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Do you want to earn $5,985 per year in tax-free income?
If so, it pays to invest in a tax-free savings account (TFSA).
All forms of employment income are taxable, as are investments not held in registered accounts (RRSPs and TFSAs). Further, even investments held in RRSPs become taxable eventually – although you can defer RRSP taxation for decades.
So, the TFSA is far and away the Canadian retirement vehicle with the best combination of tax-sheltering and withdrawal flexibility. In this article, I will explore how to get $5,985 per year in income from your TFSA.
Invest $89,328 at a 6.7% yield
If you invest $89,328 at a 6.7% dividend yield, you will get $5,985 per year in dividend income. The investment needed to hit the income target is arrived at by dividing the annual income target by a given yield. I went with 6.7% as it’s high but reasonably attainable. Yields approaching 10% (at least trailing yields approaching 10%) are out there, but such high yields tend to indicate that the markets view a stock as risky. Whereas 6.7% seems near the upper limit on the obtainable yield without taking on inordinate risk.
As for the sum invested – $89,328 – it’s a good amount to work with because it’s less than the TFSA contribution limit for someone 33 years old. If you are 33 or older and have never contributed to a TFSA before, you can contribute $95,000 today. So, many Canadians can fully shelter a $89,328 investment inside a TFSA.
Example of a stock that could make this possible
As I wrote previously, a 6.7% yield can be obtained without taking on an extreme amount of risk. That’s good news; the bad news is that such yields are relatively rare. You need to do quite a bit of searching to find a stock that fits the bill.
One example of a stock with a high yield is First National Financial (TSX:FN). It currently yields 6.2%, but its yield has averaged 6.7% over the last 12 months. It gets its high yield from a $0.204167 dividend that’s paid monthly, resulting in $2.45 in dividends per year.
If you invest $96,831.811 in First National stock, you should get $5,985 back in passive income per year. Here’s how the math on that works:
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| First National | $39.44 | 2,443 | $0.204167 per quarter ($2.45 per year) | $498.75 per month ($5,985 per year) | Monthly |
As you can see, you should get quite a bit of passive income from FN stock. Today, you’d have to invest a little more than $95,000 (the presumed TFSA limit for middle-aged Canadians), but for most of the last year, you’d have been able to snap up the stock at a 6.7% yield. At that level, you’d only need to invest $89,328 to get $5,985 per year.
Foolish takeaway
As you can see, getting to$5,985 per year in tax-free income in a maxed out TFSA is quite do-able. It requires a pretty high yield and around $90,000 in contribution room. If you can find quality stocks and have at least $90,000 in TFSA space, you can achieve a nice chunk of tax-free TFSA income.
