Gail Bebee is the author of No Hype – The Straight Goods on Investing Your Money. She can be reached at gbebee@gailbebee.com 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 Money can be withdrawn tax-free at any time and the withdrawn amounts can be re-deposited the following year.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.
New to direct investing? The series
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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.
