the following calendar year. This gives people the flexibility to replace funds if they need to access a big chunk of cash for an emergency or to make a planned purchase.
Best TFSA investments?
Retirees can finally get decent rates above 5% from Guaranteed Investment Certificates (GICs). As long as the GIC provider is on the Canada Deposit Insurance Corporation list, and the amount is within the protected limit, the principal is safe. The downside of a GIC is that you can’t access the principal during the term of the GIC, and the rate is fixed.
Dividend stocks carry more risk. The share price can potentially fall below the purchase price, and sometimes dividends get cut. However, many top Canadian dividend stocks now trade at cheap prices and offer growing dividends with yields that are above GIC rates. Stocks can be sold anytime, so you can lock in a capital gain or simply cash out if there is an emergency need for the funds.
TC Energy
TC Energy (TSX:TRP) is working on a $34 billion capital program that is expected to drive revenue and cash flow growth to support planned annual dividend hikes of at least 3% over the next few years. The board increased the payout annually over the past two decades, so investors should feel comfortable with the guidance.
Despite the positive outlook, TC Energy stock is down considerably in the past 12 months. Rising interest rates are making it more expensive to borrow to fund projects, and the company’s Coastal GasLink pipeline is now expected to cost at least $14.5 billion to build, which is more than double the original budget.
Fortunately, the project is nearly 90% complete, as of the first-quarter (Q1) 2023 earnings report. TC Energy just announced an agreement to raise more than $5 billion through the sale of 40% of its interest in another asset. This should strengthen the balance sheet to help fund other growth initiatives.
The negative pressure on the share price is probably overdone. TRP stock trades near $51 per share right now compared to more than $70 a year ago. Investors who buy the dip can get a 7.3% dividend yield at the time of writing.
The bottom line on TFSA passive income
TC Energy is a good example of a high-yield stock with a growing dividend that now trades at an attractive price.
TFSA investors can quite easily create a diversified portfolio of GICs and top TSX dividend stocks to get an average yield of 6.25% right now. GICs reduce risk to the overall investment and should occupy a percentage of your portfolio according to risk tolerance.
On a TFSA of $88,000, a 6.25% yield would generate $5,500 per year in tax-free income. That works out to an average of $458.33 per month that won’t put OAS pension payments at risk of a clawback!
