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Higher GIC Rates with Finizi

Kim Petch — Wed, 22 Feb 2012 10:45:56 +0000

You may recall that I wrote about a brand new online service for Canadians called Finizi a few months ago. I thought I would post an update today to let you know how they’re doing. In just a few months, they’ve completed over $40 million in GIC auctions.

Finizi offers a new, easier way for Canadians to purchase GICs. Using their online portal, financial institutions can bid for your business and you can select the best rate for the GIC term of your choice. If you take a look at their top bids, you’ll notice that the rates are significantly higher than those offered by Canada’s largest banks.

Last week, I posted some GIC and savings account rates from a few mid-tier Canadian financial institutions. While these rates are higher than those of the big banks, they’re not as good as those offered by Finizi. In fact, a few readers mentioned that you can get higher rates by using a GIC broker or shopping the credit unions – both excellent suggestions.

If you’re looking for an easy way to buy a GIC at a higher rate, you may want to give Finizi a try. Their rates seem comparable to those offered by brokers and credit unions and you can handle everything online. Best of all, the service is free to use.

Finizi Update

Finizi founder and CEO Daniel Shain recently sent this press release to me in order to provide an update on Finizi’s progress since their September, 2011 launch, so I thought I would share the information with you here:

CANADA’S FIRST AND ONLY CONSUMER GIC AUCTION WEBSITE

EMPOWERS INVESTORS DURING RRSP SEASON

Finizi.com introduces new features including instant auction results, customer rewards and

Canada’s most comprehensive credit card comparison and recommendation platform

Since launching its live online GIC purchase engine across Canada in September 2011, Finizi Corp., the company behind the revolutionary online platform www.finizi.com, has been hard at work planning for the hectic RRSP season, the busiest time of the year for GIC sales.

Finizi offers an online platform where financial institutions bid for customers’ business in live and fully transparent GIC auctions. Through the online portal, consumers view the top rates, make their selection, and complete the GIC purchase electronically without stepping foot into a bank. Also, since Finizi collects a finder’s fee from the financial institutions using its platform, the service is completely free for consumers.

The company recently finished its three-month pilot test of the website, during which it generated millions of dollars in GIC sales and provided the absolute highest GIC rates in the country. “Customers have been providing us with rave reviews and have recommended our service to their friends and family,” says Finizi Founder & CEO Daniel Shain. “The three most frequent comments we’ve received have been ease of use, love of its simplicity, and reaffirmation that this is a service that people want.”

“While we are pleased with our progress to date, in the online world, we are in a constant state of improvement, driven always by real time customer experience” says Shain. “Users wanted, and we responded with better auction mechanics.” For GIC auctions less than $100,000, consumers are now able to view the top bids within seconds. For auctions greater than $100,000, financial institutions have until the end of the day to bid. The company has also expanded their product offering with the introduction of TFSAs and monthly payout GICs.

For a limited time during RRSP season, Finizi is rewarding customers for using its service. Users that start an auction and complete a GIC purchase through the website will be entered into a draw. After the February 29^th RRSP contribution deadline winners will be selected to receive a $10 to $50 gift card from prominent Canadian retailers including Tim Horton’s, Cineplex Odeon, Sporting Life and Kernels Popcorn. Contest rules are posted on the company’s website.

Finizi also launches its first educational financial tool—the most comprehensive credit card comparison and recommendation platform in Canada. This smart engine allows customers to input and rank order their credit card requirements. From the hundreds of credit cards available in Canada, they receive a recommendation on which cards are most suitable for their usage. “What drove this development was simple,” says Shain. “Consumers want to apply for the card best for them, but who has the time or inclination to compare the different cards available from dozens of credit card issuers across Canada? At Finizi.com, consumers get to make an informed decision on what card is best for them with an engine that compares prices, reward programs, travel insurance and other benefits.”

(Disclosure: I have no financial interest in Finizi, nor was I compensated in any way for posting this update.)

GIC or Savings Account?

Kim Petch — Tue, 14 Feb 2012 10:45:48 +0000

I recently had two reasons to look up the going rates on GICs and savings accounts. I thought I’d share what I found with you today and raise the question: Is it worth it to put cash into a 5-year GIC when some savings accounts are paying almost as much while offering the same safety and more liquidity?

Why GICs or Savings Accounts?

I mentioned two reasons I was interested in looking up rates: First, we’ve been contributing more monthly to our sons’ RESP since the older two are turning 17 this year. (Yikes!) That makes this the last year we can contribute to an RESP for them and receive the 20% CESG. As a result, some cash has built up in the brokerage account where we hold the RESP. Since we’ll need the money relatively soon, stocks and bonds are not an option for us. Our discount brokerage doesn’t pay interest on cash balances, so GICs were the only choice other than zero return here.

Second, we have a GIC maturing soon and we need to decide what to do with it. Should we roll it into another GIC or put it in a savings account? This is part of the safety component of our RRSP, so again, I’m not even considering equities or bonds for this particular slice of capital.

Select GIC and Savings Account Rates for Canadians

I didn’t look up rates for every financial institution, so I’m only including the ones I investigated here. While it’s not a complete picture, it does provide a decent idea of the range of options out there today. (These rates were current as of last week and probably haven’t changed much since.)

