Use a TFSA to Make $800 in Monthly Tax-Free Income

Your TFSA (Tax-Free Savings Account) is a powerful wealth-building engine. The sooner you put it to work, the more effective it’ll be at helping you get on that fast track to a comfortable, maybe even early, retirement. Unfortunately, many Canadians aren’t positioning their TFSAs optimally.

Whether it’s not contributing as much as possible or holding cash in savings rather than investing in stocks, REITs, and growthier securities, I think that not optimizing your TFSA is leaving a lot of compounding power on the table. For Canadian investors who want to supplement their income, the TFSA is an intriguing way to score a decent amount in tax-free passive income.

Of course, to score an extra $800 per month, you’re going to need a hefty principal. Around $800 per month amounts to $9,600 per year. And given the cumulative limit of the TFSA is at $109,000 (though very few Canadians have TFSAs worth this much), one could, in theory, put the amount to good use in a dividend payer to give their income a nice boost. To land $9,600 per year worth of income on a $109,000 TFSA, though, you’ll need to seek out a yield of 8.9%.

Though it is possible, I certainly wouldn’t advise going that far for yield, not only because of the added risks but also because of the capital appreciation and growth you could leave on the table. Higher-yielding exchange-traded funds (ETFs) tend to have very limited growth, and if you’re going to pick an ETF that trades off not only all the capital gains but perhaps suffers capital losses as well to get that yield to where it needs to be, I think the trade-off is not worth the while, especially considering the higher management expense ratios (MERs) that tend to come with super-high-yield ETF products.

Checking out the market’s higher yielders

In terms of the types of stocks that could, in theory, help get an $800 per-month income generator going, something like Telus (TSX:T), which yields 11.22%, could do the trick. With shares viciously tanking by the week, though, one will need to extend oneself on risk by a great deal. And it’s not certain how long the payout will last, especially as analysts and investors brace for a potential trimming of the payout at some point over the next two years or so.

Based on Telus’s dividend, you’d actually score just north of $1,000 per month with $109,000 in invested principal. Of course, it’s inadvisable to go into one stock, especially one that’s under so much pressure when it comes to your TFSA.

A yield-heavy ETF

In my view, BMO Covered Call Utilities ETF (TSX:ZWU) is a great ETF with a 7.2% yield right here. While it’s not quite the 8.9% yield that investors will need, some TFSA investors who’ve contributed and invested might already have a higher principal that would allow the ZWU to amount to $800 per month. Let’s say a TFSA is just shy of $140,000 or so.

Either way, the ZWU stands out as a great passive-income option for investors who want a careful balance of income and defensiveness, even if it means missing out on capital gains potential. If you don’t mind flat to negative returns in the next five years for that hefty distribution (6-8% yield or so), only then is the ZWU worth buying up. Personally, I think it’s not a worthy trade-off unless you’re keen on getting an extra $800 every month.

The post Use a TFSA to Make $800 in Monthly Tax-Free Income appeared first on The Motley Fool Canada.

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More reading

• 1 TSX Dividend Stock to Consider While It’s Down 50%
• All it Takes Is $3,000 in Telus to Generate Hundreds in Passive Income
• 2 Canadian Dividend Giants to Buy With Rates on Hold
• A 11.3% Passive-Income Stock I’d Put My Whole TFSA Contribution Into
• What’s the Deal with Rogers’s Dividend?

Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool recommends TELUS. The Motley Fool has a disclosure policy.