It’s getting harder to stay on top of TFSA contributions, especially as lingering inflation continues to weigh heavily on budgets. Of course, if it’s not possible to make the full $7,000 contribution this year (and yes, it’s quite a hefty commitment for many), perhaps putting it off to a future year could make sense.
Do note that your contribution room will just keep rising, but once there’s finally enough financial wiggle room or some sort of windfall that comes your way, one can make up for lost time with their TFSAs. The flexibility is great, but at the end of the day, the sooner one can contribute and invest their contributions, the more time one’s nest egg will be able to benefit from the power of tax-free compounding.
When the time comes and one has more than enough to contribute a big chunk with an outsized contribution, one must always double-check to ensure that they’re not going over their maximum allowable amount.
The penalties for overcontribution are just so stiff and so easily avoidable!
For investors who have the cash to stash in a TFSA, but want to turn the tax-free account into more of an income generator than a tax-free compounder, there are plenty of great monthly passive income ETFs out there that might make sense to stash away.
A TFSA with a tax-free monthly passive income approach?
Of course, going after high yields comes with its own fair share of risks, but for younger investors who understand the trade-offs, I’m certainly not against going for some of the newer specialty income ETF products that have popped up on the TSX Index in recent years.
They’re tactical, strategic income investments, which, I think, could deserve a place in the portfolio of TFSA investors who want more of an incentive to contribute and invest than just watching the balance steadily rise year after year, while not moving the needle much in the nearer term. Instead of chasing quick capital gains, I’d argue that going for higher-yielding covered call ETFs could be the wiser choice.
In this piece, we’ll look at a covered call ETF that caps upside in bull markets (we’re in a fierce one right now), but offers a very generous yield upfront. Indeed, there are a lot of total return traps on the high-yield ETF market (high yield at the expense of capital gains and total returns, which sums up both), but, for the most part, investors should be ready to put in the due diligence to better get a grasp of what it costs to get that yield some percentage points higher than the norm.
BMO Canadian High Dividend Covered Call ETF
Personally, I’m a fan of the BMO covered call ETF lineup, especially the BMO Canadian High Dividend Covered Call ETF (TSX:ZWC), which pretty much holds large-cap dividend stocks with generous yields while incorporating a covered call strategy on top, which adds to the distributions in any given month.
The underlying basket of blue-chip stocks makes for a rather balanced risk/reward for investors seeking a bit more of an income edge without having to put themselves at great risk. Of course, the management expense ratio is on the higher side at 0.72%, but that’s to be expected for a covered call ETF.
With a nice 5.7% yield, no leverage, and no added complexity (beyond covered calls), the ZWC stands out as a one-stop shop that could help position your next TFSA contribution with cash flow generation in mind.