Instead of RRSP - Tax-Free Savings Account?

Who knew there was such a thing?

I guess not many, hence the reason for the update from Tom McFeat of the CBC News...

Coming in 2009, a TFSA (Tax-Free Savings Account) looks like an RRSP except that contributions aren't deductible, but nor do you pay tax on the growth, or at withdrawl time. You never permanently loose any contribution allowance room as you can payback what you withdraw or you can carry forward unused amounts. Cool. Too bad there is an initial cap of $5000/year... but the hope is the cap with rise over time.

Everyone who qualifies should have one. The way people will take advantage of them I am sure, will prove to be interesting...

Here it is straight from the horse's mouth...

The Coles Notes of the RRSP

You mean I can do something more with an RRSP than just lay out the cash and buy it?

Okay - this is all new(s) to me.

But this article from CBC.ca News has compressed the RRSP landscape into a few paragraphs. Very helpful indeed. Here are some interesting tidbits...

- toss your Canada Savings Bonds into an RRSP for a tax deduction on its face value (called a 'contribution-in-kind') see Jeff Buckstein's* RRSP online article in the Globe and Mail
(Note from the article: "When transferring investments that normally accrue capital gains into your RRSP, you also need to be aware that future gains are treated as income and therefore fully subject to tax when the funds are eventually withdrawn from your plan. Thus, some experts advise that, if given a choice between transferring in interest-generating items, such as bonds, versus assets such as equities, which generate capital gains outside the RRSP, you should transfer the income-producing assets. Otherwise you will “lose the benefit of that tax-preferential treatment...” ") - kind of sounds like the capital gains wipes out the tax deduction?

- tax-shelter a number of different investment vehicles in an RRSP

- withdraw $ under the Life Long Learning and Home Buyers Plan and make it up in future years rather than cashing out an RRSP

- RRSP 'catch-up' loans are available to close the gap of allowable, unused contribution (although realize that interest payments are not tax deductible - so perhaps only loan what the tax return can pay back for you immediately)

- RRSP contributions can now be made up until 71 instead of 69

Unfortunately, many fellow country-men have not taken advantage of this government offered 'free-bie', like me, up until recently. But we are now... better later than never!

* Buckstein's advice seems to conflict the CBC news article on one point; that gold, silver and other precious metals can be Registered as a tax deduction. *Investivation underway*

APPEND: Just found this question/answer from TDCanadaTrust.com and it has this neat little chart that shows the benefit of contributing to an RRSP all year round rather than waiting until the last minute (like we usually do). Nifty... makes a good case.

Profound Insight...

"Those who cannot remember the past...
....are condemned to repeat it."

- George Santayana

Wait a Minute... I Think I Know that Tune

A short article by Richard Conniff, writing for MSN Money called "Are You an Irrational Investor?" suggested a couple of 'irrational' thought patterns that, yes, I think are somewhat familiar to me. Of course, realizing my behaviour has been played like a broken record for everyone to hear is not pleasant nor do I want to be referred to as 'nutsy-bobo'. But accepting I do indeed exhibit some of these symptoms, however, may help me start singing a new song.

Anything here sound somewhat familiar to you?

1.) "I don't want to think about it right now."

2.) "I know something you don't."

3.) "If I don't play, I can't lose."

4.) "I'll gladly pay you Tuesday for a hamburger today."

Conniff tries to tie electrical conflict in the brain with these erroneous thought patterns. This kind of suggests there's nothing you can do about it because it's physiolocial. I think it's just willfull ignorance enabled by a weak character... and the good news is that can be changed the second I decide to. Here's to new thinking, changed behaviour and beautiful music!

What's in a Name

Oh what we learn when we read...

Dow Jones Industrial Average is also known as the Wilshire 5000.

S&P 500 stands for 'Standard and Poor' and was originally called the Composite Index with only 90 stocks.

P/E is the Price of a stock compared to its Earnings.

Market Value or market capitalization or market cap is the product of the shares outstanding for a company and the price per share.

Investor Return is the change in the price per share plus the dividend.

IPO is Initial Public Offering.

Offer Price is the price at which an IPO's stocks are valued prior to being floated to the public. Very few investors are privy to these prices.

Trading Price is the price most average investors end up paying for a stock on an IPO's first day of trading, which can easily be double the offer price, if not higher.

Capex is capital expenditures; many erroneously believe these drive profits... they do not.

