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What Should You Do With Your Tax Free Savings Account?

Tom Drake — Mon, 03 Jan 2011 10:00:32 +0000

The Tax Free Savings Account is a government program that allows your investments to grow tax free. There is also no tax owed when you withdraw money from your TFSA. With a new year, we now have another $5,000 in contribution room for our Tax Free Savings Account. So what should you do with your TFSA? Lets look at some options.

Use Your Tax Free Savings Account As An Emergency Fund

If you don’t already have an emergency fund, you should consider starting one right away. A TFSA can be a great way to accomplish this since the money is normally easy to get when needed and your savings will grow tax free.

Save Up For Annual Expenses With Your TFSA

Maybe you have large annual expenses like property tax or insurance? Maybe you just want to start saving towards next Christmas? Contribute to your Tax Free Savings Account each month so that you’re prepared for when these bills are due.

We have set up an ING Direct TFSA in my wife’s name to use as both an emergency fund and to save up for our large annual expenses. If you sign up for a new ING Direct TFSA, you can get $25 for free by entering Orange Key 35090351S1.

Your Tax Free Savings Account Can Shield Your Investments From Taxes

Another option it to put some of you investments into the TFSA. A Tax Free Savings Account works especially well if you want to withdraw a tax free income from income trusts and REITs. Income trusts can have various types of distributions, some of them not very tax efficient.

I set up my TFSA with Questrade and invest in REITs and a couple oil income trusts. You can sign up for a Questrade account and get a free $50 in trades with this Questrade promo code.

What do you use your TFSA for? Do you have different plans for this year’s contribution room?

What Should You Do With Your Tax Free Savings Account? originally appeared on Canadian Finance Blog on January 3, 2011.

ING Direct – TFSA With No Fees

Tom Drake — Mon, 13 Sep 2010 09:00:51 +0000

We recently used an Orange Key to set up an ING Direct Tax-Free Investment Savings Account (TFSA) in my wife’s name to use as our emergency fund and saving for annual expenses like Christmas gifts and property taxes. We decided to use ING Direct for three reasons:

Unlike some other banks, this is a TFSA with no fees
The current 2% is a great rate compared to most other banks’ high interest savings accounts
Using an Orange Key (35090351S1) gave us a free $25 when we opened the account

ING Direct Orange Key: 35090351S1

TFSA with no fees

Some banks have TFSA accounts with either administration fees or withdrawal fees. We chose ING Direct because they have no fees. This is especially important in these early years of the TFSA since the fees could wipe out any tax savings from the interest on a relatively small balance.

High interest rate

While a couple years ago, I wouldn’t be calling 2% a “high interest rate”, in the current economy this is about as good as it gets for a savings account. While everyone loves their low mortgage lending rates, the low interest rates have a negative effect when you’re trying to save money and earn interest on it. That said, ING has a good track record of providing one of the best interest rates at any point in time, so I’m hoping to see this rate increase eventually and stay ahead of the competition.

ING Direct does also offer a Tax-Free Guaranteed Investment (GIC) with up to 3% interest. While this account didn’t suit our needs since we plan to access the money, it could be a great way to set up a GIC ladder inside your TFSA.

Orange Key for a free $25

Being able to use an Orange Key for a free $25 helped to break the tie between ING Direct and Ally, which is another good choice for a TFSA, also with no fees and the same interest rate. Once you have your own account, you also get an orange key to refer friends and family and not only do they get $25 added to their ING savings account, buy you will get $25 as well!

If you want to sign up for a TFSA at ING Direct, you can use Orange Key 35090351S1 to get a $25 added to your account for free! Once you sign up, just send them a cheque for you initial deposit of $100 and once they finalize your account you’ll have an extra $25 added. The Orange Key is also good for accounts outside of a TFSA, including high interest savings accounts, GICs, and mutual funds.

ING Direct – TFSA With No Fees originally appeared on Canadian Finance Blog on September 13, 2010.

Canadians and Procrastination

Guest — Thu, 17 Jun 2010 09:00:40 +0000

Many of the challenges in life can be resolved by the process of time, some are created instead. While the do nothing philosophy can work on certain challenges, investing and saving are not one of them.

It has been my experience that Canadians end up doing themselves a financial disservice at times and can be aided and abetted in this by certain Government actions. Many times the actions are well meaning but can have unintended consequences.

Canada Pension Plan

Early in my career I observed the effect of Canada Pension plan. Surely we all realize the lack of real financial merit with CPP? You would have thought this was readily apparent, yet over the years I have seen client after client use CPP as a fairly central and important aspect of their retirement planning. In denying the reality, they were able to postpone saving in favour of greater current consumption and maintaining priorities that reduced retirement savings.

Registered Retirement Savings Plan

I also noted that Canadians will only tend to act when a deadline approaches. Use it or lose it will cause many of us to act. This could be seen in the long lines of people putting funds in RRSP’s to meet the Feb 28 deadline each year. During this last week of the “RRSP Season” we used to work regularly to midnight to make sure we got the funds in and the tax receipts issued. There were two motivations, one was the tax deduction and the other was that if you did not use the deduction, you lost it. There was no carry forward.

Seeing this problem, a benevolent Government changed the rules. You could carry forward unused deduction room for use in a later year. In my opinion this very action has resulted in further procrastination. We do not lose the deduction and can use it next year, “taking away the pressure or need to act now.” So, as a nation we took comfort in this and have reduced our usage of the RRSP deduction. Gone are the long last minute lineups and the “round 2 it” has taken over.

