New savings plan holds promiseArticle By: Gordon Pape
Page 2 of 2 For emergency savings. Every personal finance book I've written or read emphasizes the need to have an emergency savings fund to protect a family against job loss, critical illness, or some other unexpected financial crisis. Until now, there has been nowhere to effectively keep this money. Most bank accounts pay minimal interest and any return you receive is taxed at your marginal rate. Investing the money in tax-advantaged securities like dividend-paying stocks introduces a risk factor that is not appropriate for emergency cash. RRSPs aren't suitable because if the money has to be withdrawn, it will be taxed. A TFSA neatly solves the problem. Even if the emergency cash is invested in low-return securities like money market funds or T-bills, the interest will accrue tax-free. As loan collateral. This provision is especially interesting. It is against the law to use RRSPs as loan collateral and the penalty for doing so is deregistration of the plan. No such rule will apply to TFSAs. This means that investors who may need money for a short period and who don't want to withdraw it from the plan (perhaps because it is in a locked-in GIC) can simply pledge the TFSA assets against the loan. Income-splitting. If you give money to your spouse to invest, any profits earned are attributed back to you for tax purposes. TFSAs will provide a huge tax loophole, however. One spouse may contribute to the other's TFSA and no attribution rules will apply to the investment income earned. As the years pass and the contribution entitlement builds, this will become an important strategy to reduce overall family taxation. This only scratches the surface of the many possible uses for these accounts. One thing is certain: financial planners are going to have a field day in the coming years devising new and imaginative techniques to recommend to their clients. Interested in investing in high-yield life settlements? Get the full story before you act. Read Gordon Pape's article at www.buildingwealth.ca/FreeIWB.cfm - it's included in a free sample copy of his Internet Wealth Builder newsletter. Photo ©iStockphoto.com/johanna goodyear
© March 2008 Gordon Pape Enterprises Ltd.
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