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By Greater Fool (Reporter)
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Wednesday, February 22, 2017 16:12
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Now that tax-free accounts have room for $52,000 – and a couple can shelter $104,000 – they deserve your respect. TFSAs are not glorified savings accounts. They’re not for dicking around with a few loser stocks your BIL pumped. They have nothing to do with your next vacation. They should form the cornerstone of a decades-long financial plan. So if you can find a hundred bucks a week, do the right thing.

But TFSAs are also flexible, malleable, twisty vehicles that can be bent to serve many purposes. Blog dog John has an example.

“Long time reader!   My question is regarding my parents, recently retired, no savings to speak of… CPP/OAS/GIS… some calculations still being finalized… I am helping them out financially.

Assuming I have a good relationship with them, does it make sense to put $100K from checking into their own TFSA – with the trust and understanding that the money eventually gets back to me? I know you cannot comment on the trust factor, but what about the idea? Tiny risk, assuming they do not go crazy and burn all the money somehow, but otherwise is it a sound strategy? Would CRA complain because how can you be on GIS if you have TFSA?  Thanks, John.”

First, John, learn from thine parents. You can be young and poor and happy. Nobody can be old, broke and content. If your folks own real estate, it should be sold and the money invested for cash flow. If recently retired, these people are likely in their 60s, with twenty or thirty years left to finance. Your hundred grand won’t do much to help them in the long run. It’s always a sad thing when, after sixty decades on this earth, a couple cannot look after themselves. Learn, John. Prepare.

As for the TFSA strategy, it works. You can gift parents (or a spouse, or adult children) money to stuff into a tax-free account. There it can generate income for your folks which will not impact their OAS pogey since it’s uncounted as taxable income. Win.

And unlike RRSP contributions, which hit a wall at age 71, money can go into TFSAs every year they are alive. In fact, for most wrinklies, it makes great sense to transfer assets owned in a non-registered account annually into the TFSA, where taxless growth can occur and income flow out. And no need to ever convert into a RRIF. (In fact, all retirees should be taking the mandatory RRIF payments and plunking them inside a TFSA to mitigate the tax bite.)

But there is a wrinkle. So long as your folks keep the assets you financed inside the TFSA, things are cool. If they withdraw then any future growth or income will be attributed back to you (assuming the CRA knows where the cash came from).

The big question: do you trust your parents? If not (and recall they’ve saved nothing to date, and apparently lack financial discipline) then set this up as a POA account (power of attorney), and give them an allowance. Tough love. Badly required.

And speaking of TFSAs, there are almost 12 million of the little suckers opened in Canada, still with 80% of the assets idling in interest-bearing assets like HISAs (the jumbo shrimp of the investing world) plus comatose GICs. Most people with these accounts think of them as a place to temporarily store shoe money or save for new hardwood. And when T2 sliced the contribution limit in half, the nation let out a giant collective yawn. Most folks have absolutely no idea what money machines these can become, and a major reason is the banks. Like Pete learned.

“Garth – I’ve taken a ton of your advice over the years. I’ve had an iTrade account since Scotia purchased Etrade so many years ago. For the first time I was cornered by TNL@TB when moving some assets back into Scotia and opening another investment account.

“Long story short – I’ve had a TFSA sitting with cash in it with them for a while. So TNL@TB got all smiles and cheeks telling me I should look at a laddered GIC with them.  Little did I know the bank would set you up with a laddered system – NEVER promising a return but instead talking about 33% re-investment plans “COMPOUNDING” returns. TNL@TB – “very common practice these days among TFSA account holders, Mr. Smith”

“I did the backstroke out of there Olympic style, however felt the need to share the sell tactic with you.  I can see how people end up in these dead end situations with investments.  Cheers and bless you for changing my views on investing.  You are a man among boys and a dog lover so you win. Blog is amazing and….Hazel also thanks you.  (2 year old rescue Dober – Sharpei mix).”

For the record, a laddered GIC is just that – a string of interest-bearing deposits strung together with modestly appreciating rates where the interest earned on one is dumped into the principal for the next. Hence the ‘compounding.’ Money is divided into equal hunks, with each put into GICs with maturity dates ranging from one to five years – that means each year a piece of your dough matures and becomes available as cash, to be dumped into a new 5-year GIC. The idea is to earn more than you would with a one-year deposit, but not to lock all the money up for half a decade.

And what do GICs pay these days at the bank? A one-year deposit yields 1.35%, and the five-year model returns 2.01%. The inflation rate is about 1.6%, which means just about every stage of a laddered GIC is guaranteed to lose you money, even inside a TFSA where you’re shielded from paying tax on that asset. So a GIC held outside a tax-free account may be a sign you may have recently died. Have a trusted friend check.

The point of today’s post?

Simple. This vehicle is flexible, effective yet squandered. If you max it, invest for growth and do so for 25 years, you’ll have about $325,000. If you buy GICs then empty it and buy a floor you’ll have, well, a floor.


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