TFSAs in Your Best Interest or the Banks?
January 26, 2010
This article illustrates why my opinion on TFSA accounts runs counter to what the banks would have you do.
I hardly think tying up less than $25,000 dollars makes sense at returns of less than 3%.
Ritch Wigham
Research Capital
http://ritchwigham.com/
PH.(604)-662-1853
T.F. 866-662-1853
Research Capital Corporation (RCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-RCC website please understand that it is independent from RCC and that RCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by RCC.
The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Research Capital Corporation (“RCC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor RCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to RCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.
Tax Free Savings Accounts: What to do
January 19, 2010
…and why you shouldn’t listen to your favorite banker!
Last year in his wisdom Jim Flaherty our vaunted and illustrious Finance Minister decided to appease the trust unit’s people, the banks, and finally the markets by introducing the TFSA or Tax Free Savings Account. The premise being that you could take five thousand ($5000) of your after tax dollars and “contribute” it to this account every year and accumulate in theory a sizable portfolio in a few years, while doing this tax free. Since the money you put in was after tax dollars you would be able to accumulate wealth without having to pay capital gains tax or withdrawal (withholdings taxes) as you would in an RRSP.
Great idea.
What this did for the banks was allow them to try and keep more of your money while also charging you for the privilege. Sound familiar? You see if you set your TFSA up with the bank they could charge an admin fee like they do for your RRSP since it is another kind of registered account, and at the same time try and convince you that their in-house investment products were somehow a good idea for your future. As a note I should mention now that my firm, Research Capital “does not” charge an administration fee but does charge minor fees when book-keeping functions are performed (withdrawals as an example).
The problem arises from here for these accounts. If it costs you anything in the form of a drawdown on $5000 dollars in charges then you must return those fees plus a percentage to make this plan worthwhile. So if you think that it is worth your while to tie up this money for a return of say $500/year (which is 10% by the way) minus anywhere up to $200 dollars for fees than help yourself and please continue allowing the banks to make more from your money than you do. At best that is what will happen if you invest in the “safe” products that you will be offered at any of the banks or mutual fund companies or credit unions that are offering these accounts. The reality is that you will more likely get a return of less than the 10% that I mentioned earlier and could well be lucky to have broken even at the end of the year.
So what is the alternative?
Well the alternative is to view this account as an account that you use to try and rapidly build up your equity until you do have it to a level where more sedentary investments do make sense. In my opinion that is somewhere north of $25,000.00 dollars. This means that you can put your $5000 in every year and accumulate the moneys at virtually no (or very little return) for five (5) years or get aggressive earlier on (first couple of years) and try and achieve that level of funds more quickly. This requires a more aggressive or if you will “riskier” approach. Personally I cannot see why I would tie that small amount of money up unless I was shooting for a superior return and willing to take the risk associated with that. I don’t mean” go big or go home” necessarily, but there are many emerging companies listed on our exchanges that make much more sense to me, as they are going (if properly chosen) to far outstrip the returns that you would achieve in a fund or some kind of similar investment.
My suggestion for your first couple of years is to take your initial money and choose no more than two companies that you think have upside. It is very hard to suggest more than that because your costs versus the leverage that you are trying to achieve have to be proportional. For example; if you buy 4500 shares of two companies @ $.50/share you will have two commissions of $110.00 (in this case I am using Research Capital minimums) and a share cost of $4500.00 dollars for a total of $4720.00. This is just under your $5000.00 contribution in year one. At this level all that you need to have happen is for your stocks to appreciate by $.05 to cover your costs. Every penny above this is potential returns on your money. (4 x $110.00 = $440.00/ 9000 x $.05= $450.00) I use the premise of both buying and selling your shares as you have made no money until you sell your stock.
The math is not at all complicated; the complication comes with picking the right stocks, at the right level in their development. Just because it looks cheap doesn’t mean that it is.
The point that I am making is that it makes no sense “not” to take some risk in trying to maximize your returns in your TFSA. Even if you don’t make money initially I really don’t feel that with the small amount of money that you are dealing with there are other strategies that can give you a return that makes having one of these accounts worth your while. If $5000.00 dollars is going to make a difference to your status you shouldn’t be making “any” investments with anyone anyway, that includes the banks. You should just be leaving your money in a savings account or an RRSP for the tax savings that it offers you.
If you would like to discuss setting a TFSA up, and looking at higher return strategies; please give me a call we can talk and I can tell you if this is right for you!
All the best for now,
Ritch Wigham
Research Capital Corporation (RCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-RCC website please understand that it is independent from RCC and that RCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by RCC.
The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Research Capital Corporation (“RCC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor RCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to RCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.