Stock Up Sale
Canadian seniors are searching for ways to get better returns on their hard-earned savings without being bumped into a higher tax bracket or putting their Old Age Security (OAS) payments at risk of a clawback.
OAS pension recovery tax
Retirees who collect OAS need to keep an eye on their annual income. The government has a system in place that implements a pension recovery tax on OAS payments when seniors have net world income in a calendar year that tops a minimum threshold. In 2024, the number to watch is $90,997. Every dollar of net world income above that amount triggers a 15-cent reduction in the total OAS that will be paid in the July 2025 to June 2026 payment schedule. As an example, a person with a net world income of $110,997 in 2024 would see OAS reduced by $3,000 next year. That’s a big hit that should be avoided, if possible.
Anyone who has a decent work pension and receives full Canada Pension Plan (CPP) and OAS, along with other taxable income that could come from Registered Retirement Income Fund (RRIF) payments, Registered Retirement Savings Plan (RRSP) withdrawals, or investments in taxable accounts, can easily top the minimum threshold. It’s true that $91,000 is good pension income, but life is not getting any cheaper, and once you remove all the income taxes on this amount, some people might still find things a bit tight at the end of each month, especially if they are still carrying mortgage payments.
TFSA advantage
One way to generate passive income on savings without being hit by more taxes is to hold the investments inside a Tax-Free Savings Account (TFSA). All interest, dividends, and capital gains earned inside the TFSA can go straight into your pocket and the money does not get included in the net world income calculation.
Retirees have as much as $95,000 in cumulative TFSA contribution space in 2024. If a person has TFSA space open, it makes sense to hold investments in the TFSA before investing savings inside taxable accounts.
Good TFSA investments for passive income
The surge in interest rates over the past two years helped drive up bond yields and boosted the rates investors can get on Guaranteed Investment Certificates (GICs). Retirees can currently get GIC rates above 5% for a one-year term on non-cashable products and above 4% for multi-year commitments. This is an attractive option for investors who don’t want to take on risk and can meet their income needs at these rates.
At the same time, many top TSX dividend stocks currently trade at discounted prices and offer higher yields than GICs. Owning stocks carries risk, but there is also upside potential on a rebound while dividend increases drive up the yield on the initial investment.
TC Energy (TSX:TRP), for example, currently offers a 7.4% dividend yield. The company has increased the dividend annually for more than 20 years.
Telus (TSX:T) has also bumped up its dividend every year for more than two decades. The telecom stock currently provides a 6.9% yield.
The bottom line on top stocks for TFSA passive income
Investors can easily put together a diversified portfolio of GICs and high-yield, dividend-growth stocks that would provide an average return of 5.5% today. On a $95,000 TFSA, this would generate $5,225.00 per year in tax-free passive income that won’t put OAS at risk of a clawback.
