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  • Finally decided what to do with the tax-free savings account
  • Thinking about the Canadian Tax-free Savings Account

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.

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.