There is a lot written in the newspaper about TFSA.  It is true that they are a great investment vehicle, one everyone should have, but in a financial planning perspective, they need to be used appropriately.  Let me qualify my statement with a few points:

.  TFSA versus savings account: If you currently have a savings account earning interest like an ING account for emergency purpose for example, a TFSA is ok for this purpose but you have to be aware that money withdrawn can NOT be put back in until the following calendar year.  Therefore, TFSA are not appropriate for savings account you use and draw from on an ongoing basis.

· TFSA versus Mortgage: if you have a Home Equity Line of Credit (HELOC), it may be best for you to use funds you have to reduce that mortgage rather than putting it in a TFSA.  This is especially true if your HELOC rate is greater than the TFSA rate.  Money saved on a HELOC will likely be at about 4.5% compared to 3% in an ING TFSA for example.  Both are tax free.  So, clearly, reducing your HELOC mortgage is best in this case.

· TFSA versus closed mortgage: If you have a closed mortgage, you can’t borrow the funds as easily again when an emergency occurs, therefore, in this case, I would say to save in a TFSA for an emergency purposes.

· TFSA versus open investments: If you already have an investment portfolio, you should transfer $5000 annually from that account to your TFSA to shelter the earnings.  Therefore, you don’t necessarily need new funds to make your TFSA contribution.

· If you have little RRSP room and need to save for your retirement: TFSA are the best place to invest for long term accumulation.  You should invest these funds as part of your long-term investment strategy. 

· Wealth accumulation: TFSA are good for your emergency savings but they are really great for accumulation .  The tax saved on interest, gains or dividends is minor on $5000 but over several years, if you contribute $5000 per year and if you don’t make any withdrawals, the tax saved on the large accumulation will be significant.  This is especially when TFSA gets really exciting!

As you can see, TFSA pitfalls and misuse can easily occur if you don’t take your circumstances in consideration. It is best to review these options with us so, we can help you figure out what is the best given your own personal situation.

Call us anytime!

The Bank of Canada has slashed its key overnight lending rate by 75 basis points yesterday, to 1.5%.  The Chartered Banks’ new prime rate is 3.50%. Many Bank watchers had been anticipating a cut of just 50 basis points. 

“The outlook for the world economy has deteriorated significantly and the global recession will be broader and deeper than previously anticipated,” the Bank said in a statement. “Measures taken by major governments are beginning to encourage credit flows, although it will take some time before conditions in financial markets normalize.” The Bank said that the Canadian economy had unfolded as expected through the summer and early fall, and admitted that it is now following the rest of the world’s economies into recession.

Lower borrowing cost is good news if you have debts.  However, you may be surprise d to find out that credit cards have not lowered their interest rates and Home Equity Line of credit have only dropped by a fraction of recent cuts.  The spread banks now make between mortgages / HELOC and GICs is getting thinner.  Major Banks have reported that they can’t pass on the full reduction of recent rate cuts to the consumer.  New HELOC rates now range from prime +.5% to prime +1% currently from 4.25% to 4.75%.

Please note that if you have a HELOC in place you may be grandfathered the Bank’s prime rate of 3.5%.  Make sure to never close that grandfathered HELOC.  You may never be able to get prime rate again.