TFSA – Jan 2009

December 3rd, 2008 by Potato

Well, January 2009 is right around the corner, and now it’s time to start thinking about packing money away in your shiny new TFSA to grow tax-free. What are some of the TFSA options out there?

High Interest Savings: I like the TFSA for a number of reasons, but the fact that it’s so flexible, allowing money to go out and come back without losing contribution room or incurring taxes is probably number one. Because of the flexibility of the account, it’s very well suited to serve as my emergency/medium-term savings fund, which calls out for a high interest savings account. Note, however, that you can’t recontribute until the year after your withdrawl, so don’t plan on using it as a revolving door high interest savings account.

Other Fixed Income: Bonds and GICs are taxed in a fairly harsh way (as are high interest savings accounts). But, they should form at least a small part of one’s portfolio, so the ideal place for them is within a TFSA. However, I haven’t seen any GIC TFSAs advertised yet.

Stocks, index funds: I don’t plan on having any stocks or index funds in my TFSA in the first year, but with $5000 contribution per year, I also don’t plan on having $10k in fixed income/emergency funds by year 2, so next year I will probably switch to having some equities in there. Most likely I’ll throw my index funds in, not necessarily because of tax preference, but for tax simplification: it’s just a lot harder to deal with calculating tax due on a mutual fund than it is for a stock. Note however that US dividend-paying stocks would benefit more from being sheltered. It will also depend on fees, as self-directed RRSPs (for holding US stocks, for instance) generally have annual fees whereas mutual fund RRSPs don’t, and it will probably be the same for the TFSA.

I’d like to go into more detail on the various offerings, but firstly most of the banks haven’t released the details yet, and secondly, that’s been covered by virtually every PF blog out there, so you can easily find it and I’d be wasting my time.

For those who don’t know, the TFSA is the new tax free savings account, just about the only good thing given to Canadians by the Canada’s New Government (and I suspect, only so they can find tax leakage in it and take it away later). You put money you’ve already paid tax on into your TFSA, where it can grow tax-free, and can be taken out tax-free. It’s quite flexible, and in many ways superior to an RRSP (where you put pre-tax money in, it grows tax free, and then you pay tax on the withdrawl). For many people, especially those in lower incomes (low enough that you expect to be in the same or higher tax bracket at retirement as when you’re contributing), it may not make sense to contribute to an RRSP (and indeed, I do not have one yet), and the TFSA might be your first choice of savings vehicle.

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