Gail Bebee is the author of No Hype - The Straight Goods on Investing Your Money. She can be reached at firstname.lastname@example.org and her website is www.gailbebee.com. This is the final article in a 12-part series for people that are new to investing on their own.
No series on investing would be complete without addressing the impact of our government on our investing returns.
The usual approach to this subject is negative, focusing on the nasty bite the taxman inflicts on investing profits. In this article I want to take a more positive tack and discuss the opportunities to boost your returns by taking advantage of programs offered by the government of Canada.
At the top of my list is the Tax-Free Savings Account (TFSA) which rolled out in January, 2009. The program, as its name implies, is designed to encourage people to save money. It allows individual Canadian residents 18 or older to contribute up to $5,000 tax-paid dollars annually to a TFSA and avoid paying tax on all the profits earned inside the account. It's a great place to put investments such as bonds and guaranteed investment certificates (GICs) which generate fully taxed income. For example, if your tax bracket is 40 per cent, investing $5,000 in a 4-per-cent GIC yields $120 after tax after one year; inside a TFSA you earn $200, over 60 per cent more.
What I really like about a TFSA is its flexibility. Any unused contribution room can be carried forward. Money can be withdrawn tax-free at any time and the withdrawn amounts can be re-deposited the following year. That makes it a suitable spot for money earmarked for either short-term or long-term savings goals. I think a TFSA should figure in the personal finances of almost every adult Canadian resident. A TFSA can be easily opened at any discount broker and most financial institutions.
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If you have children who will need ever more costly post-secondary education at some point, the Registered Education Savings Plan (RESP) should definitely be on your radar screen. Where else can you automatically earn 20 per cent or more on your money? That's not a misprint: if your family's net income is more than $77,664 and you contribute $2,500 annually to a special RESP account, you can receive a Canada Education Savings Grant (CESG) of $500. And, you can make this contribution and get the grant every year, for each of your children, until they reach the age of 17. The lifetime maximum grant available is $7,200 per child. You invest the money in an RESP account (the specific investments that are available depend on the plan you choose) and your profits grow tax-free.
Once the money is withdrawn for eligible educational purposes it is taxed in the hands of the student. The one downside to an RESP occurs if your child does not pursue post-secondary education. You must return the CESGs to the government and pay tax on the accumulated income (i.e. the profits).
To take advantage of the RESP, you'll need a special account. Discount brokers among others, offer these accounts.
Before deciding which financial institution will benefit from your RESP business, it's essential to familiarize yourself with the minutiae of RESPs.
A good place to start is this Government of Canada website.
You should also read the Ontario Securities Commission brochure: Get the facts about RESPs before you invest. The latter is vital reading whether or not you live in Ontario.
No. 3 on my list of profit-boosting government programs is the well-known Registered Retirement Savings Plan (RRSP). Why only third? Because, I prefer tax avoidance (TFSA) and free money (RESP) over a program which only defers tax (RRSP). RRSPs encourage Canadians to save for retirement by letting them contribute untaxed dollars to a special account. For the 2009 tax year, you can contribute up to 18 per cent of your previous year's earned income to a maximum of $21,000. You can carry forward unused amounts. RRSPs are a good home for your most highly taxed investments, but there are many other qualified choices as listed in this Canada Revenue Agency bulletin which also generally applies to RESPs and TFSAs. Your savings grow tax-free inside your RRSP account, but the tax man gets his money when you withdraw the funds which are then taxed as income, the most highly taxed category.
Distributions from Registered Retirement Income Funds (RRIFs, the most popular fate for RRSP money after retirement) receive the same tax treatment. Nonetheless, a tax dollar deferred will earn you more profits and should not be ignored.
Like TFSAs and RESPs, RRSP accounts are widely available. Caveat emptor. Before opening an account for any of these three programs, ask about any applicable fees such as annual administration and withdrawal fees.
If you still have money to invest after availing yourself of the above programs, consider buying some quality dividend-paying stocks which are eligible for the Canadian dividend tax credit. The tax credit effectively boosts your after tax profits. If you are in a lower tax bracket, the government may even pay you to earn these dividends. In British Columbia, for example, if your taxable income is $35,716 or less, the 2009 marginal tax rate on dividends is 14.36 per cent.
If you haven't taken advantage of the profit-boosting opportunities presented by TFSAs, RESPs, RRSPs and the Canadian dividend tax credit, do take the time to assess the impact these programs could have on your personal financial plans. I am confident that virtually all readers who do will be financially rewarded for their efforts.
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