With the upcoming tax free savings/investment account in 2009, my mind has been racing about what exactly to do with the account.
Between my wife and I, we will have $10,000 worth of contribution room available to us in the first year which we intend to fully maximize.
How do we intend to use the account? I’ve written a few ideas in the original TFSA column which I’m going to expand on below.
I am a big fan of passive income which is evident in my dividend investing endeavors. One idea that I have for a tax free investment account is to invest for income.
The reason being is that the income is completely tax free.
With my leveraged account, I don’t invest in anything that produces a return of capital like income trusts or corporate mutual funds. However, since taxation isn’t an issue with the TFSA, I will be looking into consistent high yielding equities to produce a tax free monthly income.
Some equities that come to mind are REITs and income trusts like Canadian Oil Sands.
Thus far (as of Jan 2, 2009), Questrade is the first and only discount brokerage to offer a tax free trading account.
Another idea is to use the TFSA for aggressive equity/options trading. This one is not as attractive as investing for income as capital losses cannot be claimed within a TFSA account.
On the other side of the coin, gains will not face any taxation either.
One lower risk options strategy is to write call options for equity positions that you already own.
With this strategy, you set the price that you are willing to sell your position for, but collect a premium in the process. If the stock price raises above your limit before the expiry date, you will be forced to sell. However, if the stock price stays flat or goes down during this time, the option will expire.
The result? You get to keep equity position and your premium collected. If you like, you can keep writing call options and collecting those premiums.
Check out this link for a detailed series on how call options work.
Credit Card Arbitrage
When I wrote about credit card arbitrage before, I came to the conclusion that the strategy wasn’t worth it due to the thin spread between borrowing and accumulated interest after taxes.
However, using a TFSA in conjunction with this strategy eliminates the taxation on the earned interest and makes the strategy more feasible.
Basically, take the free money that select 0% credit cards offer, deposit it into a high interest tax free savings account (approximately 3% these days), and collect the tax free returns on the free money.
The Globe and Mail
The biggest caveat being to watch the dates when payments are due.
4. Emergency Fund
This is perhaps the most popular solution for the TFSA as it will allow people to let their “emergency” money grow/withdrawn tax free.
How the Tax Free Savings Account Really Works
While there’s nothing wrong with using the TFSA this way, there might be a bigger potential with using the TFSA as a retirement account.
What do you plan to do with the upcoming tax free savings account?If you would like to read more articles like this, you can sign up for my free weekly money tips newsletter below (we will never spam you).
Posted in tfsa and tagged tfsa, wealth strategy