TFSA stands for Tax-Free Savings Account is a new tax-shelter tool for Canadians coming in 2009.

Margin Borrowing is getting a loan to purchase stock you can't pay for.

Short Selling is the backward practice of selling stock first, then buying it later. If prices fall after the sale, there is a profit.

Stock Lending is like renting out your stock for use; you retain ownership and can call the loan at any time.

Credit for Emergencies Only

Just read a tidbit from Geri Willis of CNN's 'Your Money'. Her article is good guidance for the credit card addicted.

I think I liked best the advice from John Ulzheimer of Credit.com to use no more than 10% of your available credit. Additionally "people with the best credit have a utilization rate of no more than 7 percent,". Beyond that it apparently hurts your credit score. Whoa.

Okay, I think that's doable.

Don't Be Emotional

'Don't be emotional when it comes to money' they say. I've read those words in every investment book and blog I've seen.

It means find the courage to do the opposite of what everyone else is doing and fly right into the fire. Turns out that it's really the only way you can 'buy low, sell high'.

Noreen Rasbach (Globe and Mail investment blogger) has thrown down the gauntlet this morning. She points out that the numbers are in and the supposedly long-term, stoic, emotionless mutual fund investors have been exposed as a bunch of pre-teen girls... they bailed and ran out on the latest market down-swing to the tune of $3.1 B (redemptions in Janaury). Many of these investors instead chose the money-market funds as a safe-haven alternative. Gee, could they all have met 10-15 year long-term goals already?

What's a newbie to do in the face of this kind of chicken-run?

I've got a load of RRSP's in hand, and I have absolutely got to invest them somewhere for growth. While the account my last year's RRSPs are sitting in currently pays 4%, I do not consider that sufficient to classify as 'growth'. This year's RRSP contribution will be locked in for 1 year at the slightly better rate of 4.3%. Good rates these days, but still not the 'growth' I am looking for.

So I believe the choices that stand before me are Index funds, Money Market funds, and Mutuals. I am leaning towards the mutuals Noreen... tally ho!

The Wealthy Barber - Beginning with a Classic...

We all have to start this journey somewhere - so I grabbed 'The Wealthy Barber' by David Chilton (updated 3rd edition) from the local library. Here is a synopsis of his advice...

1.) Set aside 10% of all your income for long-term growth.

2.) Invest that 10% in mutual funds (1st choice), real estate (2nd choice-more risk).

3.) Get a will.

4.) Buy only the insurance you need - renewable, convertable, term insurance.

5.) Prepare your retirement fund by knowing what's coming your way and supplementing it. (Chilton refers entirely to the US pensioning systems, but we have lots of knowledgable expertise in Canada to research re: RRSP contrib. and GIC, etc. etc.)

6.) Own your home - one within your means and pay your mortgage off early, if possible.

7.) Save on day to day expenses
- "A dollar saved is two dollars earned";take the time to find the best deals, be thrifty.
- Keep a detailed household financial summary (budget) and learn from it. For example, you may find the operation of that brand new car is more expensive than a used one or that brown-bagging office lunches could save you $3000 a year!.
- Don't use a credit card, instead save to buy.
- Save for smaller consumer items in a competitive guaranteed invesment vehicle.
- Borrowing to buy encourages you to live outside your means... so don't!

8.) Investment advice:
- One of the best investments is to pay-off non-deductable debt (car, credit card, etc.)
- Of the stock market? Buy commodities or gold, have fun but don't rely on the market for financial planning.

9.) Income tax advice:
-"A dollar saved is a two dollars earned" - in reduced tax.
- Pay as little tax upfront as possible.
- Do your own taxes, as least preliminarily and learn from it.
- Go into business (a legitimate business) and benefit from business expense write-offs.
- Read up on advice from the professionals.

10.) Having an emergency fund of $10,000 just sitting around earning low interest is hogwash. $2000-$3000 is sufficient enough cushion for emergencies. If you want more, get a line of credit.

11.) Allow you child to earn some of their own college money. Purchase the rest with monthly payments into an equity mutual fund. Get family to help save.

12.) With a 1 in 4 chance of being disabled for 1 year during your working life, make sure you have appropriate disability insurance.

Overall, sensible if somewhat American in the specific content.
A little chatty in an attempt to be story-telling-ish, but you could pick through it easily enough. The book definitely gives you a sense of having all your bases covered financially. This strategy sets your mind at ease and was worth the read.