Tax-Free Savings Accounts
Posted by RycePapers | Filed under RycePapers
The tax-free savings account is a completely legal way to earn income and pay no tax. This account could eventually become one of Canadians’ biggest assets, perhaps even bigger than their RRSPs.
While RRSPs give you a tax deduction from your current income tax payable, the tax-free savings account provides you with no deduction, but the benefit of not paying tax on the other end, when you remove the money. This is different than the RRSP because people will be surprised, I think, when they start removing RRSP assets and find out they’re paying tax on the entire amount in their RRSP.
Tax-free savings accounts began in 2009. For the years 2009, 2010, 2011, and 2012 you could put in a maximum of $5000 each year into this account. I put my money into savings and the $20,000 is now worth $21,167.64. $1,167.64 free interest so far. Hey, if you saw this amount on the street, you would pick it up. It is enough for a modest vacation.
For 2013 the maximum amount was raised to $5,500 annually. For something different, I put this money into an investment account and bought BMO covered call utilities ETF. This investment is an exchange traded fund. Similar to a mutual fund, in an ETF there is group of stocks in the portfolio. Different from a mutual fund because these ETF shares are traded on the stock exchange any time the market is open.
This ETF owns utilities such as hydro companies, telecommunications companies, etc. The twist on this investment is the portfolio managers go into the options market and write call options on those shares. This is a way to increase the income on the portfolio, in addition to any dividend income from the shares in the portfolio.
This account is worth $5463.77, a decline of $36.23. That’s the stock market for you: prices go up and down. What I like about these ETFs is that they are eligible for dividend reinvestment (DRIP). That means the monthly income it pays you can be used to buy more shares in the ETF. This gives the benefit of dollar cost averaging, a great way to add to your shares whether the price is up or down. When the price is down you buy more shares, and when it is up, your entire investment is worth more. Win, win.
The benefit of these tax free savings plans is you can access them without wondering if the money will push you into a higher tax bracket. And then, the next year, you can put back all the contribution money if you choose to.
If you haven’t yet looked into TFSAs, maybe 2014 will the year you will start earning income tax free! Happy holidays everyone.
That is what’s on my mind today, what do you think?