Sample Savings Account and GIC Rates for Canadians: February, 2012

	Ally	ING	Canadian Tire	CT TFSA	Questrade
Savings Account	2.00%	1.50%	2.00%	2.75%	—
1 Yr. GIC	1.50%	1.25%	1.15%	1.40%	1.85%
2 Yr. GIC	1.75%	1.50%	1.55%	1.80%	2.05%
3 Yr. GIC	2.00%	1.80%	1.75%	2.00%	2.30%
4 Yr. GIC	2.25%	1.90%	1.95%	2.20%	2.40%
5 Yr. GIC	2.5%	2.35%	2.43%	2.68%	2.68%

Rather than add a bunch of asterisks to the table, I’ll just point out a few key things here:

There are two columns for Canadian Tire Financial. The second lists their rates for TFSA accounts. As you can see, there’s quite a difference. I’m not sure how long that will last.
The rates quoted for Questrade (discount broker) are based on the best GIC rates posted in their daily bond bulletin at the time.
Not all of these financial institutions offer all kinds of accounts. For example, only Questrade offers RESPs. Canadian Tire and Ally don’t offer RRSPs.
Right now, ING Direct is offering a 90-Day GIC for 2.50%. That’s a great rate, but it’s only for RRSP and TFSA accounts, and it’s only available until the end of February. At the end of the 90 days, you’ll need to find a new place for that money.
ING is also currently offering a 2% rate on TFSA savings accounts. I’m not sure how long that will last.
There are plenty of other financial institutions out there. They may offer other options if none of the above fit for you.

All of this can get a little confusing, but it just goes to show that there are no one-size-fits-all solutions in personal finance. Five different people could look at this information and make 5 different choices based on the type of account they hold, their time frame, and a host of other factors.

Back to our original question: is it worth it to put your money into a 5-year GIC when it’s earning just a hair more than some savings accounts? Well, it depends. If you really want the maximum return on your money and you don’t need it for 5 years or more, it still looks like most 5-year GICs beat most savings accounts. If, however, you don’t want to lock up your cash, or you’ll need it before 5 years have passed, you may want to consider a savings account instead.

There are plenty of options for your cash out there. Understanding your financial situation coupled with a little homework can help you make the choice that’s right for you.

Have you made any decisions on where to park your cash yet this year?

5 New Year’s Resolutions that are Good for Your Wallet

Guest Post — Fri, 06 Jan 2012 10:45:49 +0000

The following is a guest post with some good advice to kick off 2012. Enjoy!

The New Year is upon us, and for many, this time of the year signifies a time of new beginnings. People strive to better themselves by creating New Year’s resolutions, many of which are focused on health. While trying to be a better person in the new year is nothing to scoff at, there are a few New Year’s resolutions that are good for you both physically and mentally, as well as financially.

Losing Weight

Obesity is one of the greatest epidemics plaguing America today, making losing weight one of the most popular New Year’s resolutions this year. However, losing weight isn’t just ideal for your health, it is also highly beneficial to your wallet. In addition to saving money with reduced eating out and grocery bills, losing weight will also save you money longterm as it will provide you with lower health insurance premiums and keep you from suffering expensive medical conditions, such as diabetes.

Going Green

Going green has been on nearly everyone’s mind in recent years, and many are choosing to live more sustainably this year. While some aspects of going green aren’t always cheap, such as new solar paneling, everyday switches, such as switching to CDLs, adding weather stripping to doors and windows, and lowering the thermostat, can actually save you money while you help the environment.

Quitting Smoking

Smoking is in no doubt an expensive habit. Regular smokers can find themselves spending upwards of $200 a month on cigarettes, and even more so in the future should they begin to suffer from one of the numerous health conditions associated with smoking. By quitting smoking, you can save over $1,200 a year alone in cigarettes, and even more down the road by avoiding high medical bills.

Finding a Better Job

There is no doubt that millions of American’s are fighting for new jobs, whether it be selling car insurance or selling real estate, but that doesn’t mean that you should skip out of hunting for a new job yourself in the new year. Finding a new job can not only provide you with a better salary, but also with health insurance and 401(k) match that can provide you with thousands of extra dollars in the future.

Skipping the Coffee Shop

Caffeine is one of the most addictive, a socially acceptable, chemicals in our culture today, and it’s not uncommon to hear someone say, “You don’t want to see me before my morning coffee” or “I really need a Diet Coke right now.” However, that being said, caffeine is also a highly detrimental and expensive habit. The morning coffee that you grab on your way to work or that soda that you get at lunch can quickly add up. So by choosing to give up caffeine in the new year, you will be sure to save yourself a couple hundred dollars.

Everyone wants to get off on the right foot in the new year, and choosing the right New Year’s resolutions is a great way to do so. Just make sure that when you choose your resolutions that they are doing more for you than just making you feel like a better person – make sure that they will also increase your monthly budget too.

TFSA Contribution Limit for 2012

Kim Petch — Tue, 15 Nov 2011 10:45:29 +0000

Simplicity is the ultimate sophistication.

