Seniors in Canada are seeking strategies to increase the returns on their assets in order to combat rising living expenses and keep tax-free passive income.
Tax-Free Passive Income for Retirees (Photo: Nasdaq)
Tax-Free Passive Income Benefit
Although government pensions like the Old Age Security (OAS) and the Canada Pension Plan (CPP) are adjusted for inflation, retirees may nevertheless find themselves in higher marginal tax brackets as a result of the increase in their pension benefits. A person’s OAS pension recovery tax-free passive income, also known as the OAS clawback, is also put into effect by the Canada Revenue Agency as soon as their net world income reaches a certain minimal level. The amount to pay attention to for the 2023 tax year is $86,912. Every dollar of more net world income results in a 15-cent clawback on the OAS payments the next year.
Holding the investments inside a Tax-Free Savings Account (TFSA) is one strategy to generate investment income while avoiding tax-free passive income consequences. The TFSA contribution cap was raised by $6,500 in 2023. The combined maximum TFSA space per person now stands at about $88,000. That is sufficient to create a sizable investment portfolio that will produce income that is tax-free.
Every year, more contributions are accepted. The TFSA limit will rise by at least $6,500 in 2024. Additionally, any earnings that are taken out of the TFSA free up an equivalent amount of contribution space in the subsequent fiscal year of the tax-free passive income.
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Tax-Free Passive Income Good Investment
Guaranteed Investment Certificates (GICs) are now available to retirees at competitive rates. At the time of writing, one-year GICs are eligible for 5.5% returns for tax-free passive income, and durations of two to five years are eligible for returns over 5%. GICs typically provide you the choice of receiving interest payments monthly, semi-annually, or annually, though the rates may vary according to which option you choose.
An investor of tax-free passive income in retirement might easily put up a balanced portfolio of top Canadian dividend companies and GICs that would currently yield, on average, 6%. This would produce $4,500 in yearly tax-free passive income on a TFSA of only $75,000.
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