How to Use Your TFSA to Earn $420 per Month in Tax-Free Income

I’ve long thought the Canadian government badly misnamed the Tax-Free Savings Account (TFSA). The benefits are excellent, but the name itself leads many people to misuse it.

A surprising number of Canadians never look past the word “savings” and end up parking cash inside an account that is actually designed to be one of the most powerful investing tools available. In short, the TFSA allows your investments to grow tax-free and lets you withdraw money at any time without triggering tax or affecting government benefits.

For younger investors, the TFSA is an ideal vehicle for long-term growth. And for those who are further along in life and starting to prioritize income, it can also be an excellent way to generate tax-free passive cash flow.

There are many ways to do this, but one of my go-to options is Canoe EIT Income Fund (TSX:EIT.UN). This fund simplifies income planning thanks to its fixed monthly distribution of $0.10 per share.

Below, I’ll break down how this fund works, why it fits well inside a TFSA, and exactly how many shares you would need to earn $420 per month in tax-free income.

What is the Canoe EIT Income Fund?

EIT.UN holds a concentrated portfolio of roughly 40 Canadian and U.S. stocks, split close to 50/50. It is actively managed and can use up to 1.2 times leverage, meaning it may borrow modestly to enhance returns.

The hallmark feature is its managed distribution policy, which targets a steady $0.10 monthly payout regardless of short-term market fluctuations. That distribution is funded by a mix of dividends, capital gains, and return of capital.

Because the tax character of those distributions can be complex in a non-registered account, the TFSA is the cleanest place to hold this fund. Inside a TFSA, everything you receive is tax-free, and withdrawals do not need to be tracked or reported.

How the monthly income works

The income math for this fund is refreshingly simple. Every share pays $0.10 per month, or $1.20 per year total in distributions.

The fund typically goes ex-dividend around the third week of each month, with the payment arriving around the middle of the following month. As long as you own the shares before the ex-dividend date, you receive the next payment.

Because the payout is fixed, you don’t need to guess what the yield might be next quarter or worry about variable distributions. You simply decide how much monthly income you want and work backward.

How many shares do you need for $420 per month

To earn $420 per month, you divide your target income by the monthly payout per share.

$420 ÷ $0.10 = 4,200 shares

Owning 4,200 shares of Canoe EIT Income Fund would generate $420 per month, or $5,040 per year. Held inside a TFSA, that income would be entirely tax-free.

How much do you need to invest

Once you know the number of shares, the final step is calculating the capital required. As of writing on December 18, the fund trades at $15.77 per share.

4,200 shares × $15.77 = $66,234

That means you would need to invest roughly $66,234 inside your TFSA to generate $420 per month in tax-free income. The exact amount will fluctuate with the market price, but the share-based income math remains the same.

The post How to Use Your TFSA to Earn $420 per Month in Tax-Free Income appeared first on The Motley Fool Canada.

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More reading

• 1 Way to Use a TFSA to Earn $100 in Monthly Income
• Passive Income: How Much Do You Need to Invest to Make $400 Per Month?

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.