Retirees and other investors with cash to put to work are wondering how they can earn extra passive income without having to pay more tax or get hit with a clawback on their Old Age Security (OAS) pensions. One way to achieve the goal is to generate income inside a Tax-Free Savings Account (TFSA).
TFSA limit increase
The TFSA limit is $6,500 in 2023 and is thought to increase to $7,000 in 2024. The current cumulative maximum TFSA contribution room is $88,000 per person. This means retired couples would have as much as $176,000 in TFSA contribution space this year and $190,000 in 2024.
All earnings generated on investments held inside the TFSA are tax-free and can be removed as income that won’t bump you into a higher tax bracket or put Old Age Security (OAS) pension payments at risk of a clawback.
OAS pension recovery tax
Seniors who receive OAS need to keep an eye on the total taxable income that they get from company pensions, the Canada Pension Plan, OAS, Registered Retirement Savings Plan (RRSP) withdrawals, Registered Retirement Income Fund (RRIF) payments, and earnings on investments held in taxable accounts.
As soon as net world income hits a certain level, the Canada Pension Plan implements a clawback on OAS that will be paid in the following year. In the 2023 income year, the minimum income threshold is $86,912. Every dollar of net world income above that amount triggers a 15-cent reduction in the OAS to be paid in the July 2024 to June 2025 period. For example, a senior with net world income of $106,912 in 2023 would take a $3,000 OAS cut next year.
As such, it makes sense to maximize TFSA contribution space before holding income-generating investments in taxable accounts.
Best TFSA investments today for passive income
People with cash available to invest can now get attractive returns from Guaranteed Investment Certificates (GICs) and quality dividend stocks.
A one-year GIC that is non-cashable pays as high as 6% right now, depending on the financial institution. GIC rates for longer terms are paying above 5%. This is pretty good for an investment that is risk-free, as long as the GIC is issued by a Canadian Deposit Insurance Corporation (CDIC) member and is within the $100,000 limit.
Dividend stocks come with risks, but many top dividend-growth stocks have sold off to the point where they now appear undervalued and offer yields above 6% or 7%.
Enbridge, for example, has increased its dividend for 28 consecutive years.
The stock now provides a 7.7% dividend yield, and investors should see the payout continue to increase.
The bottom line on TFSA passive income
It would be quite easy to build a diversified portfolio of laddered GICs and top dividend stocks to get an average yield of 6.25% right now. At this rate of return, couples with the funds to maximize their TFSA contribution space could generate $11,000 in tax-free passive income on their combined portfolios worth $176,000.
