Before you cut up your credit cards in an attempt to curb spending, or purge old accounts, stop and consider the consequences. It seems rational to close off old credit card and retail accounts that you no longer use, but it may end up hurting your credit score.

When it comes to getting a mortgage, car financing, or any other credit, your current score will play a factor. Keeping your score high can save you thousands of dollars by qualifying you for better interest rates and lending products.

Continue reading “STOP! Don’t Cut Up Your Credit Cards if You Care About Your Credit” on my blog at BiggerPockets to learn the 5 factors that make up your credit score, and why closing your old accounts may hurt your score rather than helping it.

photo credit: kainr

Since the introduction of the Tax Free Savings Account (TFSA) for Canadians in 2009, there has been a debate over which savings vehicle is best. Although there are several factors which come into play such as income, marginal tax rates, clawbacks on retirement benefits, and utilization of the RRSP Home Buyer’s Plan, in this article I’m going to put a less mathematical spin on it all. Everyone has a unique situation, but I’ll help you skip to the simple conclusion.

The TFSA vs. RRSP Debate in a Nutshell

To start, there are 2 situations where the TFSA is the obvious choice:

1. You have no RRSP contribution room remaining
2. You want to have easy access to your savings

The real debate is for anyone not maxing out RRSP contributions, but wanting to save for the long-term. Making an RRSP contribution will get you a tax break today but will be taxed as income when you draw on those funds during retirement. To fund your TFSA, you’ll be using after-tax dollars but they won’t be taxed when you withdraw them down the road.

The bottom line here is that the TFSA wins if your current marginal tax rate is lower than your anticipated marginal tax rate when you would draw from your RRSP in retirement.

Betting on Yourself

What do savings contributions and marginal tax rates have to do with betting on yourself? Simple, do you think you’ll do well enough financially for your marginal tax rate to be higher in retirement than it is today? Are you going to place your wager on a higher or lower marginal tax rate in your retirement years?

If you plan to work as an employee until age 65 and then retire off on your pension income and savings, your marginal tax rate is likely to be lower in retirement than it is now (unless your portfolio does tremendously well).

On the otherhand, if you currently working to build streams of passive income through businesses or real estate investments, then some of your income may persist into your retirment years, and your marginal tax rate may be higher than it is today. In this case, the TFSA will be your winning strategy.

Beware the Trend

Regardless of what you estimate your future income will be, the rates for each tax bracket are likely to be higher in the future. Given the nature of our pension system and demographic trends, tax cuts seem unlikely over the longhaul.

Simply consider the number of people currently working today compared with the number of retirees today. The current ratio of income earners to retirees allows our social security program to work well, but this ratio will be changing soon. As the boomers enter retirement, there will be more retirees and fewer income earners (taxpayers) to pay for the retirement benefits of the boomer generation. When the government needs to cover the benefits they’ve promised our aging population, tax cuts are out of the question.

Bottom Line

The sustainability of social security is questionable, so be sure you save enough during your working years to fully fund your own retirement. For most, that means socking away more than the $5,000 per year we’re allowed to contribute to our TFSA accounts to make sure your “Golden Years” are truly golden. To make the most of your savings strategy, consider a Self-Directed TFSA which opens up more investment options compared with Savings or Mutual Fund TFSAs.

Most importantly, if you’re not yet betting on your marginal tax rate being higher during retirement, figure out a way to make it happen!

photo credit: banspy

Many of us only think of our RRSP or TFSA accounts only when tax time rolls around, but setting up the right accounts and considering your strategy before the tax rush is a worthwhile idea. In 2009 the Canadian government introduced the Tax-Free Savings Account (TFSA) which is currently available in 3 general flavours:

1) Savings
2) Mutual fund
3) Self-directed

Aside from creating additional confusion for Canadians about where to park their savings, the TFSA has been a great tool for the financially savvy. I personally prefer real estate investments over stocks, bonds and other paper assets, but enjoy having my Tax-Free Savings Account as a place to accumulate savings between the purchase of one rental property and the next. As I gathered statements for each of my accounts in preparation for another rental property purchase last week, I realized how my TFSA has served me well in saving for some big purchases.

Whether you are saving for your next rental property, a down payment on a place of your own, a new car, or braces for your kids, I wanted to share some basic knowledge that can help everyone make the most of their Tax-Free Savings Account. The best place to start is to understand each of the 3 main types of TFSA accounts that are currently being offered.

1) Savings TFSA

The most basic type of Tax-Free Savings Account, and the type most people are familiar with is the regular savings account. These accounts work just like a savings account at any bank where interest is earned on the balance you keep in the account, but the interest you earn will be tax free. With the record low interest rates seen over the past couple of years, it doesn’t take a genius to make a better return using one of the other options. Plain vanilla savings accounts generally only make sense for your TFSA if you will soon need access to your funds, or wish to remain very conservative. If you can wait on the funds a while but still want to keep your money safe, you can consider purchasing GICs in one of these accounts to boost your interest earnings.

