Canadian retirees want to get better returns on their savings without being bumped into a higher marginal tax bracket. Seniors who receive Old Age Security (OAS) also have to watch out for the OAS clawback. Using the Tax-Free Savings Account (TFSA) to generate tax-free passive income is one way to achieve this goal.
TFSA limit increase
Most Canadian pensioners have the full cumulative TFSA contribution limit of $88,000 available to them, including the $6,500 TFSA limit in 2023. For 2024, the dollar limit will be at least another $6,500. The government increases the size of the annual limit in increments of $500, indexed to inflation.
Canadians who are not sure how much TFSA space they have available can contact the Canada Revenue Agency (CRA) to get a TFSA contribution room statement or go their My Account section of the CRA website, where all the other tax information is located.
Best TFSA investments for passive income
The types of investments that can be held in a TFSA are similar to what a person can hold in a Registered Retirement Savings Plan (RRSP), but you want to make sure the income on the investment is from a Canadian source to avoid a tax hit.
For investors seeking passive income, it would make sense right now to focus on Guaranteed Investment Certificates (GICs) and top dividend stocks. GICs finally pay decent rates after years of being effectively useless for investors who need to generate income on savings. At the time of writing, the rates available from insured providers range from about 5% for a five-year GIC up to 5.5% for a 12-month GIC. Interest payments can be taken monthly, semi-annually or annually in most cases, but the rate might be different.
GIC rates are probably nearing their peak in this cycle. The Bank of Canada will likely only increase interest rates one or two more times, so there is probably limited upside on GIC rates for short-term certificates, and the long-term rates could start to decline if the market senses the government will need to reverse course to avoid causing a deep recession.
Dividend stocks look cheap today after getting hammered over the past year due to the sharp rise in interest rates. Additional weakness is possible, but once the government indicates it has won the battle against inflation, dividend stocks should rebound.
As such, now is probably a good time for income investors to buy top TSX dividend payers. They are heavily out of favour, and many offer yields above the highest GIC rates. Stocks like Telus (TSX:T) and Enbridge (TSX:ENB), for example, have increased their dividends annually for more than 20 years and currently provide yields of 6.3% and 7.6%, respectively.
The bottom line on TFSA passive income
Seniors have an opportunity to put together a diversified portfolio of GICs and top Canadian dividend stocks that can easily deliver an average yield of 6% today.
On a TFSA of $80,000, this would generate $4,800 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.
