A Legal Means to Avoid Paying the Tax Man.

Who wants to pay tax when you don't have to, right?

I know I certainly do not so as soon as the clock struck midnight on December 31 I sent a message to my administrators asking them to transfer $5,000 from my non-registered accounts to my Tax-Free Savings Account (TFSA).

I really do not like the name the government gave to this tax-free haven as it's title often misrepresents the benefits.  It's not a savings account, per se.  It can be an investment account so that you can put any stocks, bonds or mutual funds into your TFSA and any interest income, dividends and capital gains you receive are not subject to tax!  Calling it a 'savings account' has led clients to believe that you have to put the funds in a 'savings account' at the bank earning today's low rate of interest rather than use a more effective investment strategy and they tend to dismiss this strategy all together.  What a missed opportunity!!!

What's even better is that if you have come into a windfall in 2011 and have not been contributing over the past 3 years you can catch up and put in $15,000 all at once!  The rules are that you can contribute $5,000 per year from 2009.  Unlike a RRSP you will not receive a tax deduction for your contribution but when you take the money out it isn't taxable income either (which it would be if you took it out of an RRSP).  You can also replace the money you took out.  Let's look at this example.

Let's say in 2009 I put in the allowable $5,000 and then again in 2010 so now I have $10,000 in the TFSA (I'm not going to add any returns for the purpose of this example).  I decide I want to go on a vacation and take the money out so I take out the whole $10,000.  In 2011, I win the lottery and I can put in $15,000!  That would be the $5,000 amounts I am replacing for the 2009 and 2010 tax years as well as the new contribution for 2011.

Sometimes it is more important to use the TFSA for a savings vehicle rather than contributing to a RRSP!!!  It can also be used as a tool for income splitting.    If you want further information or clarification please feel free to comment or contact me @ kjankowski@tewealth.

Really want to help your kids understand how it all works?

OK, so you're getting closer and closer to retirement and maybe it's a fleeting thought or maybe it's outright panic but....have you saved enough?  Thinking that most of us do not want to be living in our children's basements at retirement perhaps we can also help our kids to have the answers earlier in life, rather than have history repeat itself.  The moment your young one comes home and says they have a job take 18% of their income from them in a form of savings.  Open a RRSP for them and make a contribution, annually or monthly if there is enought to work with.  There is no age limit to RRSP contributors.  There may be limits on what types of accounts they have in that they cannot 'trade' in the market until they reach the age of majority but they can have a deposit type RRSP at your local bank as long as they have earned income. 

Effective parenting comes from two different directions.  One, you are 'forcing' your children to take an interest in learning about investments.  Believe me, if it's their own money they will soon be asking about mutual funds, stocks, bonds and the like.  The biggest effect, however, is their savings at retirement.  OK, so what 17 year old is thinking about saving for life after 65 especially when there are so many things a young person wants to do NOW!  If you save earlier it is much better than starting later.  For example, a person age 25 saving $5,000 per year will have $1,000,000 at age 65 compared to a 45 year old saving double the amount ($10,000) which will end up with $400,000 at the same age (both based on a consistant 7% return).  That's a valuable difference.  But wait...there's more.  Because your impressionable youngster does not have a big marginal tax rate you needn't deduct the RRSP contribution amount until they start working full-time in their future careers.  You can carry-forward the contribution so that once they start working they can use all or some of all the accumulated contributions when they will receive more of a return for their money.  Also, it may motivate your youngster to contribute to their own RRSP's if they are aware that they can use those funds towards a down payment for their new house.

Now wouldn't that be kinda cool?   Down payment for their new house???? A RRSP account and a learning lesson about how to invest..........???   I think so.......