TFSA Accounts

Hey CC, I was a little late to the game also.

I transferred some high yielding energy income trusts and REITs for my account in May. Got some for my wife's account just last week!

I had been thinking about going the GIC ladder route, but I don't feel its a good vehicle for the cash component of our investment allocation since minimums within self-directed accounts are $3500, so not much room to build a ladder.

In a few years, when the amounts are higher, I'd like to use it strictly to hold my cash portion of the account, but I think the ladder approach is best to ensure some liquidity if opportunities arise.

For our 'emergency' or short term savings (within 1-2 years) I just leave that in a high interest savings account since as was pointed out, interest income will be minimal, especially at current rates!

i do appreciate your concern over lack of CDIC coverage under 1) in your post, and if it were myself i'd probably avoid such an institution.

the standard advice to keep interest-bearing securities in a registered plan and tax-advantaged investments in non-registered accounts doesn't apply all that perfectly to a tfsa, although it does apply to a certain extent. One might say that this rule gets skewed when it comes to tfsas.

to my way of thinking, 100% of withdrawals will be tax-free, so in the end the taxpayer will not lose the tax advantages of dividends and capital gains as he will be replacing these with something even better.

also, for at least a few more years, there is no point treating these accounts as if they held 100,000 because, with a 2009 startup date and limited to a 5,000 contribution per annum, most tfsas won't approach the 100K mark for a number of years.

like mr. bean, my own tfsa has held common stock and stock equivalents. Lady luck has favoured us. For such a tiny account - only 5,000 to start with - i've traded it aggressively, only lately easing into something more sedate by rolling more than half into BA.UN for the high yield, although this has to be watched closely and probably will have to be taken out within a year or less.

an interesting strategy that will work well in a rising market is a diagonal call spread, or its inverse, which would be a put diagonal in a falling market. The tweaked factor for a tfsa is that the long leg of the diagonal gets bought within the tfsa, while the intermittent sales of the short leg get carried out in a margin account. Thus the capital appreciation of the long leg is fully captured in the tfsa, while the hedging cost is borne in the margin and serves to offset other capital gains in the margin. The inevitable catch in all this is that one has to be right about the direction of the market.

oh my goodness. People are thinking of a tfsa as an emergency cash account, something to pay into & withdraw from like an ordinary bank account except that it has no fees.

i know there's a lot of big-name fancy financial planners on this board whereas i'm just a very ordinary kind of pie, but the fact is the government fell asleep over tfsas and gave canadians their biggest tax break since before capital gains ... a tfsa is a stunning opportunity, a far better deal than a rrsp, and my only concern is that the govt won't let them last.

the goal should be to drive this plan towards the greatest possible accumulation of funds inside the plan in the shortest possible period of time. Ideally there should be no withdrawals whatsoever until retirement, or until an exceptional life need arises. Every dollar inside a tfsa is literally a goose that will lay nothing but golden eggs.

the annual contribution ceiling is $5,000, making these early plans so tiny they're like a bonsai tree or petit-point embroidery. It's worth learning how to use leverage through double and triple ETFs and through the selling of options just to cultivate these little treasures.

I think the TFSA is far better than an RRSP if you have any kind of growth.

Here's a simple example:

Invest $5000 into both accounts today. Assume a 12% growth rate for 30 years until retirement. Using the Rule of 72, your money will double 5 times giving you a portfolio of 2^5*5000 = 32*5000 = $160,000

TFSA: you have $160,000 with the freedom to withdraw as much as you like for whatever purpose you like absolutely tax free .

RRSP: you're limited on how you access your funds, taxed at your marginal rate for withdrawals, have estate issues to hassle with etc. I dare you to withdraw the full $160,000 at once. You'd have CCRA drooling. The tax break on the $5000 contribution is negligible in this example.

The TFSA wins hands-down.