The Motley Fool Canada »Bank Stocks» TFSA 101: How Retirees Can Earn $ 314.50 More Per Month Without Triggering OAS Clawback
The TFSA offers Canadian retirees a great opportunity to generate tax-free income on savings that will not put their Old Age Security pension at risk from the CRA pension recovery tax.
TFSA limit increase in 2021
The TFSA limit increase is $ 6,000 for 2021. This increases the cumulative maximum TFSA contribution room to $ 75,500. A retired couple would therefore have up to $ 151,000 of space to create a stable, tax-free income stream.
All interest, dividends and capital gains earned in the TFSA remain beyond the reach of the CRA. Investors can withdraw the full value of the profits to add to their other income. For seniors, the CRA does not apply TFSA earnings to the calculation of worldwide net income used to determine OAS clawback.
When income exceeds a certain level, the Canada Revenue Agency imposes a collection tax of 15% on every dollar of income above the minimum amount. The minimum threshold for the 2020 income year was 79,054. So a person with a worldwide net income of $ 89,054 in 2020 would bet with an OAS clawback of $ 1,500. This applies to their OAS payments from July 2021 to June 2022.
Company pensions, CPP, OAS, RRSP withdrawals and RRIF payments are all considered taxable earnings and count in calculating global net income. Employment income from part-time employment or income from rental property is added to the total. Income on investments held in taxable accounts is also included in the composition.
As such, it doesn’t take long for an elderly person receiving a decent work pension to break through the $ 79,000 mark.
Best income stocks to hold in a TFSA
Owning stocks involves risk. The value of the share price may fall below your purchase price. Additionally, dividends can be reduced when a business is in financial difficulty.
However, GICs pay less than 1% these days, so there isn’t much choice but higher dividend stocks to get a decent TFSA return. Fortunately, the TSX Index is home to many large dividend payers that should be safe holdings under almost any economic circumstance.
Let’s take a look at Toronto Dominion Bank (TSX: TD) (NYSE: TD) and BCE (TSX: BCE) (NYSE: BCE) to see why they might be great choices for a TFSA income fund.
Why TD Stock is Good for TFSA Income
TD is the second largest bank in Canada by market capitalization. It is also one of the top 10 banks in the United States. This fact is not well known, but TD has invested billions of dollars over the past 15 years to acquire and strengthen a significant US presence. In fact, the branch network stretches from Maine all the way down the east coast to Florida with more locations in total than in Canada.
The US Exposure offers investors a great way to profit from US economic growth through Canadian equity. TD has one of the best dividend growth rates on the TSX Index in the past 20 years and remains very profitable despite the effects of the pandemic.
At the time of writing, the stock offers TFSA investors a dividend yield of 4.4%.
Is BCE stock still a good buy for seniors?
Seniors have always loved BCE for its reliable and generous dividend. The company is very different today than it was in the past, but the stock still deserves to be a top choice for an income fund.
BCE benefits from a large competitive gap. The company generates adequate free cash flow to support the dividend and has the power to increase the price of its core services when it needs additional cash. Low interest rates are helping ECB borrow at very low levels to fund network upgrades, so more liquidity should be available to investors.
The stock looks cheap right now and offers a solid dividend yield of 6%.
The bottom line
TD and BCE deserve to be benchmarks for a diversified TFSA income fund.
Retirees can easily build a portfolio of top dividend paying stocks that would provide an average return of 5% today. This would generate $ 3,775 per year in tax-free dividends on a $ 75,500 TFSA. This is over $ 314.50 per month, which will not put your OAS at risk.
A retired couple could generate $ 629 per month in tax-free income by taking full advantage of their TFSA contribution space.
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Andrew Walker, a silly contributor, owns shares of BCE and TD.