Written by Andrew Walker at The Motley Fool Canada
Retirees are searching for ways to boost the income the receive on their savings without being bumped into a higher tax bracket or getting hit with the Old Age Security (OAS) pension recovery tax. Fortunately, the Tax-Free Savings Account (TFSA) can help.
The TFSA limit is $6,500 in 2023. This brings the cumulative contribution space to a maximum of $88,000 per person. Canadian pensioners can hold investments inside the TFSA to generate tax-free passive income that can go straight into their pockets. The Canada Revenue Agency (CRA) doesn’t include TFSA earnings when calculating net world income used to determine the OAS clawback.
This is a big deal for seniors. The 15% OAS clawback kicks in once net world income tops a minimum threshold. The amount to watch in the 2023 income year is $86,912. Every dollar of net world income above that amount triggers a 15-cent reduction in the OAS payments for the July 2024 to June 2025 period. At net world income of $142,428 for seniors in the 65 to 74 age group, the full OAS gets clawed back next year. The maximum income recovery threshold is $147,979 for seniors who are 74 and older.
Retirement income of $87,000 might sound like a lot, but it doesn’t take long to hit that level when a person receives a decent company pension, Canada Pension Plan, OAS, and other taxable income. Once income tax is removed, many people at this income level are still watching their monthly budgets.
As such, it makes sense to avoid the OAS pension recovery tax, if possible.
GICs or dividend stocks for passive income
A GIC pays as much as 5.5% right now from an insured provider. GICs are risk-free as long as the certificate is from a Canada Deposit Insurance Corporation (CDIC) member and the amount is within the $100,000 limit. On the downside, the investment is locked up for the term of the GIC, so this gives investors less flexibility if they need to access their money. In addition, the rate on the GIC is fixed for the term.
Dividend stocks come with risks. Share prices can go lower, and dividends sometimes get cut if a company runs into financial trouble. However, stocks with great track records of dividend growth tend to rebound when the market recovers, and their dividends normally continue to rise during economic turbulence. Many top TSX dividend stocks now appear undervalued. If an investor needs emergency access to the funds or wants to book profits on a surge in the share price, the stock can be sold.
Top dividend stocks for TFSA passive income
Bank of Nova Scotia, BCE, and TC Energy are good examples of quality dividend stocks that look cheap right now and offer dividend yields of 6.8%, 7%, and 7.8%, respectively.
The distributions should be safe, and the stocks have sold off to the point where investors could see meaningful capital appreciation on the market recovery once interest rates stop moving higher.
The bottom line on TFSA passive income
A diversified portfolio of GICs and top TSX dividend stocks could easily generate an average yield of 6% today. On a TFSA of $88,000, this would provide $5,280 per year in tax-free passive income that won’t put OAS at risk of clawback.
The post How to Use Your TFSA to Earn $5,280 Per Year in Tax-Free Income and Avoid the OAS Clawback appeared first on The Motley Fool Canada.
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The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of BCE.