I'm sure the majority of my readers have learned about the new financial instrument that the Canadian federal government has announced in their budget; the TFSA (or 'Thank the Feds' Savings Account), aka Tax Free Savings Account. For those of you who would like to know more about these new accounts that will be available starting in 2009, I'm going to refer you to the clever minds that I read on topics like this:
Mike From Four Pillars, The Benefits of Tax Free Savings Accounts
Canadian Capitalist, Tax Free Savings Accounts
Financial Jungle, Tax Free Savings Account
Million Dollar Journey, Federal Budget 2008 Tax Free Savings Accounts (comments)
If you read these 4 posts, they'll provide a pretty good primer on the TFSA. For those of you who are either really bored, or really excited about the TFSA, you could also read the comments attached to each post, which tend to spark ideas and ideas for further discussion.
After having a few days to digest the TFSA, I do feel that it is a huge positive for financially aware Canadians. The trouble is that many Canadians are not very financially aware, and in that respect the TFSA will turn out to be yet another instrument that is beneficial, but underutilized (a la RRSP).
Will We TFSA?
For our situation and goals, starting in 2009 I will maximize my wife's and my TFSA room ($10,000) every year going forward. Considering our current investing strategy and activity in a non-registered account, by not utilizing the TFSA to it's maximum I would be essentially choosing to pay tax our investment gains on that $10,000 portion. Looking at it this way, I really have no choice but to utilize the TFSA to its fullest. As previously mentioned we do both contribute quite a bit to RRSPs, however we emphasize non registered investing for reasons mainly for the purpose of flexibility and availability of capital. The fact that we'll be using the TFSA will affect goal #4, I will have to sum up the total value of 3 accounts now to track progress toward goal #4.
2 comments:
Thanks for the link - I love the "thank the feds" name... :)
Mike
The TFSA is definitely attractive, but is it more attractive than deducting interest expenses?
I figure that, at a 5% rate of interest, and a 35% tax bracket, you could deduct 175bp of interest expense per year on borrowed money. But the value of the TFSA, in the long run (assuming 10% annualized return on equity investments) will only somewhere between 80-150 bp per annum of return.
As you've alluded in the past MG, you use a 5-year fixed rate mortgage, and such mortgage should be up for renewal soon. Seems to me the superior option is to sell your portfolio, pay the mortgage down, refinance the mortgage, and then re-borrow.
Just my 2 cents -- but I think, for a leveraged investor such as yourself, once your affairs are arranged so you can properly deduct interest, that you're still better off keeping your long-term funds outside a TFSA, instead of inside.
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