How to Use Your TFSA to Earn $5,000 Per Year in Tax-Free Income

$5,000 in tax-free passive income might not seem like a lot, but let’s break it down—that’s roughly $416 a month.

That amount can cover a car payment, subsidize part of your mortgage, pay for utilities, or even fund a weekend getaway.

Achieving this level of income requires the right investment vehicle, and one such account that offers this opportunity is the Tax-Free Savings Account (TFSA).

The TFSA lives up to its name, as all income earned within it, including capital gains and dividends, as well as withdrawals, are completely tax-free. This makes it an ideal tool for building and accessing passive income.

In this guide, I’ll show you how you can use Hamilton Enhanced U.S. Covered Call ETF (TSX:HYLD) to generate $5,000 of annual passive income, leveraging the advantages of a TFSA to maximize your returns.

How HYLD works

HYLD operates as a “fund of funds,” meaning it holds a collection of seven other Hamilton exchange-traded funds (ETFs) to provide sector exposure similar to that of the S&P 500 index.

The core strategy of each underlying ETF involves covered call writing. This means they sell call options on stocks they hold, which are derivatives that grant the buyer the right, but not the obligation, to buy a stock at a specified price within a certain time frame.

This strategy generates income from the premiums received for selling these options. However, engaging in covered call writing is not without its trade-offs.

While it does provide immediate cash premiums, it can also limit the potential upside if the stock’s price rises beyond the strike price of the call option.

Essentially, while you gain income, you might miss out on some capital gains if the shares appreciate significantly.

To enhance returns and somewhat mitigate the impact of capped upside gains, HYLD employs leverage—it borrows up to 25% of its value in cash to reinvest.

This use of leverage can amplify the fund’s earnings but also increase volatility and risk, as both gains and losses are magnified.

Despite these complexities, HYLD offers substantial income potential, with a distribution yield of 11.52% as of June 5.

How much you need to invest

Assuming HYLD’s most recent May monthly distribution of $0.143 and the current share price at the time of writing of $13.19 remained consistent moving forward, an investor would need to buy roughly $38,426 worth of HYLD, corresponding to 2,914 shares to receive $5000 annually, or $416.70 monthly.