Welcome to
super saver spring
offer ends april 20
save over \$140
Sale ends in
\$0.99
per week for 24 weeks
Welcome to
super saver spring
\$0.99
per week for 24 weeks
save over \$140
// //

### Investor Education

I'll give you the bad news first. The average score on last week's third annual Investor Clinic quiz was 45 per cent.

The good news? That's actually a respectable score, considering I went out of my way to make some of the questions exceptionally difficult.

Several readers e-mailed for an explanation of certain answers. So today and next week I'll look at a handful of these answers in detail.

If you haven't taken the quiz yet, you can find an interactive version here.

By far the question I received the most e-mails about was question No. 5:

Dorothy is 25 years old and has contributed a total of \$3,000 to her tax-free savings account. Her TFSA is now worth \$3,800. As of Jan. 1, 2014, the maximum she could contribute would be:

• a) \$5,500
• b) \$26,000
• c) \$27,200
• d) \$28,000

Just 40 per cent of respondents chose the right answer: d.

Some readers thought it must be a misprint, but I can assure you it is correct. The TFSA, available to Canadians 18 and over, was launched in 2009 with an annual contribution limit of \$5,000. The limit was the same for 2010, 2011 and 2012, but was raised to \$5,500 in 2013 and will remain there in 2014.

The key thing to know is that contribution room is cumulative. If you add up all of the annual limits (don't forget 2014), you get \$31,000. You then have to subtract the \$3,000 that Dorothy already contributed, which gets you to the answer of \$28,000. The fact that her TFSA has grown to \$3,800 is a red herring; it's how much you put in that matters to your contribution room, not the value of your TFSA.

Here's another thing to keep in mind: If you make a TFSA withdrawal, the amount is added back to your contribution room. However, this doesn't happen until the calendar year following the withdrawal, so you can't immediately recontribute the funds (unless you already have sufficient contribution room).

Question No. 6 also stumped a lot of people:

Dave has a fixed-rate mortgage at 4 per cent and a marginal tax rate of 40 per cent. If he buys a \$10,000 GIC in a non-registered account, what interest rate would the GIC have to pay in order to match the after-tax return of paying down his mortgage with the \$10,000 instead?

• a) 4.1 per cent
• b) 5.3 per cent
• c) 6.7 per cent
• d) 8.8 per cent

The correct answer, c, requires a bit of math. When you pay down your mortgage, you effectively earn an after-tax return equivalent to the interest rate on the loan. So the question becomes: What GIC interest rate, when taxed at 40 per cent (because the GIC is held in a non-registered account), would equal the mortgage rate of 4 per cent? If X is the required GIC interest rate, Dave's after-tax return would be 0.6 times X. If 0.6 times X must equal 4 per cent, X is therefore 4 per cent divided by 0.6, or approximately 6.7 per cent.

I chose this question because it demonstrate the benefits of paying down one's mortgage. The return is guaranteed, and on an after-tax basis it is much higher than you can get from a GIC.

The final question I'll discuss today is No. 14:

For the 10 years ended Aug. 31 â€“ a period that included the global financial crisis of 2008-09 â€“ the S&P/TSX composite index posted an annualized total return, including dividends, of approximately:

• a) 3 per cent
• b) 5 per cent
• c) 6 per cent
• d) 8 per cent

The most popular answer was c, but the correct answer was actually d. The question demonstrates that stocks are capable of delivering solid long-term returns even when they suffer a serious short-term setback. That's why I believe stocks should be part of a well-balanced portfolio.

2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

View more suggestions in Following Read more about following topics and authors
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mailâ€™s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mailâ€™s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mailâ€™s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

• Treat others as you wish to be treated
• Criticize ideas, not people
• Stay on topic
• Avoid the use of toxic and offensive language