TFSA: Tax Free Savings Accounts

There has been a lot of misleading talk surrounding the new TFSA or Tax Free Savings Accounts.

They do NOT have to be Savings accounts.

The account itself is similar to an RSP in that you can hold savings accounts, GIC’s, Mutual Funds, Stocks, Bonds and a few other securities in the account. They also do NOT need to be opened at your bank (and really if you are reading this should have one with me )

Most institutions do not have any annual fee for these accounts and most do not have any transaction fees depending on the security that you hold within the account. You can have more than one TFSA (just like an RSP) however amounts are tracked so that you do not go over the maximum contribution limit (5K for 2009).

If you do go over this limit you will penalized by CRA in the tune of 1% per month for any money that you are over. In my opinion there is little advantage of having more than one since in one account you can hold any mix of the investments mentioned above.

How they work (or are taxed)

Anyone over the age of 18 that is a Canadian resident can open one. No “room” is needed to have one. Unlike an RSP you will NOT get a tax deduction for depositing to them, however, unlike an RSP you will NOT be taxed on any growth within the TFSA. This is where it gets fun. You can use these accounts for many applications. If you do not have an emergency reserve of cash, then this is a great place for it.

You can hold it in a savings account or GIC or Bond, and any interest that you make on that money will be tax free. This is important since interest income is taxed at the highest rate and in some circumstances even higher than earned income. Saving for a house? This is the place to do it as any interest or capitals gains made while saving will not be taxed when you take it to buy your house (or cottage, or car or whatever).

Another very neat and important difference between TFSA and RRSP is that any money you take out of it gets ADDED to your limit for the next year (more on this later). Another application for this account could be for your very aggressive or speculative investments. Let’s say you have an emergency account already, or line of credit that you would use in case of emergency.

Your need for liquid “safe” money is not high so you put 5K into a speculative security, that security hits and you triple your money in a short time. You take the 15K out and put it in your pocket TAX FREE. AND 15K gets added to next year’s TFSA amount. The downside of this is that if you lose any money in the speculative security you cannot claim capital losses either. (ask more about this is it is of interest).

As you can see they are a little bit more complicated in some ways but are also much more flexible and can be used for many different applications. In my opinion (and the opinion of my two close accountants) everyone should have one of these regardless of goal for the money deposited.

There is no downside.

I'm Mad at My Industry

Do you ever get mad at all the things that you think are wrong with your industry, company, workplace...whatever! I have been in the financial services industry for over 20 years of my life.

I love it, I really mean love it.

In my mind (other than playing in the NHL) there is no better job. I meet new people, make new friends, help them financially, and get paid to do it. How can you NOT love this profession? Like most things in life, it is not all roses, and on a day to day basis it is amazingly refreshing to wake up and love starting to work at 5am and never really stop until I got to bed at 11.

However one thing that has been eating at me for probably 15 of those years is the lack of transparency in 2 things in our business. Most clients are completely unaware of HOW THEIR ADVISOR MAKES MONEY (and more importantly why they should care). The biggest "secret" kept from clients is what we can and cannot recommend to our clients. How many Mercedes salespeople are going to tell you, after they learn everything they need to know about your driving needs, that the perfect car for you is a Toyota? Right, none.

Same thing happens in the financial world.

Here is a rough idea as to how it works. MFDA (Mutual Fund Dealers Association) licensed advisors can offer products like, savings accounts, GIC's, Mutual Funds and a few other less known products like Labour Sponsored Funds. Life Insurance companies have "investment" products very similar to mutual funds called segregated funds, and they can also sell GIA's (pretty much like a GIC).

Then you have IIROC (Investment Industry Regulators of Canada, used to be IDA or Investment Dealers Associationg) licensed advisors that can offer you all of the above plus individual securities like Stocks, Bonds, Limited Partnerships, ETF's etc.

In my career I started at our nations 2nd largest bank. I spent 8 years there starting as a teller and leaving as the Assistant Manager. I then started my Independent career (I will come back to what that means in a moment) at an MFDA licensed firm. And now will finish my last (hopefully 40+) years where I am at a full service IIROC firm.

When at the bank and my last firm, I can honestly say that I did a lot of very good financial plans and investment plans for my clients.

The transparency in offerings goes beyond what type of investment (mutual fund, seg fund, stock etc) and this could be an even bigger issue. Here is an example.

Back to cars, ok so you have decided on the Toyota and there is a dealership in town that has a car lot with 50 cars on it or there is another that has 5000. All else being equal, meaning service is great at both, they are equal distance to your home and everything else, where do you think your chances are better of finding the perfect fit for you? Same thing happens in this industry.

There are firms out there that have their own product. Chances are when you go and see an advisor from that firm, that is the product you are going to be offered. But are you told that there are 4950 more cars to choose from at the other location, or even worse that the EXACT same car is cheaper at the other location?
This is what I hate about my industry.

If I have one thing to offer you, I am going to fit it into your life somehow, and tell you how this one thing is perfect for you and how it is going to get you where you want to go. And if it IS the thing that you need, great but shouldn't you be told about other choices so that you can make an informed decision on what is best for your needs? Maybe a segregated fund is what you need, but if it is the only thing I can offer you, what are the chances I am going to tell you that what you really need is a mining stock.

Clients are left in the dark about a lot of things, but how and what your advisor gets paid and what they can and can not offer you should NEVER be hidden.

I would appreciate your comments or questions regarding these matters. Do you know HOW and WHAT your advisor gets paid and WHAT he/she can and can not offer you?

Ethan Sings: Making Gramma Proud