August 15th, 2010

The Tax Free Savings Account is an excellent option for the 20-something investor.  20 is a good age to start thinking about creating savings.  Some people are ahead of their time and have earned a lot of money at this point: they would surely want to do better than a Youth Account, which pays very little interest!  20 is also above the 18-year age limit of the TFSA.

For this age group, it would be advisable to, first, set up an automatic transfer system, as in a certain percentage of their earnings each month set aside for investment into the TFSA.   If one banks online, this is easy to set up and does not need much monitoring.  This is for those who do not have $5,000 right away.  (Of course, Mom or Dad can come in quite handy over here and, possibly, make their own contribution to encourage the saving streak in juniors!  Just perhaps include the clause that the money cannot be touched for whimsical expenditure and specify the time period as well!)  Parents will not be hit with any sort of taxes for their generosity, as there are neither attribution rules nor tax implications with the TFSA.

Even if one is married at this age, which is often the case, spousal contributions are permitted.  Withdrawals can be easily made with no fees and the account can be replenished at any time without penalties.   This account is easy to manage at this stage in life especially because, from a taxation point of view, it is fairly simple to figure out and way easier on the bank account…and the nerves!  It offers much leeway to the investor.

So when should one launch off into the TFSA world?  As early as possible, as soon as one hits 18 preferably!  (Or, back to our previous strategy of getting one’s parents to set the ball rolling, even before 18!  The parents can manage the account until the statutory age is reached.)  That way, by age 20, one is already in a savings groove so to speak, and has a feel for how everything works.  The longer one can have tax -sheltered savings, the further it goes towards making one rich.

A lot of 20- something year olds would balk at the mere mention of $5,000: while some adults’ scoff at how paltry the sum is, it seems enormous to the youngsters.  Stay in faith; where there’s a will, there’s a way!  Apart from the usual ideas of hosting a garage sale and going on eBay to sell your designer clothes, don’t forget that trusty source of all things good: your parents!

Here, a sales pitch has to be carefully formulated.   Aim for honesty, which is always the best policy!  Then, highlight what’s in it for them.   Adults despise taxes and will do anything to minimize them legally, and this is universally true.   The people who love paying taxes have just got to be in the minority!  (Hopefully by this time you have already created a foundation of trust with your parents by keeping curfews and doing chores!  If not, a good time to start would be before you deliver your sale’s pitch!)   Inform your parents that there are no tax attribution rules, and they can consider this as good tax planning: if they give you your inheritance in advance, you will be judicious with it and allow it to accumulate.   You can offer, as well, to keep all documentation transparent, give them full online access, and invite them to monitor it regularly with you on a set schedule.   This could also afford an opportunity to do things as a family and spend more quality time together.  The TFSA can also be used like an RESP for future studies, with way less restrictions.

If you are living apart and have your own job, consider moving back in with your parents to save on the rent which can be invested in the TFSA.  Many parents, especially those getting on in years or those who do not have too much company, might welcome this greatly.   Of course, offer to contribute to some of the household expenses and certainly pull your weight to make this more appealing to Mum and Dad!

How would a 20-something get the most out of the TFSA?   By adopting these strategies as are elucidated in Gordon Pape’s Ultimate TFSA Guide:

1. Go all the way and deposit $5,000 into your account per annum.

2. Invest in early January of each year as contribution room of another $5,000 becomes available each year.

3.  Educate yourself about contributions in kind or swaps and try to maximize your return.

(Gordon Pape’s Ultimate TFSA Guide would provide more information on these.)

If one is still studying at this point or has only recently joined the work force, the TFSA has none of the restrictions of the RRSP in terms of percentage of income that can be contributed.   You or your parents can open a self-directed TFSA and deposit $5,000 even if your earnings are nil.

Go for it!   The TFSA can take you places!   Start now!  The sky’s the limit to realizing your dreams!

March 14th, 2009

Investment planning is typically modified through the course of an investor’s lifetime, as their investment goals and time frames change. During your 20′s, your investment goals are typically different than they are in your 30′s and so on. With the new TFSA becoming available in 2009, it is important to understand how many investors plan to utilize this account for their financial futures.

Read the full article here: http://ezinearticles.com/?TFSA-Through-the-Ages&id=1861872

March 5th, 2009

Now that it is 2009 Canadians have access to the newest type of savings account, the Tax Free Savings Account (TFSA). The TFSA will give investors an opportunity to capitalize on tax free investment benefits. This new account is not widely understood, however, Canadians are excited to learn how it can benefit their financial futures.

One of the primary points to understand about the TFSA is that it is not merely a savings account as you may be familiar with from your local banking institution. A savings account creates an image for many of a low interest, liquid type of cash account. And while you can invest into cash within your TFSA, it presents virtually a limitless list of investment options to consider investing into, including securities, debt instruments and even real estate investments. An investor can invest in virtually whatever investments they wish inside of their TFSA accounts.

Most Canadians are familiar with the traditional RRSP investment account, commonly used for retirement purposes. Unlike the RRSP account, contributions made into the TFSA account are made on an after tax basis. Therefore, when the account owner withdrawals their funds, they are not subject to income taxes as they would if they had invested into an RRSP account. This tax free benefit is one of the largest draws for investors to consider utilizing the TFSA for their financial purposes.

Another key difference between the TFSA and traditional investment accounts is that funds can be withdrawn from the TFSA for virtually any financial purpose. For example, a TFSA owner could utilize those funds to purchase a home, a car, to send their children to college or as a retirement savings vehicle. This flexibility to withdrawal funds without a financial penalty creates flexibility that is attractive to most investors.

One last key difference between this new TFSA account and other retirement accounts is that money can be re-contributed into the account at a later date. For example, if an individual contributes their maximum allowable funds into the TFSA account each year and makes a withdrawal 5 years after they open the account, they can re-contribute the withdrawn amount into their TFSA so that they can take advantage of the tax free benefit again within their future. So, the ability to use this investment vehicle for shorter term financial goals as well as for long term financial goals is appealing to most investors.

While no investment vehicle is a perfect match for every investor, there are several key advantages to the TFSA that should be taken into consideration when creating both a long term and a short term financial strategy. Once the decision has been made to utilize the TFSA for financial goals, the specific investments must be selected for the account to hold. Personal risk tolerance, total investable assets, asset allocation, investment time frame and investment purpose should be taken into consideration when making these individual investment selections.