Lazy Investor

So now, we have the TFSA. Compared with RRSP, which one is more favorable depends on a lot of factors including your marginal and average tax rate, the pension you will receive when you retire, if you are going to use this money to buy your first home, etc. Let’s look at one of the most important factor, your tax rate, for this comparison first. The following tables show you three scenario:

a) you have the same tax rate when you contribute to your TFSA or RRSP as when you withdraw money from then. As you can see in the table, the overall return from TFSA and RRSP is the same.

Reference: http://www.budget.gc.ca/2008/plan/ann4a-eng.asp#personal

b) & c) If you have higher tax rate when you contribute to your TFSA/RRSP than the time when you withdraw money from the account, you are better off to contribute the money into RRSP first. On the opposite side, it will be better for you to contribute into TFSA rather than RRSP.

If we look at the tax rate alone, the answer seems to be very simple. If your tax rate is going to be lower than the time you contributed into this type of account, RRSP is better. Otherwise, TFSA is better. If you expect to be in the same tax rate for your whole life, then it does not matter to contribute into RRSP or TFSA.

However, it is not THAT simple. There are still many other factors might affect the decision. For example, even if you are going to have the same tax rate for your whole life, the RRSP will still be better for the first $20,000 if you are ever going to buy a house since you can withdraw it tax free from RRSP account. If not, it looks like they are equally good. But since Income earned inside the account and withdrawals from the account WILL NOT affect eligibility for federal income-tested benefits and credits(Income from RRSP does), TFSA is actually better since you will not affect the CPP, OAS benefits that you might receive from the government.

Scenario c) actually makes me wonder for the people who save a lot, there must be a point when contribute into TFSA is better than into RRSP. I have not quite figured out what that point is yet.

The budget 2008 has been announced today. The following is the highlights:

- Tax exempt saving fund, up to $5,000 annually. No tax on gain, withdraw anytime without penalty.
- 10.2 Billion to pay down debt.
- Maximum RESP time limit extended to 35 years; contribution period extended by 10 years.
- tax break on capital equipment depreciation extended to 2012
- $500-million for investment in public transit.
- A $2-billion fund for infrastructure investment will be made permanent.
- $250-million over five years to help the automotive industry develop more environmentally friendly vehicles.
- $350-million for a Canada Student Grant Program.
- $90-million for older workers hurt by factory closures.
- $300-million to for nuclear energy.
- $330-million over two years to improve access to safe drinking water for First Nations.
- $400-million to encourage provinces to recruit 2,500 police officers.
- $43 million to Communications Security Establishment
- $75 million to Canada Border Services
- Permanent annual increase in military spending of 2% by 2011
- New organization to administrate EI premium.

As you might have noticed, there is a new account type being introduced today. It is called Tax Free Saving Account(TFSA).

What is TFSA?

It stands for Tax Free Saving Account. According to the budge 2008, Starting in 2009, people 18 and older will be able to put up to $5,000 per year in a Tax-Free Savings Account and rack up investment gains without paying taxes at any time, including withdrawal. Any unused contribution room will be carried forward just like your RRSP room. The $5,000 annual contribution limit will be indexed to inflation in $500 increments. Contributions to a spouse’s or common-law partner’s TFSA will be allowed, and TFSA assets will be transferable to the TFSA of a spouse or common-law partner upon death

What is the benefit of TFSA?

The major benefit of TFSA is that it allows the money you put into it to grow tax free.

Don’t we have RRSP to allow my money grow tax free already? What is the difference between them?

The differences are:

- Although the money in RRSP can be withdrawn anytime before actual retirement, you are subject to withholding tax while doing it; the money in TFSA could be withdrawn anytime without any withholding tax with all the gains being tax exempt.

- When you withdraw your money from your RRSP account, your contribution room is forever lost. Withdrawals from TFSA will create contribution room for future savings.

- The money put into RRSP is tax deductible. In other words, you get tax refund from contribution in RRSP. The money you put into TFSA is not tax deductible. Therefore, you use after-tax dollar to fund your TFSA account.

What could be held inside TFSA?

You can hold many investment vehicles inside your TFSA, such as stocks, bonds, GIC, mutual funds, etc. However, please note that since all the capital gains inside TFSA is tax free, it also means any capital loss inside it cannot be claimed to be offset your other capital gains or carried forward. So please think carefully before holding any stocks inside TFSA. Technically, TFSA works the best for the fixed income investment vehicles, such as GIC and bonds.

