Tax-Free Savings accounts

[Sherilynn]

The new tax-free savings accounts have attracted a lot of attention and it seems that most people are trying to find a way to leverage them.

Being of fairly limited imagination when it comes to investments, I have simply started transferring my security deposits into them. I figure that money is just supposed to sit in a savings account anyway, so why not make the best of it?

Obviously the $5000 yearly contribution limitation would make this idea rather riduculous for someone with a large number of doors, but for our small (for now!) portfolio, it should work well.

I would be interested to hear other ideas for utilizing the TFSA.

Regards,
Sherilynn

 

[housedoc]

?????
I`m trying to understand money and landlording.
Why would you want to use your tfsa for such a purpose?
As a landlord, don`t you get to write off any taxes paid on the interest earned from those deposits?
You only get a maximum of $5000 per person per year in a tfsa, right?
Wouldn`t you want to maximize the tax free interest on your own money rather than on deducable interest income?
Am I confused or does that make sense?

 

[GarthChapman]

QUOTE (Sherilynn @ Jan 4 2009, 03:05 PM) The new tax-free savings accounts have attracted a lot of attention and it seems that most people are trying to find a way to leverage them.

Being of fairly limited imagination when it comes to investments, I have simply started transferring my security deposits into them. I figure that money is just supposed to sit in a savings account anyway, so why not make the best of it?

Obviously the $5000 yearly contribution limitation would make this idea rather riduculous for someone with a large number of doors, but for our small (for now!) portfolio, it should work well.

I would be interested to hear other ideas for utilizing the TFSA.

Regards,
Sherilynn

Interesting concept. I`m not sure how you would be able to make the most efficient investments by doing that as your SD monies must be in a Trust account. I`m also not sure that you want those non-taxable gains somehow tied into your real estate business - it seems to me that could possibly confuse their eligibility for their tax exempt status. I think you should consult with your tax accountant on this.

 

[Thomas Beyer]

QUOTE (Sherilynn @ Jan 4 2009, 03:05 PM)
The new tax-free savings accounts have attracted a lot of attention and it seems that most people are trying to find a way to leverage them.



Being of fairly limited imagination when it comes to investments, I have simply started transferring my security deposits into them. I figure that money is just supposed to sit in a savings account anyway, so why not make the best of it?



Obviously the $5000 yearly contribution limitation would make this idea rather riduculous for someone with a large number of doors, but for our small (for now!) portfolio, it should work well.



I would be interested to hear other ideas for utilizing the TFSA.



Regards,

Sherilynn


don't do it !



a) it is not your money !

b) the interest is too low for it to make sense

c) it is designed for long term PERSONAL wealth building to accumulate gains or interest tax free !!

d) i.e. buy high growth stocks, ETFs, REITs or Covered CALLS, like on ECA, USO, SU, Wal*Mart @ 11 - 25% !!



Read here how to make 11 % on Wal*Mart (as an example) or 20-29% on an oil ETF in one year, TAX FREE:



http://myreinspace.com/public_forums/General_Discussion/61-8913-What_else_do_you_buy__besides_Apartment_Buildings.html

 

[Nir]

Hi All,

Let`s not waste our keyboards, you only get around 10,000,000 types/key

The banks are spending so much on advertising this "amazing" product when all we`re talking about is like $30 a year:

$5,000 x 0.03 (3% a year interest for example) = $150. assuming 20% tax bracket: $150 x 0.2 = $30. you made $30!

Wow!

Cheers,
Neil

 

[Thomas Beyer]

QUOTE (investmart @ Jan 5 2009, 03:20 PM) Hi All,

Let`s not waste our keyboards, you only get around 10,000,000 types/key

The banks are spending so much on advertising this "amazing" product when all we`re talking about is like $30 a year:

$5,000 x 0.03 (3% a year interest for example) = $150. assuming 20% tax bracket: $150 x 0.2 = $30. you made $30!

Wow!

Cheers,
Neil
Hence: invest with 15%+ returns .. so you make $750 tax free .. and using a 40% marginal tax rate on the last $ earned you save $300 .. 10 times the amount you state !

 

[Nir]

Hi Thomas, 99.9% of the population using this option will make much less than 15%.. closer to 5% if they`re lucky. Also, the average person does not reach the 40% tax bracket. The huge advertisement is for people who will save an amount much closer to $30 than $300

What you mentioned is correct, however my comment was simply about the banks using any opportunity to exaggerate to make money.
Regards, Neil

 

[ohsofrugal]

Well regardless of you saving $30 or $300 the first year, its still a great idea. Sadly, the banks are the only source of financial information for the `average` person so I think its great they are promoting it so hard.