The kindness of Government has resulted in an unintended consequence, we are saving less. Not a good result. How much RRSP contribution room have you built up? Yet, we tend to applaud Government for their kindness and wisdom in this regard. A little like parents letting the kids have the car with no deadlines or rules.

Tax Free Savings Account

The TFSA (tax free savings account) rules have also been made flexible enough that general procrastination rules here as well. Have you setup your TFSA? I thought so!

Now I am not an advocate of tightening the rules. Personally I have fully utilized both programs and do not need the extra kick in the pants that a deadline would impose. However, I sense this is because I am a financial planner, accountant, and focused saver since I was schooled in the ways of my Scottish Grandmother by her admonitions about taking care of the pennies and the dollars will take care of themselves.

This does not, however, prevent me from lamenting about the general level of non-saving and lack of focus present in the general populace. Relying on future government largesse is the height of financial planning folly but I am at a loss as to how to help Canadians get motivated. Other than writing and speaking aloud in the faint hope that those that really need to read this will get motivated. Not holding my breath.

There are ways to get started almost painlessly, but getting started is the challenge.

Author Bio: Bruce McConnachie is a Portfolio Manager and Investment Advisor with the full-service firm Mackie Research Capital Corporation. With a background in accounting (CGA), financial planning (CFP) and finance and real estate (BCom), Bruce offers hands on guidance and management of portfolios for individual and corporate clients.

Canadians and Procrastination originally appeared on Canadian Finance Blog on June 17, 2010.

Real Estate Investment Trust (REIT) Portfolio

Tom Drake — Wed, 25 Feb 2009 11:00:05 +0000

I’m considering holding REITs in my TFSA since they would be a good income earning investment, but not necessarily tax efficient. My first thought was to look into the iShares CDN REIT Sector Index Fund (XRE), but it’s 0.55% MER is rather high for an ETF than only has 11 holdings.

You can replicate more than 55% of the index fund by investing in the four largest Canadian REITs, saving the 0.55% expense and possibly reducing risk by buying the more established, large cap, companies. The four largest are RioCan REIT (REI.UN), Canadian REIT (REF.UN), H&R REIT (HR.UN), and Boardwalk REIT (BEI.UN). Coming close to their actual weighting, a simple way to set up a portfolio would be 40% in RioCan and 20% for each of the other three.

Real Estate Investment Trust (REIT) Portfolio originally appeared on Canadian Finance Blog on February 25, 2009.

Investing Your Charitable Donations Credit

Tom Drake — Thu, 19 Feb 2009 11:00:01 +0000

I was asked a question about my charitable donations post from last week. The question was, instead of the $200 in my example, what if he donated say $1,000 a year… would he be better off getting the credit each year and investing it?

For starters, lets break down the tax credit he would receive, each year or once at the end of 6 years. If you claimed your charitable donation each year you would get $262 back each year come tax time. If you saved up the receipts and filed 6 years together you would have $1,712.

If he was to receive his $262 credit each year and put it into an investment making 5% he would have $1,782, a slight increase over the $1,712 he would receive by saving up the receipts for 6 years. However, if the money went into a savings account or GIC, making 2.5%, he would only have $1,674. With either scenario, the interest earned would also be taxable unless held inside a TFSA or RRSP.

The numbers do work out better if you are fortunate enough to be able to donate $2,000 a year. At that amount, investing the $552 credit each year into a savings account or GIC at 2.5% would give you $3,526, a $74 increase over the $3,452 you would receive by claiming after 6 years. These savings are not huge, but at least you won’t have to hold onto your receipts!

Investing Your Charitable Donations Credit originally appeared on Canadian Finance Blog on February 19, 2009.

TFSA – Tax Free Savings Account

Tom Drake — Thu, 05 Feb 2009 12:00:27 +0000

I’ve had a few people ask about the Tax Free Savings Account, or TFSA. Some get the wrong idea because of the term “savings account”. While you can hold a savings account in the TFSA, you could also use it for stocks, mutual funds, bonds, GICs, etc. The TFSA is basically a shell similar to an RRSP. They both allow you to grow your investment without taxes. Where they differ is when you put money in and when you take it out. With an RRSP, you get a tax refund for money that you put into the plan and then pay tax on the money you withdraw at retirement. With a TFSA you do not get a refund when you put money in, but do not pay any tax when you withdraw money. You also don’t lose your contribution room when you withdraw from a TFSA, you can deposit that amount back in the next year.

For this first year that it’s available, I actually do plan to open a high interest savings account in my TFSA to set up an emergency fund, but this is not the most efficient use of a TFSA as a tax strategy. Since you do not pay taxes on your withdrawal, it is better to have high yielding investments in your TFSA since the expected larger sum will be tax free. With this logic, placing lower yielding investments like bonds and GICs into RRSPs make more sense. You’ll still get the same tax refund for the dollars you put in and when you have to pay tax at retirement it won’t be as high as with stocks or REITs.

One more thing I really like about the TFSA is its use as a income tax shelter. If you were to purchase REITs and other income trusts in your TFSA, you could withdraw the payments they make as a continual tax-free income. If you are pushing your contribution limits, I wouldn’t advise including dividend paying stocks since they are quite tax efficient and the best candidate to be outside of both RRSPs and TFSAs.

TFSA – Tax Free Savings Account originally appeared on Canadian Finance Blog on February 5, 2009.