~Leonardo DaVinci

When the Tax Free Savings Account was introduced in Canada in 2009, it was hailed for its practicality and simplicity. Any Canadian 18 years or older can now contribute up to $5000 per year to a TFSA and have those savings grow completely tax free. While TFSA contributions are not tax deductible, you will not have to pay any tax on the money you withdraw from your TFSA.

You can put just about any type of investment in your TFSA, or choose a number of different TFSA accounts for different purposes. You could simply have a TFSA savings account, or you could open a TFSA brokerage account whereby you could include stocks, bonds, ETFs or just about any other type of investment vehicle. Whether you earn interest, dividends or capital gains on your savings, your money can be withdrawn tax free. Sounds pretty simple eh?

A Few Asterisks

While I love TFSAs as an alternate savings vehicle for Canadians, they aren’t always as simple as we’d like them to be. I guess that’s just how these things go. Life is complicated. No matter how much we’d like to simplify things, there are always details, exceptions and little asterisks to contend with. TFSA rules are no different.

There has been some confusion over what happens to your TFSA contribution room if you withdraw your gains as well as your original contributions. We addressed that here in January. The latest question peppering search engines seems to be about the TFSA contribution limit for 2012. Why the confusion? Aren’t we allowed to contribute another $5000 each year?

Inflation Indexation for TFSA Limits

In addition to any unused contribution room from other years, you are usually allowed to contribute an additional $5000 per year. You may notice that there’s sometimes a little asterisk (*) next to this figure because it is indexed for inflation in $500 increments. That means that when the inflation rate applied to that $5000 causes it to rise above $5250, the government will raise the limit to $5500.

The consensus seems to be that if the CPI (Consumer Price Index) runs around 2%, that would mean we should exceed the threshold as of 2012. While that looks likely to happen, the CRA hasn’t officially announced the 2012 TFSA limit as of initial publication of this article. I spoke to someone at CRA last week and they said that the official determination hasn’t been made yet, but that it will (obviously) be out by the end of 2011. He advised us to keep watching the CRA website for TFSA updates. (Update: The CRA has left the TFSA contribution limit at $5000 for 2012.)

With the latest Canadian CPI numbers showing inflation running over 3%, it’s hard to imagine that the TFSA limit for 2012 will not be raised to $5500, but we will find out for sure within the next couple of months. I’m sure that many Canadian financial websites will carry the news once it breaks.

For Math Geeks Only

In case you’re wondering about the details of how inflation indexation is applied to the $5000 contribution limit, I thought I might include a chart* here that shows the calculations. It’s actually very simple math. For this example, I’m using a sample annual inflation rate of 2%. *I shamelessly copied this chart from Gordon Pape’s book on Tax-Free Savings Accounts.

Given that the inflation rate is not static, I’m not sure exactly which CPI rate the government uses. They could use an annual average of the monthly inflation data. I’m also not sure whether they use the headline CPI rate or the core rate, which excludes food and energy.

If you follow the chart, you can see that the cumulative inflation factor just adds 2% to the figure from the previous year. So 2% of $5000 is $100 and that is added to the $5000 amount from 2009. For 2011, you just take 2% of $5100 (which is $102) and add it to the 2010 figure like this:

2011 Cumulative Inflation Factor = $5100 x 1.02 = $5202

Since the cumulative inflation factor will put our $5000 over the $5250 needed to round it up to the next $500 increment in 2012, it seems likely that the TFSA limit will indeed be raised for that year. Again, this example is for demonstration purposes only. I’m not sure exactly which CPI rate the CRA will use. If anyone can enlighten us on that, I’d be most grateful.

I hope this answers some of the questions floating around out there regarding the 2012 TFSA contribution limit.

Update: The CRA has left the TFSA contribution limit at $5000 for 2012.

Your comments are always welcome.

Introducing Finizi: A New Financial Tool for Canadians

Kim Petch — Mon, 19 Sep 2011 09:45:28 +0000

Starting today, there’s a new financial resource for Canadians out there. It’s called Finizi. Basically, Finizi is a free online service that allows financial institutions to compete for your business. At this time they are only offering GICs, but there are plans in the works to offer competitive bidding on rates for car loans and mortgages as well.

How It Works

Basically, you just need to go to finizi.com and:

1. Request a GIC rate

Select the type of GIC you want and specify the amount you’d like to invest.

2. Financial Institutions Bid for Your Money

Review your bids in a live auction environment. Financial institutions bidding for your business may include credit unions, trust companies or chartered banks. So far, they have about 5 institutions on board, but many have said that they would be interested in joining once the platform is up and running. You are notified when the auction closes.

3. Choose a Winner

Finizi will show you the top 3 rates for the auction and you can choose an in-branch or online fulfillment process. Once you choose the institution and rate you prefer, the winning bank will contact you to complete the transaction.

There is no cost to you as the customer. The bank just pays Finizi a finder’s fee. Finizi doesn’t collect money or sell the GICs directly. They simply facilitate the auction.

Win Win for Banks and Customers

Finizi provides a low cost means for financial institutions to acquire new customers. You may enjoy your GIC experience so much that you decide to use that institution for other products as well. There are no fixed costs associated with using the service, so the bank only has to pay Finizi for closed transactions. This is a great way for banks to take advantage of the huge move toward online banking with very little risk or cost.

