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!

June 6th, 2009

Canadians are Catching on to the TFSA.

According to a survey by a global market information and insight group, the introduction of the new Tax Free Savings Accounts or TFSAs has caught the attention of many Canadians. ”The combination of advertising by government and financial institutions has translated into a high awareness of the new investment vehicle and good initial uptake,” said Rhonda Grunier, vice-president of TNS Canadian Facts and director of the market research firm’s TFSA study. The survey found that 79 per cent of Canadians are aware of TFSAs, and this is only somewhat behind awareness of the longer running RRSP (94%) and RESP (84%) accounts. There is also little reported confusion between TFSAs and RRSPs. Only 27 per cent say that they do not understand the difference between the two.

Who’s Most Likely to Take Advantage of the TFSA?

When it comes to opening a TFSA, already 14 per cent of Canadians have already jumped on the savings wagon. Another 36 per cent of Canadians are either very likely (18%) or somewhat likely to do so (18%) in 2009. Adding those statistics and subtracting from 100 leaves 48 per cent who are not likely to open an account this year.

Not everybody is jumping on the savings wagon.