Thinking about the Canadian Tax-free Savings Account

W- and I picked up a 2008-2009 tax planning guide from the Toronto Public Library, and I was pleasantly surprised to find that the tax-free savings accounts (TFSA) recently introduced by the Canadian government can be used to hold equities which will not incur capital gains tax when sold. Now I’m trying to figure out how I should best manage the $5000 TFSA limit I have this year.

Because I’m young and I have some funds I’m not planning to use for a while, I’m leaning towards considering this as part of my retirement portfolio. It won’t be locked in like my registered retirement savings plan is (RRSP), and it won’t be taxed on withdrawal. Withdrawals from the RRSP are added on top of your income, and capital gains taxes are applied. According to this article on TFSAs and RRSPs, it may make sense to hold income-generating investments in the RRSP (where they won’t get taxed as they grow) and things like equities in the TFSA (where you won’t get capital gains tax on large growth).

Of course, that all depends on whether or not you think equities will stop going down and instead regain some value. Prolonged recessions have happened before. Glass-half-full folks could also see this as a great time to pick up mutual funds or individual stocks at a discount, though. =)

Another alternative is to use it as a high-interest savings account for my emergency fund and short-term goals. $5000 There’s currently no other tax-efficient way to store funds I may need/want to access in a bit.

Or perhaps a mix of both!

Decisions… decisions… Anyway, if you’re going for the high-interest savings account, try PCFinancial For guaranteed investment certificates (GICs), try ING Direct (they’re easy to manage and they have decent rates). If you’re going for a mutual fund, try TD Canada Trust – their index e-series funds have the lowest management expense ratio I’ve come across so far, and they’re fairly easy to manage online. =)

Take this blog post with a grain of salt. I’m not a certified financial planner, just a 25-year-old who likes figuring things out.

UPDATE: PCFinancial offers the Tax Free Savings Account with an interest rate of 3.05% on the entire balance of your account (instead of the tiered system of ING), so it beats ING a little bit when it comes to savings accounts. Although at this point, you’re quibbling over 0.35%, which (given the $5000 contribution room) comes out to less than $20. May not be worth opening another account for over one year, and interest rates tend to fluctuate anyway.

Gen Y Growing Up: My first chat with a financial planner

Another milestone! Today, I consulted a financial planner for the first time. I’d been meaning to find a financial planner who could review my setup and suggest other best practices, and I learned a lot from the session.

When I told the financial planner how I’d maxed out my registered retirement savings plan. She was impressed and suggested looking into corporate class funds. They’re taxed a little differently than regular mutual funds, and can be more tax-efficient than regular funds when outside an RRSP. I took the literature and promised to read up on it. Based on this Globe and Mail article about corporate class funds, it seems that corporate class funds are good for active investors who like switching in and out of funds, and not so good for buy-and-hold investors who favor index funds because of tax efficiency and low management expense ratios. (TD Canada Trust e-Series has the lowest-MER index funds I’ve seen so far, as the exchange-traded index funds that are increasingly popular in the US are somewhat bulkier over here.)

It was good to get some advice on uncommon concerns, such as international personal finance. How would I need to prepare for the scenario of moving back to the Philippines? I knew that my RRSP investments could be left in Canada, but I didn’t know how to handle my non-registered investments and other accounts in a tax- and duty-efficient manner. It turns out that I can leave money here, but I may not be able to give further instructions from overseas, and withdrawing everything could result in losses or high taxes. One way to handle this situation might be to convert all my accounts into long-term investments, then leave very good instructions. I’m currently planning to stay in Canada for a while, but it’s nice to know what I need to do in order to prepare for other options.

I answered her questions about my existing assets and expenses, and I asked her to help me prepare several retirement scenarios: the traditional retire-at-65 kind of plan, the ambitious be-flexible-at-40 plan, and the calculations for time in between. I wanted to figure out what a basic plan is, then inch that retirement date earlier and earlier. I gave her the numbers she asked for, and she’ll share some plans with me the next time we meet.

Writing about this gave me an epiphany. What I want to develop is not a retirement plan, but a medium-term opportunity plan. I don’t need to know how many dollars I’ll need in order to never work again. I’m not in the habit of postponing life until then, and I certainly hope I can continue doing meaningful work forever. What I want to know is this:

How can I position myself so that I can create and take advantage of opportunities while dealing with the risks?

(This post is not financial advice. Good luck!)

May 8, 2012
I ended up not going with the financial advisor or her advice, instead sticking with index funds with low management expense ratios. I’m not trying to beat the market, and I don’t trust actively-managed funds. The opportunity fund that I started building after this epiphany worked out really well, though. It enabled me to leave my full-time job and focus on building my own business, which is what I’m doing now. Yay!