Wednesday, November 26, 2008

Tax Free Savings Account Mania Hits Canada

The next time you sit down to watch the "idiot box" for an hour, take note of the number of commercials for the new TFSA's coming January 2009. No wonder. According to a survey by Scotiabank, Canadians want to learn more about the tax-free savings account with 61% of poll respondents looking for more information. Several financial services firms are already accepting pre-registration for the account. The Scotia poll found that 40% of respondents who had not already taken advantage of pre-registration are still interested in opening a TFSA.

"Information is vital for Canadians to understand the benefits of the TFSA and how they can incorporate it into their financial plan," said Gillian Riley, managing director and head of retail deposits, Scotiabank. "As part of our efforts to inform and educate Canadians, we have trained our advisors to be prepared to answer questions and provide solutions around the account. We have also developed an online TFSA calculator that, by asking a few simple questions, can determine how much money an individual can save using the TFSA."

Wow. You would think that suddenly every Canadian over the age of 18 has an extra 5G's lying around waiting for just such an opportunity. Most experts agree that the bulk of deposits will come from the upper crust of society who want to shelter more money. Yet it will benefit all Canadians but raises an interesting question? Are you planning on making an RRSP or TFSA contribution this year? Tim Cestnick from the Globe and Mail writes about the differences and whether you should do an RRSP or TFSA. One important point - this assumes you invest the money in identical investments. Most people considering the TFSA are looking at depositing money for an emergency and therefore will have no risk attached to the funds.

Alison Cunliffe wrote in the Toronto Star puts forward the idea from an adviser that "Now that TFSAs are available, though, that counsel changes, Baldwin says: fill up your tax-free account, then your RRSP, at least for the next few years, until the amount of money involved starts to get significant".
While that certainly seems reasonable, let me ask one important question. When/If the stock markets recover, do you want to wait until later to buy into the market. Perhaps a better suggestion would be the following - commit to your RRSP's as you did in the past, but now take your resulting tax refunds and apply them to the TFSA. This serves a multitude of purposes - you are buying low on the investment side, saving for retirement, and still setting aside money for an emergency. Obviously this still needs to be looked at on an individual basis and we look forward to the challenge of making the best suggestion.

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