Family finance

Tax-Free Savings Accounts are growing more valuable by the day

If you haven't already done so, you can now put up to $10,000 into your Tax-Free Savings Account, and starting next year you'll be able to add another $5,000. That's because, starting with each calendar year after 2008, you build up $5,000 of contribution room per year. If you didn't contribute in 2009, you have that year's $5,000 of room plus the $5,000 of room for 2010. This makes TFSAs an increasingly important investment tool.

But as contribution room continues to add up, it raises an interesting question. What do you hold in your TFSA? Many people, according an Ipsos Reid report, have taken an ultra-conservative approach and are using TFSAs to hold GICs and other fixed term deposits.

But if your bank is paying you 1% annually on your GIC, it would take 70 years to double your money - at 2% it would take 35 years to double up. Even worse, with inflation factored in, consumers may actually be losing money on bank deposits.

TFSAs can hold many other investments that are potentially more rewarding. You should talk to your financial advisor about alternatives. "If time is on your side and the goal is to save long term, savings accounts and deposits might not be the most suitable investments for your TFSA," says Wilmot George, Director, Tax and Estate Planning with Mackenzie Financial. "While these limit downside risk, the potential for strong tax-free growth is also limi"

Here are four reasons to consider investing in a TFSA:

 

Any investment return (capital gains, interest and dividends) earned in a TFSA is never taxed, not even when withdrawn.

TFSA money can be used for any purpose you wish - from down payments on a home to vacations or financing your child's college education.

Unused contribution room can be carried forward to future years. And any amount withdrawn from a TFSA can be re-contributed in a future year without requiring new contribution room.

Making a TFSA withdrawal won't affect your eligibility for the federal tax credits or income-tested benefits, such as the Canada Child Tax Benefit, Old Age Security or the Guaranteed Income Supplement.


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Family finance

Are you sitting on
your cash?
If so, you may want to consider an alternative

Canadians entered 2010 sitting on a mountain of cash - about $1 trillion to be exact. It's largely sitting in savings accounts and GICs, and here's the rub: all you can get on short-term savings is about 0.25% and on five-year deposits about 3.25%. It's hard to make money at that rate. In fact, if you invested your money at 1% it would take 70 years to double and at 2% it would take 35 years to do so.

The returns get even worse when you deduct taxes and calculate in inflation. In fact, you could actually end up losing money. If you're sitting in cash, and you intend on leaving your money there for a long period - five years or more - you may want to talk to your advisor about the various fixed income, balanced or equity alternatives you can use. As the accompanying chart illustrates, GICs just won't make you much money - if any.

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Manager views

Is there growth in emerging markets?
James Morton thinks there is.

Some of the priciest real estate in Asia can be found on the aptly named Victoria Peak, which towers over Hong Kong's business district. Prices there are probably only matched on the Bund in central Shanghai where villas are going for $8 million. Western investors who watched the real estate bubble burst in the US have speculated that China's real estate market will soon blow up as well, putting an end to the country's decade-long period of surging growth. But James Morton, Manager, Mackenzie Cundill Emerging Markets Value Class, believes the China doubters have it all wrong. "I can tell you that fears of a bubble are exaggerated," says Morton. "The corporate sector is healthy and governments across Southeast Asia are in surplus. It's a very different picture than Europe and the US."

Morton, who also manages Mackenzie Cundill Recovery Fund, knows China first hand. He started meeting with company executives across the region after China created the first free economic zone in Shenzhen, where the country's manufacturing boom began. Then in 1999 he took the helm of the newly-minted Cundill Recovery Fund which had a mandate to buy companies emerging from a financial crisis - in this case the Asian currency washout. Since then he has watched Asia rebound as it learned from the mistakes that had pushed a number of countries and corporations across the region to the edge of bankruptcy.

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