For customers, this is just an extension of the increasing move to online financial transactions. The auction model is designed to increase flexibility and transparency for financial consumers – no more shopping around for the best rate. This way, banks can compete for your business and you can complete the whole process online from the comfort of your home if you like.

You can learn more about Finizi by visiting their website or you can watch an interview with Finizi founder and CEO Daniel Shain. If enough financial institutions avail themselves of this technology a great competitive marketplace for Canadians could emerge. It’s great to see Canadian entrepreneurs at work! Congratulations to Daniel and his team and best of luck with this new venture.

(Disclosure: I have no financial or business interest in this company, nor was I compensated in any way for writing this review.)

What do you think of this new way of buying GICs?

RRSP vs. TFSA: One Last Dip into the Debate

Kim Petch — Mon, 21 Feb 2011 10:45:11 +0000

The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.

~F. Scott Fitzgerald

Update: Thanks to Arjun at Investing Thesis for including this article in the Canadian Personal Finance and Investing Carnival #16.

Very few topics elicit the kind of virulent debate that the TFSA vs. RRSP argument has generated in Canada this RRSP season. To be honest, those of us who cover finance are probably a little tired of writing about the TFSA vs. RRSP war. I’m sure a lot of readers don’t care to read about it anymore. And yet we (including me, apparently) just can’t seem to let it go. (The RRSP deadline for the 2010 tax year is March 1, 2011, so it should be over soon. )

For years, the RRSP was the stalwart, and really only, widely available tax deferral tool for the average Canadian. Rarely did it come under any real criticism in the mainstream media – until the TFSA came along. Now we see articles almost daily comparing the two. If you point out the short-comings of RRSPs, you can expect a rebuttal accusing you of being an RRSP basher or of “railing against” RRSPs as if you had lost control of your senses. Others will just come right out and say that you’re stupid. Now that really advances the conversation.

On the other side, those who staunchly defend the virtues of RRSPs are sometimes accused of being old-fashioned or in the pocket of the financial industry. Really? Some citizen blogger who works in a completely unrelated industry is conspiring with the Bay Street elite? As a Mom, this is the point at which I would step in between my sons and say “Come now boys. Let’s put this in perspective.”

How about a Little Perspective?

Let’s face it. Those of us who are knee-deep in the nitty-gritty of these financial issues can get a little carried away arguing over the details. To most people, it’s pretty obvious that both RRSPs and TFSAs are great savings and tax management tools for Canadians. Perhaps Jim Yih put it best in his recent article: TFSA or RRSP: Why Not Do Both?

The average Canadian is probably not interested in who’s right or wrong on the most minute details of either product. They just want to understand how they work and how they apply to their personal financial picture. There are some really good basic comparisons out there. Young and Thrifty recently posted a very comprehensive head to head comparison of the two. I wrote a TFSA vs. RRSP comparison last year too. If you’re interested in a little more detail, Larry MacDonald pointed out a few pitfalls to watch out for in 13 RRSP Blunders.

It can also be helpful to read about how other Canadians are choosing to allocate their savings. Paul Brent recently asked me how my family was handling the TFSA vs. RRSP quandary for a Globe and Mail article asking Why Choose a TFSA over an RRSP? The point of the article was simply to give some examples of scenarios where you might choose to top up your TFSA before, or instead of your RRSP.

When you couple the brief quotation in that article with an article I wrote more recently on 5 Reasons to Skip the RRSP Contribution this Year, it’s easy to see how some might put me in the RRSP-basher camp. To be clear, no one has done that to my knowledge. Still, I thought it might be helpful if I spelled my our current thinking on TFSAs vs. RRSPs vs. paying down debt.

Our RRSP Strategy

One area where I do sympathize with the RRSP critics is that I think we need to make sure to remember that we will pay a withdrawal tax when we initially draw down our RRSP accounts, and that the amount of tax we ultimately pay on those withdrawals won’t be finalized until we file our taxes for the year of the withdrawal. It’s important to realize that anything you take out of an RRSP is treated as ordinary income, whether it came from your deposits, capital gains, dividends, or interest income.

On the other hand, TFSAs don’t provide the up-front tax deduction that RRSPs offer. In 2009, we happened to receive a one-time deferred compensation payment from a former employer that would have boosted our income beyond the highest tax bracket. We put some of that money toward our mortgage balance and the remainder in an RRSP. We were able to simultaneously pay down debt, reduce our tax burden, and shore up our retirement savings. This is a good example of an instance where the RRSP makes a lot more sense.

We also maxed out our TFSAs in 2009, the first year they were offered. During the period from 2008 to 2010, our income was uncertain as my husband changed jobs a few times. The money in the TFSA provided a cushion in case of further volatility in our income.

We put a little more money into our TFSA in 2010, but nothing in our RRSP. Our income wasn’t as high, and we chose to put almost all of our disposable income into paying down the mortgage. In 2011, we will pay down the mortgage first, since we don’t have much left owing on it. Next, we will need to contribute to our sons’ RESPs. Two of them will turn 16 this year, so next year is the last year we can contribute for them and still receive the 20% CESG kick.

