Canadian retirees can take advantage of their growing Tax-Free Savings Account (TFSA) limit to build investment portfolios of income-generating TSX stocks and Guaranteed Investment Certificates (GICs) to generate tax-free passive income that won’t put their Old Age Security (OAS) pensions at risk of a clawback.
TFSA limit 2024
The TFSA limit is $7,000 in 2024 compared to $6,500 in 2023. This bumps the maximum cumulative TFSA contribution space to $95,000. The size of the TFSA limit is indexed to inflation, with jumps occurring in $500 increments.
All income generated inside the TFSA from interest, dividends, and capital gains is deemed to be tax-free. The full amount of the gains can be removed as passive income or reinvested to build the savings fund. Any amount that is removed from the TFSA during the year opens up equivalent new contribution space in the following year in addition to the regular annual TFSA limit. People who might need to make large withdrawals for a short-term need, for example, have the flexibility to replace the money in the next year.
OAS clawback
TFSA earnings do not count towards the Canada Revenue Agency’s net world income calculation that is used to determine the OAS pension recovery tax. Seniors who received OAS and have high retirement incomes need to keep an eye on the minimum threshold for the OAS clawback. In the 2024 income year, the amount is $90,997. Every dollar of net world income above this level results in a 15-cent reduction in the total OAS that will be paid out in the July 2024 to June 2025 payment period.
It makes sense for most retirees to maximize income-generating investments inside a TFSA before holding investments in taxable accounts.
TFSA Investments for passive income
Pensioners have some attractive choices in the current market conditions for investments to generate TFSA income. Rates on GICs from Canada Deposit Insurance Corporation member providers are in the 4-5% range for non-cashable GICs with terms of up to five years. It makes sense to ladder the terms to balance out the rates earned on the GIC investments.
Investors who can handle more risk in their portfolios might want to add some high-yield dividend stocks to boost the average return. The surge in interest rates over the past two years that helped drive up GIC rates has also led to a pullback in the share prices of many top TSX dividend-growth stocks. The Bank of Canada is expected to start cutting interest rates before the end of 2024, so this might be a good time to pick up some dividend stocks while they remain out of favour.
BCE (TSX:BCE), for example, has a long track record of dividend growth. The stock trades for less than $45 at the time of writing compared to more than $70 at the high point in 2022.
Investors who buy BCE stock at the current level can get a dividend yield of 8.9%. The company expects to deliver 2024 revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) that will be similar to 2023.
TC Energy (TSX:TRP) is another dividend stock that continues to increase its payout each year but trades well below its high. At the time of writing, investors can buy TRP stock for close to $49 per share. The stock was as high as $74 in 2022.
TC Energy generated strong financial results in 2023 and has a large capital program in place to boost cash flow in the coming years. Management intends to increase the dividend annually by at least 3% over the medium term. Investors can currently get a dividend yield of 7.8%.
The bottom line on TFSA passive income
The right mix of GICs and dividend stocks depends on a person’s risk tolerance, required returns, and need for quick access to the invested funds.
In the current market conditions it is possible to build a diversified portfolio of GICs and dividend stocks that would provide an average yield of at least 5.25%. On a TFSA of $95,000, this would generate $4,987.50 per year in tax-free passive income.
