A Tax-Free Savings Account (TFSA) allows Canadians to earn passive income completely tax-free. You can invest up to another $7,000 in 2024 and your contributions can grow over time without any taxes on capital gains, dividends, or interest. Over the years, even modest investments can grow into significant savings thanks to the tax-free nature of the TFSA, making it a great tool for building wealth and generating passive income. So how could you turn that into $4,600?
Why TFSA?
The TFSA stands out because it allows your investments to grow without worrying about taxes affecting your earnings. Whether you're earning dividends from stocks or seeing capital appreciation in exchange-traded funds (ETFs), all of your earnings remain tax-free within the account. This feature makes it an incredibly powerful tool for generating passive income. Unlike Registered Retirement Savings Plans (RRSPs), there are no penalties for withdrawing funds, making the TFSA a more flexible option for both short-term needs and long-term growth.
To start generating passive income, one of the smartest strategies is to automate your contributions. Many banks and investment platforms allow you to set up automatic transfers to your TFSA. This ensures you're investing consistently and can help your savings grow over time. Reinvestment is another key to maximizing growth. By reinvesting dividends and earnings, a snowball effect is created where your returns begin to generate even more returns.
Reinvesting dividends, in particular, allows your investments to compound. Over time, this compounding effect can significantly increase your passive income. As your portfolio grows, dividends increase, and by reinvesting them, you accelerate the growth of your overall portfolio. The sooner you start and the more consistent you are, the faster your passive income can grow, making it an ideal long-term strategy for Canadians seeking financial freedom.
Consider this safe growth stock
Brookfield Renewable Partners (TSX:BEP.UN) on the TSX is a great investment for Canadians looking to generate passive income. With a forward annual dividend yield of 5.42% at the time of writing and strong earnings momentum, BEP.UN offers growth and income potential. Its quarterly revenue growth of 23% year over year highlights its strong earnings momentum. As one analyst noted, “BEP.UN's focus on renewable energy positions it well for long-term sustainable growth.”
BEP.UN's beta of 0.87 also indicates lower volatility compared to the market, making it a relatively stable investment. Although its profitability metrics show some challenges, the company's long-term focus on renewable energy gives it strong future growth prospects. With an enterprise value of $48.14 billion and a payout ratio of 649.02%, BEP.UN is well positioned for dividend investors seeking stability and stable income in the renewable energy sector. Its high dividend yield makes it a great option for those looking to generate tax-free passive income in their TFSA.
To create that $5,000, let's assume BEP stock rises at its compound annual growth rate (CAGR) of 7%. Add in dividends and this is what you might see.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | FULL PAYMENT | FREQUENCY | TOTAL PORTFOLIO |
| BEP – now | $36 | 1,041 | $1.92 | $1,998.72 | quarterly | $37,476 |
| PEB – 7% | $38.50 | 1,041 | $1.92 | $1,998.72 | quarterly | $40,078.50 |
In a nutshell
As you can see, by investing in 1,041 stocks, you could earn $2,602.50 in returns and $1,998.72 in dividends. That's a total of $4,601.22! Simply put, using a TFSA to invest in options like BEP is a smart way for Canadians to generate tax-free passive income. With its high dividend yield and strong momentum in the renewable energy sector, BEP.UN offers stability and growth. Combine that with automated contributions and rollover strategies, and you have a recipe for turning your investments into a powerful long-term income generator without worrying about taxes affecting your profits.