If you choose to contribute the full 5k each year, even if you only make 3% compounded annually - you will have accumulated $187,765.21 all tax free after 25 years. Somebody who earned that with mutual funds and opted to put it in their non-registered account instead will have a taxable capital gain of $31,382.60 upon withdrawal. Even at a 20% tax bracket thats a $6276.52 tax bill that could have been avoided. The effects are obviously more magnified the higher your tax bracket or annual return.

Its not how much you make its how much you keep so whenever the government gives people a chance to keep more, sign me up!

That being said, I will be buying LEAPS or long term options in my Tax Free Savings Account. I believe that a lot of the stocks beaten up these days will be higher 2 years from now and I intend to buy them at todays prices then or sell my LEAPS that have appreciated in value for a nice profit.

 

[GregGillespie]

QUOTE (Sherilynn @ Jan 4 2009, 02:05 PM) The new tax-free savings accounts have attracted a lot of attention and it seems that most people are trying to find a way to leverage them.

Being of fairly limited imagination when it comes to investments, I have simply started transferring my security deposits into them. I figure that money is just supposed to sit in a savings account anyway, so why not make the best of it?

Obviously the $5000 yearly contribution limitation would make this idea rather riduculous for someone with a large number of doors, but for our small (for now!) portfolio, it should work well.

I would be interested to hear other ideas for utilizing the TFSA.

Regards,
Sherilynn

Great question! We looked into how we could utilize the TFSA in our current business model and saw the most relevance within 2nd mortgages.

For example, you can hold arms lengths mortgages in these TFSAs but is it really worth it to register $5k against a property (after fees, legal, etc). So what about pooling 20 of these TFSAs so you can register $100k?? Sure, if you want to deal with 20 RRSP clients, pay 20 different account fees and drive your lawyer mad!

Our thoughts were to wait a few years until people have accumulated $15-$20k+ and then proceed with the 2nd mortgage route.

Thanks,

Greg

 

[klewlis]

Gordon Pape has a new little book explaining the ins and outs of the TFSA`s. Has anyone checked it out yet? I plan to pick it up this weekend.

 

[Thomas Beyer]

QUOTE (investmart @ Jan 5 2009, 11:17 PM) Hi Thomas, 99.9% of the population using this option will make much less than 15%.. closer to 5% if they`re lucky. Also, the average person does not reach the 40% tax bracket. The huge advertisement is for people who will save an amount much closer to $30 than $300

What you mentioned is correct, however my comment was simply about the banks using any opportunity to exaggerate to make money.
Regards, Neil
indeed ..

hence: oil and gas stocks, select Canadian REITs or bank stocks (or even LEAPS - i.e. long term options) may make a lot of sense right now as they are low .. and will likely go up substantially over the next 3-4 years ..

so good for people like my kids in their late teens .. as 30 years of $5000/year + interest free growth does add up substantially !!

 

[LeighF]

Just remember, LEAPS, covered calls, puts and calls are not available to everyone. You have to be approved to do this. If you have time to invest in stocks that much, to watch the market every day and invest your personal time into monitoring your "options", yes you can make money. For me, I`m done with stock investing. I would much rather be real estate investing. I`m not even interested in REITS.

Just my two cents worth ....... oh and coincidentally, that`s how much my stocks are worth now too!!!!! LOL

 

[MonteDobson]

QUOTE (Sherilynn @ Jan 4 2009, 04:05 PM)
The new tax-free savings accounts have attracted a lot of attention and it seems that most people are trying to find a way to leverage them.



Being of fairly limited imagination when it comes to investments, I have simply started transferring my security deposits into them. I figure that money is just supposed to sit in a savings account anyway, so why not make the best of it?



Obviously the $5000 yearly contribution limitation would make this idea rather riduculous for someone with a large number of doors, but for our small (for now!) portfolio, it should work well.



I would be interested to hear other ideas for utilizing the TFSA.


Hi Sherilynn,



There are a number of development projects and cashflowing MIC investments that qualify for the TFSA.



A brief example is where you buy (using cash or RRSP) a series of bonds in an active development project for $10,000 (10 bonds x $1000). With each bond you also receive a coinciding share in the project which are usually $1/share or less (many are a penny each), so 10 shares x $1 = $10. This $10 must be paid as cash, but shares of certain projects can be held within your TFSA. Most of these projects payout investors by way of dividends on the share portion of the investment, while the bond portion earns anywhere from 4-6%. Now you own $10 worth of shares within your TFSA that could grow to ~$7500 after 5 years, TAX FREE (assuming a 15%/year annual return on your initial $10,000 investment). Lastly, you have only used $10 out of $5000 of available contribution room.