2) Mutual Fund TFSA

If you’re in it for the long-haul, a better option may be the mutual fund TFSA. I am not a fan of mutual funds due to the associated management expenses and fees, so I’d recommend looking for a mutual fund TFSA which allows you to invest in index funds. If you’d like to earn a higher return over the long run without much active management, buying index funds within a mutual fund TFSA may be a great choice.

3) Self-Directed TFSA

Finally, if you want more control over your own investments, a self-directed TFSA is probably what you are looking for. With these accounts you can make your contributions and then invest your savings as you see fit. Most self-directed tax-free savings accounts are offered through discount brokers and have reasonable trading fees. Within these registered accounts you can trade anything but futures and forex. The one thing to watch out for with these accounts is admin and withdrawal fees.

Beware of Fees

When setting up a tax-free savings account of any type, be sure to read the fine print. Be sure to avoid administration, transfer, and trade fees early on in your TFSA’s life since these fees can easily eat up any tax savings in the early years. Most Canadian discount brokerages offer self-directed accounts so be sure to shop around to find the best account for you.

My TFSA Weapon of Choice

I have been using a Questrade Self-Directed TFSA since it was introduced in 2009. The account has no annual fee or inactivity fees, a low balance requirement of $1,000, easy funding through online banking, cheap trades (currently $0.01/share with a $4.95 minimum and $9.95 maximum), and good customer service. In addition, they also offer a $50 Questrade Referral Bonus if you sign up through a referral. Sign up using the banner below and you’ll be credited with $50 in free trades.

If you are looking for a great way to make the most of your TFSA, go self-directed. And, if you’re looking for the way to make the most of that, sign up for Questrade, the $50 in free trades is a great way to get yourself started. Minimizing your fees early on will maximize your returns and help you get the most out of your TFSA.

photo credit: Ksionic

Rent To Own is a fantastic concept which has been gaining traction among renters who want to gain access to the benefits of home ownership, but have unique circumstances preventing them from making the leap into home ownership. If you are interested in owning your own home, but something is currently holding you back, Rent To Own may be a great solution. 

Who Is Rent To Own For?

There are several circumstances in which people may benefit from participating in a Rent To Own program. A few common obstacles to ownership which can be overcome using an RTO program are:

• Credit problems – Sometimes renters have trouble qualifying for a mortgage due to credit problems, and just need time to repair their credit.
• Lack of down payment – Many would-be first-time buyers lack the down payment required to own their own home.
• Recent immigration – Often times, new immigrants need some time to establish credit or get their citizenship before they can qualify for conventional financing.
• Self-employed or entrepreneur – Banks are a little harder on self-employed individuals, and there is often a need to establish a track record before securing a mortgage.
• Intimidation of buying your first home – even with good credit and a fat down payment, some buyers would still prefer to "try before they buy".

 Rent To Own Benefits

There are a wealth of benefits for participants of a Rent To Own program on both the investor and tenant-buyer side. As a tenant-buyer, you gain flexibility and peace of mind in addition to the financial rewards of home ownership. Here are some of the key benefits as a tenant-buyer:

• Minimal cash required – Unlike a straight purchase of you own home, the cash requirement is relatively small. You won’t need a large down payment, or extra cash to cover closing costs.
• Poor credit can still work – If your credit has suffered recently, you can move into a home you love, and give your credit some attention and healing time before closing.
• Rent credited towards purchase – A portion of the monthly rent is credited towards the purchase of the property which allows you to start building equity right now.
• Faster equity accumulation – Equity accumulates much faster during a Rent To Own program than during the first few years of a conventional mortgage. Your purchase credit will be more significant than the principal paydown.
• Ownership experience – As a tenant-buyer, you’ll run your own home. As long as you hold up your end of the bargain you are free to maintain, modify or renovate as you see fit since at the end of the day the home will be yours.
• Flexibility – While there is some commitment involved in any Rent To Own program, you still get to "try before you buy". If you don’t like the home, the area, or something changes in your life, you have options.
• Peace of Mind – Knowing that you will own your home at the end of the day affords a certain peace of mind to tenant-buyers. You won’t have to worry about rent increases, an absentee landlord, or how long you can stay in the home because you’ll be in charge.

If you are facing an obstacle preventing you from owning your own home, you may want to try working with a Rent to Own professional to purchase either a home they have in their inventory, or to find a home suitable to you for purchase. Don’t be afraid to do the math and see if this strategy could work for you.

TFSA Basics

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:

1. You have no RRSP contribution room remaining
2. Your current marginal tax rate is lower than your anticipated marginal tax rate when you draw from your RRSP
3. 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.