Larry MacDonald’s article made a good point about the perils of paying down your mortgage at the expense of saving for retirement. We felt OK pursuing this strategy now because we already have a decent emergency fund saved as well as a good start on retirement savings. If we had nothing saved for retirement, we probably wouldn’t be as aggressive about paying down our last remaining debt.

For me, the hardest part of deciding whether (or how much) to contribute to an RRSP in a given year is trying to guess what the future might hold. How will our current marginal tax rate compare to the one we’ll pay in retirement? If our income hits the upper tax brackets in a given year, we will certainly take advantage of the RRSP tax deduction. In addition, Mr. Cents will be eligible for the company RRSP plan this year, so we’ll take advantage of their offer to match monthly contributions up to a certain level as well.

The Bottom Line

TFSAs are better than RRSPs for some Canadians in some years. RRSPs are the better choice for some Canadians in some years. For the majority of Canadians in most years, a little of each is probably a good idea. Declaring a winner is so much less important than understanding how both vehicles work and more importantly, how best to apply them to your own circumstances each year.

How are you handling your savings this year?

(Photo Credit: Feng Yu)

TFSA: Investment Gains, Withdrawals and Contribution Room

Kim Petch — Mon, 10 Jan 2011 10:45:31 +0000

Money often costs too much.

~Ralph Waldo Emerson

Update: This article was included in the 13th Canadian Personal Finance and Investing Carnvial posted at Investing Thesis. Thanks!

As if earning enough money to live wasn’t hard enough, we have to figure out a way to put enough aside for the days when we are no longer earning income. Even more arduous is the task of finding the best vehicle for growing that money. And then there are the taxes . . .

In Canada, we have a new product that is supposed to help defray some of our tax burden. The Tax Free Savings Account became available in 2009 and was considered to be a simple, efficient way for Canadians to save money and avoid paying taxes on the growth of that money. I love TFSAs and I think they’re a great product for everyone. They do seem pretty simple on the surface, but, as always, the devil is in the details.

Capital Growth, Withdrawals, and Contribution Limits

Last year I wrote about TFSA Withdrawal Rules, giving some examples of how they work. In the last couple of weeks, however, I’ve received a lot of questions from readers on how capital growth affects your TFSA contribution room. One reader asked this question:

“If I contribute in 2009 – $5000.00 and in 2010 $5000.00 and in 2011 – $5000.00 for a total of $15,000.00 and say this summer of 2011 it has grown to $75,000.00 and I take out the $75000.00. Is it true that in January 2012 that I can put back $75,000.plus the 2012 $5000.00 for a total of $80,000.00.“

Another reader had a similar question:

“I am also curious about something about gains. I contributed the max $10K in the first two years but doubled it through investing. If I withdraw $20K in 2010, does that mean I can contribute back the $20K in 2011? Someone told me that even if the max contribution over the next 5yrs is $25K, if you build the account to $100K then that is the limit of the account. In other words, if I withdraw $100K in year 6, I can contribute back $105K in year 7. Does this make sense? (naturally the growth numbers are fictional)“

When I tried to verify the answers to these questions, I realized why so many people were asking them. None of the examples on the CRA (Canada Revenue Agency) website address this directly. So I called CRA. The gentleman I spoke to basically looked up the information in the TFSA guide and said that the best way to figure out your contribution room is to just follow the formula given by CRA:

The TFSA contribution room is made up of:

• your TFSA dollar limit ($5,000 per year plus indexation, if applicable);

• any unused TFSA contribution room in the previous year; and

• any withdrawals made from the TFSA in the previous year, excluding qualifying transfers.

The $5,000 TFSA dollar limit is indexed based on the inflation rate. The indexed amount will be rounded to the nearest $500. For example, assuming that the inflation rate is 2% for 2009 to 2011, the TFSA dollar limit would be $5,000 for 2009, 2010 and 2011, but would increase to $5,500 for 2012.

Doing the Math

Scenario #1: Investment Gains

Taking the first reader’s scenario into account, the contribution room calculation for 2012 would look like this:

2012 TFSA Limit: . . . . . . . . $ 5500 (Remember the inflation indexing kicks in in 2012, hence the extra $500)

Unused Contribution Room from 2011: . . + $ 0 (Note that unused contribution room can be negative if you over-contributed in previous years.)

2011 Withdrawals: . . . . . . . + $75 000

2012 Contribution Room: . . . . . $80 500

In terms of the second reader’s question, he is correct. If you contributed a total of $10 000 in the first two years (2009 and 2010) and by tremendous skill or luck doubled that money, you could withdraw the $20 000 at the end of 2010 and contribute back the $20 000 plus your $5000 for 2011. He is also correct, in theory, that if you grew the account to $100 000 in 5 years, you could take that $100K out at the end of the 5 years and recontribute it starting the following January.

