On TFSAs and artic air

First I should apologize, the reason I have not written anything for the past couple days is I have been insanely busy with work. Normally I make these posts during my lunch break, but lately my lunch has been that thoroughly healthy meal of, stuff it down while you work. Well today I got fed up, when my manager came to my desk, instead of doing what was asked I responded, "when I am done eating". Well that was probably a good thing, even for my employer, they say people are more productive if they take a break ever so often and lord knows I need to slow down for a few minutes. (Truth is I find writing these posts to be therapeutic in a way.)

Anyway Lesley got a letter from her bank yesterday promoting a Tax Free Savings Account. Now I know some of my readers are still in a place where a savings account is a sort of mythical thing... alright truth is, we are all in that place where saving money makes wonderful sense, once we get out from under the mountain of debt, but in the meantime, since all these banks are busy promoting the concept I'd like to take a shotgun to it and blow it all away, let me explain.

A TFSA, or Tax Free Savings Account was born of one of the more poorly thought out campaign promises of the 2006 Federal election. The promise was, "interest on savings should be tax exempt". Now to be honest, even someone as wonkish as me when it comes to public policy had never really given much thought to the few bucks in interest I make every year, since it was hardly more than a rounding error next to the huge amount of interest I pay on my mortgage. But it was a campaign promise and as such once elected the Conservatives made it a fact, sort of. Starting January 1, 2009 Canadians are free to deposit as much as $5000 a year into a special savings account, the TFSA. In theory one is free to withdraw money from the account at any time in any amount, interest earned on money in the account is tax exempt.

Okay sounds good, so what's the catch? Well first, if you have money to put into a savings account, can I be your friend? If I have extra cash I think I'll pay off the line of credit, then the mortgage. Since the interest on a TFSA is maybe 2~2.5%, and the total tax paid on that interest, is now zero, it means that if I go to the trouble of opening a TFSA I will save myself the awe inspiring... nothing, I loose money! See my mortgage right now today, is 2.85% and my line of credit is probably in the neighbourhood of 5% a year, so there is no conceivable reason why I should open a TFSA, at best I will loose 2.85-2.5=0.35%/year in interest that could have gone to reducing my mortgage!

If you have money lying around the house, and you have debts the most sensible thing to do is pay down the debts! Any idiot knows that, (of course sometimes we have money that we plan to spend, but then it is not lying around the house, it is waiting to be spent, that is different.) So going back to what I was saying, if you have spare cash burning a hole in your pocket, by all means, write me a line, the new charity of "Help Michael pay down his mortgage" is now accepting donations, sorry but this is not yet a federally registered charity.

Alright, someone out there is saying, but we should still try to set some money aside shouldn't we? Well yes absolutely, but not in a TFSA, look if I get paid, say, lets make the math easy, $100,000/year. Now lets suppose I set $5000 aside. Well if I put that $5,000 in a TFSA I pay income tax on $100,000, which for arguments sakes we will say is 30% or $30,000, so I have $5000 collecting interest at maybe 2.5% tax free and I have $65,000 money after $30K in tax and $5K in TFSA savings. If, on the other hand, I make an RRSP contribution of $5,000, then I pay tax on only $95,000, or about $28,500. (I assume we are using a flat 30% income tax because I am too lazy to do the math, but it would end up being somewhere close to that $28.5K anyway even if I did factor in all the rules.) So now I have money in an RRSP which I can invest in stocks, bonds, money market, whatever, not pay tax on any gains until I withdraw from the RRSP and best of all, of the $100K I started with, I put $5K in the RRSP and gave Mr. Harper another $28.5K which means I have $67,500 to spend today.

So the question anyone who has been following my math... is anyone following my math might be the better question. But the question you should have is, 'what good is a TFSA?' And the answer is pretty obvious, not much. But it gets better, my employer recently offered me a TFSA, one of the great features of the employer TFSA was that for every withdrawal I would only pay a $25 service charge. So in other words if I get 2.5% interest and leave $1,000 in a TFSA for a year, at the end of the year I'd be just as well off if I stuck the money under my bed at home! Literally!

Speaking of really bad things, a huge Arctic air mass has descended on the Eastern half of the country. Today with the wind it felt like -30 degrees outside. Question at what point do we stop measuring in Celsius and work in Kelvins? See minus thirty sounds so much warmer than 243 Kelvins. Tomorrow will be a balmy 244Kelvins with the wind, but Friday, could be a real killer, it's 252K without the wind, if the wind is like today it will be 242K. I miss warmer air, really I miss going for a bike ride and racing the cars on Queen Street, and winning. Its hard to win when you worry about crashing on a snowy section of road.