How to Use a TFSA to Generate $363 in Monthly Tax-Free Income

Canadian seniors and other income investors are using their self-directed Tax-Free Savings Account (TFSA) to build portfolios of investments that can generate tax-free earnings to complement CPP, OAS, and other pension payments in retirement.

TFSA limit 2026

The TFSA limit in 2026 is $7,000. This brings the cumulative maximum contribution room to $109,000 per person for anyone who has qualified every year since the government created the TFSA in 2009. A retired couple, therefore, would have as much as $218,000 in TFSA contribution space to use to generate tax-free income.

All dividends, interest, and capital gains earned on qualifying investments held inside the TFSA are tax-free. This means the full value of the earnings can be removed as income or reinvested without any concern about having to set some aside for the government. In addition, the CRA does not count TFSA earnings towards the net world income calculation used to determine the Old Age Security (OAS) clawback that kicks in when net world income tops a minimum threshold. That can make a difference for people who collect good work pensions, as well as full CPP, OAS, and other taxable retirement income.

Are GICs or dividend stocks better for a TFSA?

Guaranteed Investment Certificates (GICs) provide risk-free interest payments on the invested funds as long as the GIC is issued by a Canada Deposit Insurance Corporation (CDIC) member and within the $100,000 limit. The surge in oil prices in recent weeks has driven up inflation fears. This, in turn, has pushed up bond yields, which is why rates offered on GICs have moved higher.

At the time of writing, investors can get non-cashable GICs in the range of 3% to 4%, depending on the term and the issuer. That’s well above the current 2% rate of inflation, so there is an argument to be made for owning GICs right now. The downside of buying a non-cashable GIC is that the funds are locked up for the term of the certificate. When the GIC matures, rates available for renewal might be lower.

Dividend stocks vs GICs

Dividend stocks often provide yields that are above rates offered on GICs. In addition, every increase to the dividend raises the yield on the initial investment. Stocks can be sold at any time, so they also provide liquidity in case there is an emergency need to access the invested cash. Share prices, however, can fall below the purchase price and dividends sometimes get cut if a company runs into cash flow issues.

With markets near record highs, it makes sense for income investors to consider top TSX dividend stocks that should generate steady cash flow to support dividend growth through a downturn.

Enbridge (TSX:ENB), for example, is working on a $39 billion capital program that is expected to drive growth in earnings and distributable cash flow over the next few years. This should support ongoing dividend increases.

Enbridge has raised its dividend in each of the past 31 years. Investors who buy ENB stock at the current level can pick up a dividend yield of 5.3%.

The bottom line

The best mix of GICs and dividend stocks depends on a person’s required returns, need for access to the funds, and tolerance for risk. In the current market conditions, it is possible to put together a diversified portfolio of GICs and quality dividend stocks to get an average yield of at least 4%. On a TFSA of $109,000, this would generate $4,360 per year in tax-free passive income. That’s roughly $363.00 per month.

The post How to Use a TFSA to Generate $363 in Monthly Tax-Free Income appeared first on The Motley Fool Canada.

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More reading

• Canadian Companies With a Track Record of Consistently Raising Their Dividends
• Here’s My Highest Conviction Canadian Stock to Buy Right Now
• Is Enbridge Stock Worth Buying at Its Current Price?
• 4 Secrets I’ve Learned From Studying TFSA Millionaires
• How Splitting $30,000 Across Three TSX Stocks Could Generate $2,092 in Annual Dividends

The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.