We are continuing to research this strategy, but it appears that only some offerings will qualify, while others do not (ie. land banking does not).



More at http://myreinspace.com/public_forums/Real_Estate_Discussion/62-8399-Tax_Free_Savings_Account_Strategies.html or contact me directly for more information.

 

[Goodstuff]

Another thing everyone should be aware of with TFSA`s is that different places have different fees for withdrawals from the TFSA.

For example, certain brokerage houses / banks charge up to $70 to make a withdrawal.
ETrade has told me they don`t charge anything.
So check around.

Why do you think they`re advertising them so heavily? You have to know there is something in it for them if they`re pushing them so hard.

 

[Thomas Beyer]

QUOTE (C2Ventures @ Jan 21 2009, 09:30 PM) Hi Sherilynn,

There are a number of development projects and cashflowing MIC investments that qualify for the TFSA. ...

We are continuing to research this strategy, but it appears that only some offerings will qualify, while others do not (ie. land banking does not).
it appears that the shares have to be from an ACTIVE company to be RRSP or TFSA eligible .. is this the view of the trustee OlympiaTrust, accountant and lawyer ?

 

[gwasser]

These tax free savings accounts may appear tiny but over time they can grow into something quite impressive. How many people in Canada do save $5000 per year?

For many, apart from RRSP savings, this is the best opportunity since the invention of apple pie. Even for people that have substantial investments this is still worth it. Yes it starts out small but $5000k per year invested at 10% tax free is worth a lot - see table below.

I use 10% because that is the average stockmarket return (9.6% including reinvested dividends per year in the U.S.). This 10% per year may seem ironic for some amongst us hit by the current malaise but over the long term this is not far off. I can testify this also from my personel experience. So put your $5K at the start of each year in your TSFA and divide it evenly between a Index fund for the US (say S&P500), for Canada (my favorite is the TSX60) and for the world (MSCI World). Then focus on real estate and make even more money.

Return on Investment 10%

. Contribution Investment Income Year end Balance
Year 1 $5,000.00 $500.00 $5,500.00
Year 2 $5,000.00 $1,050.00 $11,550.00
Year 3 $5,000.00 $1,655.00 $18,205.00
Year 4 $5,000.00 $2,320.50 $25,525.50
Year 5 $5,000.00 $3,052.55 $33,578.05
Year 6 $5,000.00 $3,857.81 $42,435.86
Year 7 $5,000.00 $4,743.59 $52,179.44
Year 8 $5,000.00 $5,717.94 $62,897.38
Year 9 $5,000.00 $6,789.74 $74,687.12
Year 10 $5,000.00 $7,968.71 $87,655.84
Year 11 $5,000.00 $9,265.58 $101,921.42
Year 12 $5,000.00 $10,692.14 $117,613.56
Year 13 $5,000.00 $12,261.36 $134,874.92
Year 14 $5,000.00 $13,987.49 $153,862.41
Year 15 $5,000.00 $15,886.24 $174,748.65
Year 16 $5,000.00 $17,974.86 $197,723.51
Year 17 $5,000.00 $20,272.35 $222,995.87
Year 18 $5,000.00 $22,799.59 $250,795.45
Year 19 $5,000.00 $25,579.55 $281,375.00
Year 20 $5,000.00 $28,637.50 $315,012.50
Year 21 $5,000.00 $32,001.25 $352,013.75
Year 22 $5,000.00 $35,701.37 $392,715.12
Year 23 $5,000.00 $39,771.51 $437,486.63
Year 24 $5,000.00 $44,248.66 $486,735.30
Year 25 $5,000.00 $49,173.53 $540,908.83

 

[albainstar]

i have one. I am using as my emergency fund - which should be held in a low risk place any way
I have it with ing direct so i get about 2-3 percent intrest
Overtime it will grow, maybe in a few years like oasis said i will move into somehting higher yeilding - but probably not as a secure liquid emergency fund is always nessesary

I look at it as a way to save a bit of money I was otherwise just holding in a regular taxable savings account.
Nothing to plan my retierment on but why pay tax on anything if you dont have to?

 

[GaryMcGowan]

Godfried,
I like how you laid it out over 25 years, but also the feds have allowed for increases to the annual contribution amount over time.

$5,000 annual contribution limit will be indexed to inflation in $500 increments

g