So How does a TFSA work?
You can contribute whatever the annual maximum is (currently $5500 – but rumours suggest that if the Federal Government of Canada balances their books, it could go up to $10000). Rich people would be going bananas.
What about withdrawals?
Say you have $10,000 in it and want to withdraw $2500 in 2013. You cannot just put it right back in there. You have to wait until the following year to be able to contribute that $2500 back in, PLUS you can contribute the new 2014 allotment of another $5500.
It goes like this - If you withdraw in one year, you can only put that amount withdrawn back in the following year.
Now without further ado (whatever that is), what not to do with your TFSA.
You can contribute whatever the annual maximum is (currently $5500 – but rumours suggest that if the Federal Government of Canada balances their books, it could go up to $10000). Rich people would be going bananas.
What about withdrawals?
Say you have $10,000 in it and want to withdraw $2500 in 2013. You cannot just put it right back in there. You have to wait until the following year to be able to contribute that $2500 back in, PLUS you can contribute the new 2014 allotment of another $5500.
It goes like this - If you withdraw in one year, you can only put that amount withdrawn back in the following year.
Now without further ado (whatever that is), what not to do with your TFSA.
Some common and reckless mistakes:
Why mess with money making money!?
Try not to take what’s appreciating to purchase what will lose value. A $100,000 Porsche in 2004 can be had for around $30,000 in 2014. That same $100,000 would be worth about $200,000 today with a modest 7% return. You can buy that 2004 Porsche for $30k now and have $170k left over, growing.
Your bank will make you believe this is a prudent move (because they want your business, duh) but anyone with half an investment brain will tell you you’re a dummy and then laugh behind your back while laughing in that funny tone that smart rich people laugh in.
Ok so where do I open an account and what the heck do I put in there?
Simple.
- IT IS NOT A CHEQUING ACCOUNT! - So don’t use it to deposit and withdraw money. It is used BEST an investment account. If you want a savings or chequing account, go and open one. If you ask me nice, I’ll tell you where to store your money in the bank and make a killer interest rate comparable to bank GIC’s without any terms and conditions.
- Don’t use it to buy a car, or to save for a vacation or for a minimum down payment condo purchase – You don’t achieve exponential growth shown in the chart above by spending. You put your cash in there, lock it up and watch it grow. Find other sources of income to save for depreciating assets. Removing money in the first 10 to 15 years will significantly decrease the growth you get in years 20-30.
Why mess with money making money!?
Try not to take what’s appreciating to purchase what will lose value. A $100,000 Porsche in 2004 can be had for around $30,000 in 2014. That same $100,000 would be worth about $200,000 today with a modest 7% return. You can buy that 2004 Porsche for $30k now and have $170k left over, growing.
- For the love of the Deity that you believe in - Do not put your TFSA money into a GIC or Term Deposit. If you feel compelled to do this, put down a comment and I’ll tell you in large font how silly you are, you silly goose.
Your bank will make you believe this is a prudent move (because they want your business, duh) but anyone with half an investment brain will tell you you’re a dummy and then laugh behind your back while laughing in that funny tone that smart rich people laugh in.
Ok so where do I open an account and what the heck do I put in there?
Simple.
- Open a self-directed trading account at an online brokerage. RBC Direct Investing, Questrade, ScotiaiTrade and self manage it.
- It's going to be scary, so start with very small amounts to get comfortable. If you have $10,000 laying around and want to get started, only put in $2500 at first to get the feel for it.
This is called testing the waters. You know, you dip your feet in to check if it's good enough for the rest of your body to take the plunge. Few people (aka the cowboys) jump right in.
Or if you have bucket loads of money then you probably already have an investment guy that manages your money for you. You should already be up to speed on TFSA’s if that’s the case. If he hasn’t set you up with one, fire him and get someone else.
Just visit any one of those above mentioned discount brokerages and click the links to open a TFSA, fill out the paperwork they send you, sign a few papers and voila, you’re set up. Don’t be intimidated by the paperwork, it’s not that difficult. The cost should be pennies or free. Anything that costs you a lot of money to set up relative to how much you’re putting in, will likely do you no good.
Note: I opened three TFSA accounts with various brokerages and considered them all before I decided on the right place for me. You’ll get comfortable with it, I promise.
If you walk in to a bank or credit union, they will ask you to open an account with them. You’ll then get a shpiel of how it’s a great tool to save for a car (see above), save for a condo (see above) or to take out money for a vacation (see above). Don't fall for this bait just to open a measly 1-2% high interest (my butt!) savings account.
Speaking of the savings part of the Tax-Free-Savings-Account...
TFSA is not for savings, it is best used for GROWTH and tax avoidance!
The smart game plan is to put stuff that grows or is taxed very high into your TFSA. Putting preferred shares where you already pay low taxes on eligible dividends (see earlier posts) is better kept in a regular, non-registered account.
Now back to the bank tellers.
The really polite bank teller lady will then set you up with one of their “advisors” that peddle products they stuff in there (which they usually get a commission for). Or they’ll put you into ultra-safe GIC’s or Term Deposits because “stock markets are really really scary.”
I’m sure they mean well, but the people you see at the front of the bank and in the offices are trained to get your business. The real deal wealth managers are in the skyscrapers. When you deal with a bank, that’s who you want to deal with.
The GIC and Term Deposit Fallacy
Ok, here's the deal. If you don't like loud music, throwing snowballs at people or you put your seatbelt on when you're not moving in a parking lot then you'll probably love GIC's. You're safe, you're conservative and you avoid risk at all costs. GIC's are for you. Have fun with them and continue to get mad at banks making record profits as the years roll on because of people like you.
So they're safe, you say?
What about when the bank teller recommends putting your TFSA money into a GIC or Term Deposit because it is safe?
Actually, no.
Inflation eating away at your money is something to be weary about. A 2% Term Deposit good for 12 months when the inflation rate is 2% means you’re not making any money (return – inflation rate = real return). So 2% GIC minus 2% equals ZERO percent. Where do i find the inflation rate? Well, right here.
The GIC take home message
If you're not beating the inflation rate, you're losing. Simple as that.
Don’t believe your money is “safe” in a Term Deposit. That’s like someone saving $20 in a vault from 60 years ago for the future. Imagine you found that $20 now, you could barely buy McDonalds meals for a family of four. Inflation has eroded the purchasing power of that $20.
But I digress. Inflation will be talked about more in depth another time. I have to go watch some sports.
Ok one last thing.
Remember this when opening your TFSA, the more that people look at you funny for doing what you’re doing - the more you’re doing it right. Regular people don’t have a clue. That’s your measuring stick.
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