I qualified this explanation with “in theory” because this scenario assumes that there were no other withdrawals and no over-contributions. Also, it may not be entirely correct to say that your contribution limit has permanently grown to $100 000 because you could sustain investment losses down the road that would reduce the size of the TFSA. Let’s look at an example that includes some investment losses:

Scenario #2: Investment Losses

Suppose, as in Scenario #1, that you had contributed $5000 per year in each of the first 3 years (2009, 2010, & 2011) for a total of $15 000 in contributions. However, instead of growing the account by 5 fold as in our extremely optimistic first case study, you sustained a substantial 33% loss. Ouch. Your TFSA would then be worth about $10 000 instead of $15 000. If you withdrew the entire $10 000 in 2011, here’s what your 2012 contribution limit calculation would look like:

2012 TFSA Limit: . . . . . . . . $ 5500

Unused Contribution Room from 2011: . . + $ 0

2011 Withdrawals: . . . . . . . + $10 000

2012 Contribution Room: . . . . . $15 500

Note that this contribution room limit is lower than what your limit would have been if you had not sustained any losses. An investor who had contributed the maximum $5000 in the first three years and (in theory) incurred neither gains nor losses would have $20 500 in contribution room: $5000 for 2009-2011 plus the inflation indexed $5500 for 2012.

Final Thoughts

The examples above are very simple. Your personal scenario may be more complicated if you have done any transfers or over-contributed at any time. If you really want to know what your contribution room is, you’re best to just do the math following the CRA formula. You can also get TFSA contribution room information from your My Account page on the CRA website or from the CRA’s T.I.P.S. telephone service at 1-800-267-6999. From the CRA website:

“The Canada Revenue Agency (CRA) will determine the TFSA contribution room for each eligible individual based on information provided by you and the TFSA issuers. Your TFSA contribution room will be shown on your income tax notice of assessment or reassessment.“

You could just look for your contribution room on your notice of assessment, but if you want to do some planning ahead based on different scenarios, it’s good to have an understanding of how these limits are calculated. If you want more information, you can find the TFSA pamphlet on the CRA’s site in HTML or PDF format. I hope this helps those who have been wondering about this.

Your comments are always welcome.

GIC Strategy: Two Important Questions

Kim Petch — Wed, 13 Oct 2010 09:45:39 +0000

To decide is to walk facing forward with nary a crick in your neck from looking back at the crossroads.

~ Betsy Cañas Garmon

Update: This article was included in the 279th Carnival of Personal Finance – 80s Music Edition posted at Dough Roller. Thanks!

I’ve received a couple of questions from readers on how exactly I have allocated our GIC portfolio. Previously, I’ve written about how set up a GIC ladder, but in reality the numbers don’t always work out as neatly as they do in the examples. The idea behind a GIC ladder is to diversify your interest rate exposure. You can do this by owning GICs with durations of 1-5 years or simply buying a new 5-year GIC each year and rolling money back into 5-year GICs as they mature.

The hope is that you can take the confusion of trying to guess where interest rates are headed out of the equation. But what if you are unable to contribute equal amounts each year to a new 5-year GIC? What if your financial situation isn’t quite as smooth as the ones in the examples?

Interest Rate Confusion

Interest rates are always difficult to predict no matter how much you know about economics and finance. The fact is that no one knows what will happen, so we need to try to include multiple scenarios in our planning process. Having said that, I do believe that the current environment is quite unique in that interest rates are, for the most part, at record low levels. Given that, it would be easy to predict that rates have nowhere to go but up.

The flip side of that argument, however, is that rates have already been low for quite some time and there is a chance that they could remain low much longer. You will recall from our biflation discussion that there are strong deflationary forces present in our economy even while inflationary influences like rising commodity prices continue to exert influence as well. So inflation levels aren’t currently very helpful in determining the direction of interest rates.

Given the bipolar economy with which we are faced, it seems prudent to plan for a couple of different scenarios:

Interest rates could remain low, or even move lower, for some time to come.
Interest rates could spike much higher if monetary policy triggers inflation and/or currency wars.

It’s easy to get caught up with predictions like these: “Well, I think deflation will keep rates low in the near term, but the Fed will cause hyperflation down the road.” That may very well be true, but unless you know exactly when rates will begin to rise, it’s very difficult to allocate your capital perfectly. Alternately, such predictions could easily prove to be completely incorrect.

So what’s a GIC investor to do? I don’t have the perfect answer, but I can offer you a couple of really important questions. These are the questions I ask myself before I invest in anything, including GICs:

A. What was I thinking?

B. What if I’m wrong?

Our GIC Allocation

As I mentioned in our Q3 Financial Plan Update, I recently added to our GIC portfolio. Previously, we had most of our RRSP in a savings account because we wanted that money to be liquid in case of emergency. Our income situation was quite uncertain and we wanted to have that money available as a nuclear option if things really went downhill.

Since then, things have firmed up for us, so I felt better about allocating more of that money to GICs in order to gain a few more basis points of interest income. Here’s a rough before and after snapshot of our RRSP cash allocation:

Before

Savings Account: 75%

5-Year (September 2014 @ 3.00%) GIC: 12.5%

5-Year (May 2015 @ 3.25%) GIC: 12.5%

After

Savings Account: 14%

5-Year (September 2014 @ 3.00%) GIC: 12%

5-Year (May, 2015 @ 3.25%) GIC: 12%

5-Year (August 2015 @3.25%) GIC: 25%

2-Year (August, 2012 @ 2.5%) GIC: 25%

1.5-Year (February, 2012 @2%) GIC: 12%

What Was I Thinking?