What works the best to be held inside TFSA?

Like I just said, it works the best for fixed income investments. However, if you think you are a very good trader, you can try to trade stocks inside TFSA. If you make 10% profit, all 10% will be tax free. Also, I am thinking it might be good to hold some nice US DIVIDEND stocks such as Bank of America. Since under regular non-registered account, any dividend from US Stock will be considered as income and is taxed at the full tax rate. I think it will be beneficial to hold those inside TFSA.

It will be another year from the date we can actually contribute to TFSA. I think it will be an interesting topic in the personal finance blog world.

I got my power bill for Jan 10-Feb 10 in the mail today. To my surprise, the total amount is a crazy $264 for my two-bedroom apartment. We use electronic baseboard for heating. Considering three people living in the apartment, I think it is an acceptable amount. But still, it was a shock to me at the first sight.

Since I want to get a three-bedroom townhouse/house in the next year or two, I am just wondering how much it usually costs each month to heat up a three-bedroom house. Will it be a lot?

I love watching the show “My First Home” on TLC on Saturdays and Sundays. It is fun to watch people hunting for their first home, going through the mortgage application process, and dealing with all the unexpected crises along the way. I plan to buy a house in the next one or two years. Watching the show is also very beneficial to me when I begin to start the house hunting.

However, I did notice something. It seems to me that the housing price in the States is so much cheaper than in Canada. For example, in Las Vegas, you can get a two bedroom detached house with garage for not more than $180,000. In Orlando, $260,000 for a four bedrooms house. In Texas, the price tag is even smaller. I don’t think you can drop less than $300,000 for a detached house in any of the three big cities in Canada.

Why it is that way? I don’t think those American cities have less population than Canadian ones. And the housing demand is probably also higher there? Maybe it is due to lower cost of the materials? But it should not be that significant, shouldn’t it?

Or maybe I did not see the big picture. There are some places in the States with crazy housing price(Like NY?).

I just got my cash back reward cheque from Citibank MasterCard in a total of $136.30. To many people, it does not matter if the cash reward is posted directly into their account or having a cheque mailed to them.

I found myself always prefer to have the cheque mailed to me. Maybe I am just one of those weird people who love to see the physical cheque in front of them.

Anyway, I will deposit the cheque into my savings account tomorrow.

If you live in Canada, I am sure many of us have been shopping at CanadianTire and know about CanadianTire Money. Typically, if you buy something at CanadianTire, they will give you certain amount of CanadianTire money as a coupon (at least I think it is a coupon)that you can use towards your future purchase at the store.

But not until today, after I watched the video from CBC Marketplace, I found out that if you want to return something you bought at CanadianTire, you need to return the CanadianTire Money that were given to you. Otherwise, they will simply deduct the amount from the refund you will get from the store.

For example, you bought a toaster for $10 at CanadianTire and got $1 CanadianTire Money. Later, if you want to return that toaster, you need to return the $1 CanadianTire Money as well. What about you lost that $1 funny Money? Too bad, they will only give you $9 back. So CanadianTire is turning their coupon into a legal tender. Is CanadianTire Money a real money? Of course not, you cannot use it at any other stores than CanadianTire. It is simply a marketing method to encourage consumers to buy more from CanadianTire. It has no difference from Shopper’s Points, Air Miles, etc. By doing this, CanadianTire is actually making a force purchase of nothing. They assume that the consumer will use that $1 funny money to purchase something at the store.

In the video, CanadianTire is claiming that they are printing the CanadianTire Money using the same process the legal tender gets printed. But, hey, who cares? We, consumer, did not ask you to do it that way. Just print it the way other stores print their coupons. I am sure all consumers will be equally happy.

In the video, CBC also did a hypothetical calculations. If 10% of the consumers forget to bring back the CanadianTire Money when they return the products, the CanadianTire will ring in $155,000 REAL money each year. If 50%, $775,000; At 90%, the number goes up to 1.4 million REAL money per year!

So don’t lose your CanadianTire Funny Money, it could be REAL money, at least CanadianTire thinks so.

Found two printable coupons online. Please click on the following link to print them. Time for lotion and yogourt.

Aveeno Lotion Coupon

Danone Yogourt Coupon

My January Networth decreased by 2.37% to $31,449, although I have been paying off my car loan at a regular pace and continue to contribute $400 each month into Scotia Canadian Dividend Fund. The current turbulence on the stock market really give my networth a hard hit. I guess I will stay on the course for now.