For you Canadians out there old enough to buy a pack of Marlboro lights or Jack Daniels Old No. 7 listen up. If you haven’t heard of – or taught yourself about - a TFSA then you’re going to regret it within 3 years.
Furthermore, if you haven’t done anything about it in the next 10 years then kiss a beautiful, tax-free nest egg and a middle finger to the tax man away.
The TFSA or the Tax Free Savings Account aka The Freeken Sweet Account is the single best instrument in the Great White North (and Wet West) to give you a chance to become wealthy. Sadly, many people will not use it. Others will try and fail to grasp the optimal uses of it.
There are two classes rapidly emerging this generation due, in part, to the tfsa: The Working Class and the Investing Class. You want to belong to the investing class so you can enjoy a glass of fine vino on a boat, looking at mountains and saying, "Ahhh, this is the life," in Spanish, French or even Bengalese.
Allow me to illustrate the TFSA, because they won’t teach you this properly in school.
This easy to read chart shows you how investing the maximum allowable ($5000 the first few years and $5500 more recently when the rules changed) at a 7% rate of return.
I love the smell of compounding interest in the morning!
The independently wealthy set up accounts like this, put money into it, don’t fiddle too much with it, and let it grow. Or they hire a financial advisor to control this all for them. Either way is fine, really, especially after getting familiar with it.
Because I know how to use it properly. No GIC's or crummy 1% "High-Interest" scam accounts from my local bank teller for me.
Go back for a brief moment, take that chart I showed above and multiply it by two for a married or common-law couple. Not a bad nest egg that $1.5 Mill can bring, growing nice and tax-free.
But what does “Tax-Free” actually mean?
It means that the taxman (or woman) keeps his (or her) greedy paws off all the growth that happens in this account. Normally you pay taxes on investment income - taxes in the forms of capital gains, dividend tax, income tax, tax on interest etc… See my earlier posts about this.
These forms of taxes will be the basis of a future post.
Why? Because when you understand how you’re taxed, you can find out how to keep more in your pocket. After all, who knows how to better spend your money than you or your significant other?
Google “What is a TFSA” and “What do I put in my TFSA” and you’ll find lots of websites from major newspapers and big Canadian banks telling you asinine ways of doing nothing and making them money (banks) or reading their material and confusing you even more (major newspapers).
They mean well. But everyone has an angle.
So what’s the government’s angle with TFSA’s? They let you grow money in that account – which they call registered (because they can track it) – completely tax-free.
What’s the catch?
Well, rich people hate that there is a limit to what you can put into it.
From 2009 – 2012, you could only put $5000 per year into this mother trucker. Starting Jan 1st 2013, the Canadian government raised the contribution limit to $5500 per year.
It’s almost 2015, which means you’ve had 6 years to contribute - or $31,000 total. Make that $62,000 with a spouse. This $62,000 can turn into $76,000 at a rate of return of 7% in just 3 years. The caveat here is the rate of return. 7% is not uncommon once you educate yourself a bit.
Money making money, not sweat labour making money. Now we’re talking.
If you want a cool TFSA calculator, they’re all over the web. Finance Canada has a good one: http://www.tfsa.gc.ca/cal-eng.html
Now you can count your chickens eggs not only before they hatch, but before you even buy them (in bulk at Costco, of course).
In the next post, we'll get into the mechanics of how a TFSA works. Most of us, including your author here, have limited attention spans. We can't just spit it all out here at once at the risk of losing people to other, more flashy websites. Now excuse me while I go check some hockey scores and then catch up on Facebook to see what people are doing with their lives.