When I bought these new GICs, I wrote down my rationale. This way, if my strategy doesn’t turn out well, I will at least have some idea where I went wrong. Here’s what I wrote in August:

“Wanted to lock in these rates as bond yields have been falling. Deflation (perhaps for a number of years) is possible. But if inflation occurs and rates rise sooner than I think, we have some cash to put to work, and some shorter-term GICs maturing within 1.5-2 years. If we get some kind of really quick interest rate spike, we still have the option of early redemption.”

So for better or for worse, that’s our plan. You can see that it’s not a textbook GIC ladder. For one thing, it’s heavier on both the 1.5- 2-year and the 5-year ends. I chose this kind of barbell strategy because the shorter term rates are still better than what we’re getting in the savings account, but I didn’t want all of the money locked up for 5 years. The 3 and 4-year rates didn’t offer a whole lot more interest than the 2-year. Besides, one of the 5-year GICs is effectively a 4-year GIC because we’ve had it for over a year already.

What If I’m Wrong?

You can see by my rationale that I’ve tried to cover both inflationary and deflationary concerns. My base assumption is that rates will remain low for at least a couple more years – maybe even longer. If I’m wrong and interest rates spike sooner rather than later, we can redeem these and buy higher-yielding GICs. If we redeem before maturity, we will only receive 0.5% interest. Obviously, we would have to look at a cost-benefit analysis to decide whether or not that would be worth it.

The fact is that there is no single correct way to invest in GICs anymore than there is a right way to invest in stocks or bonds. Each of us has to look at our own financial situation and make the best decision we can with the information we have at the moment. Only time will tell whether we made the best possible choice or not. I hope this helps anyone who had questions.

What’s your GIC strategy?

Which Is the Best Way to Save Money?

Kim Petch — Wed, 16 Jun 2010 09:45:20 +0000

My problem lies in reconciling my gross habits with my net income.

~ Errol Flynn

Update: This article was included in the Festival of Frugality: Summer Edition posted at Where’s My Rolling Pin? Thanks!

I recently received a request from a doctoral student to fill out a short questionnaire on savings methods. The survey was directed at personal finance bloggers. Two different savings approaches were explained, and then respondents were asked which they would prefer, and to what degree. I wasn’t quite sure if I completely grasped the spirit of each approach, but I answered the questions to the best of my ability.

The two approaches proposed by the doctoral student are the circular savings method and the linear savings method. I’m going to outline both of them as explained by the author here, and I’d be

interested in your thoughts on them.

Circular Savings Method

This savings method involves setting aside a certain amount of money at regular intervals, such as each pay period. The idea is to focus on saving the amount that you want to save now, not next month, and not next year. “The future will be exactly like the present: if you save money now, you will save in the next pay period. If you don’t save money during the present pay cycle, it is likely you won’t save money in the next cycle. We want you to focus on your personal savings in the present”.

If you continue to save money each pay period, you will be able to look back at some point and realize that you’ve accumulated a nice nest egg. This method views life as consisting of “many small and large cycles”. I understood the focus of this approach to be saving regularly to the best of your ability given your current circumstances rather than looking very far into the future and trying to come up with an end goal to achieve.

Linear Savings Method

This method views life as composed of “separate time compartments such as the past, present, and future. We want you to think of the personal savings task as part of such a linear progress. Make your saving task a planned one: just focus on the total amount of your savings goal for the future. Think about discrete savings tasks and do each task one at a time. Do not think about what you have or have not saved in the past.”

If you save money now, you’ll be in a much better position in the future. But “saving is not an action that is the end goal, but rather a means to the more important goal of attaining something which lies in the future, such as your retirement or a better life”.

A Balanced Approach

When I really thought about it, I had to conclude that an approach that incorporates both a linear and circular component would probably serve most people well. The survey asked the following question: “If you had to suggest one of these approaches to your blog’s readers, which one would you choose and why?” My answer was as follows:

I can see some merit in both approaches, but I would likely choose the circular method if I had to choose only one. This method makes saving a habit. I think you might be able to use the two in conjunction if you used the linear method to choose a circular savings amount based on your current resources and time horizon.

For example: You could use the linear method to set short and long term savings targets, and examine areas in which to cut spending, or earn more income in order to achieve those big picture targets. Setting a regular savings amount is key to achieving those goals. This savings amount can be adjusted periodically as your life unfolds, but always saving something is imperative.

Another question posed was: “In your opinion, what are the reasons people use a linear or circular savings method for their savings?” Here’s how I answered that one:

Circular savers understand that regular saving is a good way to maintain a disciplined approach to achieving their savings goals. Linear savers are probably more concerned with the big picture and end goals and less concerned with the details of getting there.

It seems like the linear approach would work better for those who are extremely self-disciplined and are able to keep a close eye on the big picture and the end goals. Unfortunately, many of us do not fit this profile and need regular, circular savings to help us enforce that discipline on ourselves. We tend to live in the present and can sometimes forget about or ignore the future consequences of our present actions.

Perhaps one of the reasons we, as a society, have not been saving enough is that we are using the linear saving strategy, but not carrying out the discrete savings tasks necessary to achieve our goals. Including a circular component to our savings strategy would go a long way toward increasing the overall savings rate.

