Finally decided what to do with the tax-free savings account

I finally decided what to do with the tax-free savings account (TFSA) recently introduced by the Canadian government. Because I’ve got $5,000 of contribution room to play around with this year, I’ll move my emergency fund into it in a combination of a regular money-market fund and some GICs. Once I move most of my short- and medium-term savings into the TFSA, I can then start looking at it as a way to save for the long term (say, by holding stocks). In the meanwhile, it makes more sense to save the fairly hefty tax levied on my interest income than it does to hold equities in the TFSA in order to avoid capital gains tax a long way down the road.

PCFinancial offers a slightly higher interest rate for their TFSA high-interest savings account (3% to ING Direct’s 2.7%), but they ding you with a $50 transfer fee if you want to move your TFSA money to a different institution (say, if you want to invest in TD e-series mutual funds). You could withdraw for free and deposit it normally, but that still uses up your TFSA contribution room and you won’t be able to contribute as much until the next year. ING Direct doesn’t ding you with the fee and they have better GIC rates, so I’ll probably go for them.

  • I heartily endorse your decision to start your TFSA with cash-like instruments. Be careful about moving into stocks. During a deflation (as we are now in for the first time since the 1930s), everything loses value — except cash, which increases in value since it buys more over time. People in the financial industry claim that stocks appreciate in the long term — true, but after 1929 it took the Dow Jones Industrial Average 25 years to recover to its former level (1954), and few people are willing to hang in that long, so that fact is irrelevant. Do not listen to any financial advisor who has never worked during a bear market (before the current one, the last one was in 1973-74). Safety is the aim now: instead of worrying about the return on your investment, worry about the return *of* your investment. Even money-market funds aren’t safe if they achieve market-leading yields by buying risky commercial paper, for instance. I recommend T-bill funds, which are money-market funds that buy only government T-bills. I cannot overstate the importance of safety in this environment — please email or call or tweet me if you’d like to discuss. (Incidentally, I’m making money in the financial markets these days. I think that makes my comments worth more than those of an industry that asks people to hang in — while they lose their clients’ money.)

  • marco

    Want to do contribute to a bank that really believes in SRI and still get good returns?

    Try Citizens Bank (virtual bank of Van City in BC). Their TFSA account is 2.75%:

    And you’ll feel better about your money! :-)