For 2009, Canadians have been granted a new tax shelter called the Tax Free Savings Account (TFSA). The basics of the TFSA are that the contribution room increases each year (currently $5,000) for every Canadian aged 18 or older. Contributions are made with after-tax dollars, but any gains within the account are tax free, and withdrawls can be made at any time and are not classified as income. Best of all, you can withdraw funds and put them back in without losing your previous contribution room. Using the TFSA rather than your RRSP makes sense under a few circumstances:
- You have no RRSP contribution room remaining
- Your current marginal tax rate is lower than your anticipated marginal tax rate when you draw from your RRSP
- You want to have easy access to your savings
My TFSA Strategy
My strategy with the TFSA will be to use it as a shelter for my more agressive investments to maximize the potential tax savings. As contributions earn interest, capital appreciation, or dividends, the value of the TFSA grows tax free. This new tax shelter is a great way to take advantage of the power of compounding without interference from the government. Since my strategy is to use the TFSA as a shelter for my most agressive investments, a simple savings account TFSA account will not suit my strategy. If you are planning to use the TFSA for this purpose, check out PC Financial which is currently offering 3.75% interest for their TFSA accounts. To invest in more agressive options, self-directed TFSAs are offered by many Canadian brokers. Since the contribution room for the first year is only $5,000, keeping fees to a minimum was one of my main criteria in selecting an account. I won’t be day trading since that would be futile with my strategy and only $5K, so finding a low fee broker with a reliable trading platform was the goal. The fees and high commissions charged by the big banks quickly ruled them out of my search. After reviewing the offerings from many discount brokerages I narrowed my options down and selected Questrade.
Why I Selected Questrade for My TFSA
- No fees – there are no account fees, inactivity fees, etc.
- Low balance requirement – currently $1,000 minimum required to fund an account
- Easy funding – can add a Questrade account as bill payment to fund quickly without any fee
- Cheap trades – currently $0.01 per share with a $4.95 minimum, and a $9.95 maximum
- Investment options – Questrade offers stocks & options, forex, gold, mutual funds, and they provide all types of registered accounts for Canadian investors (RRSP, RRIF, RESP, and now TFSA)
- Good trading platform – works well for me, and provides everything I was looking for
- Service – was able to speak with a representative quickly, and they were able to answer all of my questions (still have to see how service is once I’ve funded my account next week)
So, as of January 2nd, 2009 the TFSA signup will be available as one of the account types at the Questrade website. If you are looking for a self-directed TFSA, this seems to be the best deal around (at least for the first few years while contribution room is fairly low).
$50 Questrade Referral Bonus
Questrade offers a bonus if you sign up through a referral. Sign up using the banner below and you will be credited with $50 in free trades, which will keep your 1st year fees to an absolute minimum.
If you have any questions, please post in the comments below so others can benefit from the answers. I’ll be posting more soon with an update on my TFSA strategy. Until then, keep enjoying the holidays, and happy investing.
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