I like to think of myself as pretty well-disciplined. As such, my approach tends to be more linear. But that hasn’t served us all that well over the past couple of tumultuous years as we haven’t been saving regularly. In the past, our income was extremely variable with a modest regular income punctuated by some fairly consistent and sometimes substantial commission windfalls.

As such, I would plan our savings based on this type of linear progression. We’ve managed to save a decent amount without contributing monthly. Still, I’m reconsidering that approach based on some recent changes. I’d like to add a circular savings component to our financial plans in order to make saving a real habit that we can maintain through good times and bad. I’ll have more on that in the next quarterly update, scheduled for the end of June.

What do you think of these two savings methods? Would you lean toward one more than the other, or would you prefer a combination approach?

TFSA Withdrawal Rules

Kim Petch — Tue, 25 May 2010 09:45:37 +0000

The best things in life are nearest: Breath in your nostrils, light in your eyes, flowers at your feet, duties at your hand, the path of right just before you. Then do not grasp at the stars, but do life’s plain, common work as it comes, certain that daily duties and daily bread are the sweetest things in life.

~ Robert Louis Stevenson

Update: This article is included in the Carnival of Personal Finance #259 at A Gai Shan Life.

I love TFSAs. I think they’re the best financial “innovation” to hit the market in a long time. Last week, I wrote a lot about the complexities that have built up, wreaked havoc on, and continue to threaten our financial system.

The beauty of Tax Free Savings Accounts (TFSAs) lies not only in their tax sheltering function, but in their simplicity. The rules surrounding this relatively new Canadian savings vehicle are noticeably sparse in comparison to those surrounding RRSPs and the tax code itself. I’ve previously written about the basics of TFSAs in the context of comparing them to RRSPs. (See TFSA vs. RRSP Duel: Who Wins? for a summary of the basic features of each.)

Today, I’d like to look at the specifics of withdrawing money from TFSAs. Although the rules are pretty simple, things can get a bit confusing, especially if you’re used to dealing with the rules of other financial products. I thought we’d look at a few examples to help make things a little clearer.

TFSA Withdrawal Basics

You can withdraw any amount from your TFSA at any time without paying tax on the principal or any accumulated investment gains. It’s your responsibility to track your contribution room limits, although the CRA does mention your limit on your Notice of Assessment. You don’t have to set up a TFSA or file a tax return in order to start gathering TFSA contribution room. You just have to be at least 18.

The main thing to be aware of when you withdraw money from your TFSA is that you can’t put the money back until the following calendar year. If you put it back in before the end of the same calendar year and that causes your total contributions for that year to exceed your contribution room limit for that year, you will have to pay 1% per month tax on the excess contribution amount.

Example 1

John opened a TFSA in 2009, the first year they were available. He contributed the maximum amount ($5000). In 2010, he was eligible to contribute another $5000 and he did so in January of that year. In March of 2010, John learned that he would be temporarily laid off. He withdrew $4000 from his TFSA, anticipating that he would need the money during his layoff.

A few weeks later, John’s employer landed a contract that meant he would be called back to work after only 2 weeks off. John wanted to put $3000 back into his TFSA, but would be unable to do so until January 1, 2011 since he had already contributed his $5000 limit during 2010. If he was unaware of this rule and contributed the $3000 back anyway, he would be subject to the 1% per month tax until the end of 2010.

Assuming he understood the rules and held off on replacing any of the money he withdrew, John’s contribution limit for 2011 would be $9000. ($5000 for his regular 2011 contribution amount + $4000 to replace his 2010 withdrawal.)

Example 2

This is an example of how I used the TFSA withdrawal rules to manage our finances recently. If you’ve been keeping up to date with my quarterly planning reports, you know that we have experienced quite a reduction in our income level over the past 2 years or so due to my husband’s recent (and frequent) job changes. As a result of a potential budget shortfall this year, I felt that we might need to draw down some of the savings in our TFSAs.

In anticipation of this, I took some money out of each of our TFSAs at the very end of 2009. I did this to ensure that we could replace the money in 2010 if possible. If I had waited until January of 2010 to take the money out, we might not be able to replace that money until 2011.

For example: At the end of 2009, I took $5000 out of my husband’s TFSA, leaving only the accumulated interest in the account. (Note that investment gains and interest are not treated as contributions.) As a result, his new contribution limit for 2010 is $10 000 ($5000 for 2010 + $5000 from the 2009 withdrawal.) If I had waited and withdrawn the $5000 in January, his contribution limit for 2010 would only be $5000.

So technically, if all we wanted to do was to be able to replace the original $5000, we could have done so using 2010′s contribution room. However, now we have the option to contribute an extra $5000 if we are able to do so. Who knows? Things are looking a little better for us than they were at the last quarterly update. Tune in at the end of June for more details!

Note that there were some changes proposed in October of 2009 that would make some withdrawals ineligible for replacement in the following calendar year. However, most of these pertain to transactions by more sophisticated investors intended to game the system and take advantage of the relatively low 1% over-contribution tax. Frugal Trader offered a good review of these proposed TFSA changes at Million Dollar Journey.

If you have any questions or comments on TFSA withdrawals, please leave them in the comments section or send me an email.