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The people’s plan

Sunday, January 8, 2017 0:09
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For those not yet born when this pathetic blog crawled out of the primordial ooze, time for some full disclosure. I am aroused by tax-free accounts. There. I said it. Don’t judge.

It was eleven years ago when it occurred to me how much better lives would be if Canadians could have something like the Roth IRA – an account Americans can stick after-tax money into, let it grow without being nicked by government, then withdraw it in retirement with no tax consequences. And why would this be better than the traditional RRSP, in place here for decades?

Simple. Lots of people retire with healthy incomes. So when you cash out RRSPs (or turn them into RRIFs) the money can push you into a higher tax bracket. Big negative. Second, taxes aren’t going down, so having all your retirement money in vehicles taxed at current levels when removed in a few decades could be heartbreaking. So why not encourage people to save by allowing free growth and in return for giving no tax break when they contribute, charge no tax when they withdraw?

In 2005 I lost my mind (again), got elected to Parliament and came up with the weird, populist idea of asking people what kind of budget changes they’d like. This was one of them. At the time I was the only blogging MP (that eventually murdered my career), and the results of my budget survey were thunderous. So I wrote a fat report for the finance minister, who made it clear he didn’t want any damn suggestions, and recommended we create a tax-free Roth-like retirement vehicle to complement the RRSP.

Well, three years later, after my sorry ass had been booted out of the Stephen Harper caucus (for blogging with people), the government introduced the TFSA. The only wrinkles from my original idea: it was no longer linked to retirement and promoted as a glorified savings account, not a long-term investment vehicle.

One other reason this thing is so cool: it’s democratic. Everybody gets the same shot at building wealth. You need only live here to get one. And the contribution limit isn’t tied to income (like an RRSP) so no big advantage to the wealthy. This one’s equal for all. The fairest, most honest, egalitarian, leveling break possible. The people’s plan.

So here we are in 2017, and the accumulated room has swelled to $52,000, or more than $100,000 per couple. In other words, serious money can be put into a TFSA. An entire balanced and diversified portfolio can live inside one family’s accounts. And while money isn’t locked in or tied to retirement, that remains the greatest use. Happily more and more beavers are starting to understand that. The tax-free account is a money machine. If you only do one thing for your future, make it this. Not an RRSP.

Here are some other things you should know:

While you can certainly flip stocks inside your TFSA, or trade ETFs and other securities, this is not intended to shelter income from an investment business. So if the CRA thinks you’ve created a job by day-trading inside your TFSA, or you’re a financial professional doing the same, the tax-free profits won’t be that way for long.

The main pay-off in retirement is having TFSA withdrawals, or any stream of cash generated by assets in your account, not considered as income. You don’t even report it on your tax return. It will not change your tax bracket. You can have a $2 million TFSA generating ten grand a month and still collect your full government pogey.

Whatever you can put into an RRSP can go into a TFSA. Remember (above all) that this is not for saving money, but investing it. The name therefore sucks. So do government promotions for the TFSA. Someday that needs to change, since 80% of the 11 million people with a TFSA have it stuffed with cash.

Never withdraw money from a TFSA, as tempting as it may be, because you’ll screw up the greatest benefit – long-term, tax-free growth leading to unreported income and eternal bliss. But if you did, wait until the following calendar year to put it back. If you re-contribute too soon, the penalty is stiff – 1% a month on the greatest excess amount in there.

Borrowing to fund a TFSA is not a sweet deal since the interest isn’t deductible from taxable income. Also be aware US dividend-paying stocks in your plan will be subject to a 15% IRS tax. In fact, because the evil Yanks don’t recognize the TFSA as a legitimate tax shelter (like the RRSP), Americans living here (or dual citizens) should avoid this unless they like making accountants rich.

If you can’t decide between putting money into an RRSP or dumping it into the TFSA, do both. A contribution to a retirement plan will net a tax refund that can be used for the tax-free account. You can always use non-registered assets you have now (like ETFs) to make a ‘contribution in kind’ to your RRSP, then the government will send you money in the form of a tax refund for selling yourself assets you already owned, which can be used to fund the TFSA.

Is this a great country, or what?


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