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Archive for the ‘TFSA’ Category

Do it. The rewards of this program offered by the government are astounding. As a twenty-something investor this is where you should hold your more aggressive positions.  Unfortunately, most Canadians think the TFSA is simply a savings account (probably because of its horrible name) and have their money tied up in high interest savings such as ING or Ally where they are getting around 2% in return on their savings. This is crap.

While this message is more geared towards the young investor, this is something everyone should know; the TFSA is another tool the Canadian government has provided us with in order to avoid tax on capital gains.  In contrast, the RRSP is a tax deferral strategy.  In my opinion, every avid twenty-something investor/saver should be attempting to max out their TFSA before contributing to an RRSP. Additionally, your TFSA should be made up of 3-4 holdings in highly aggressive stocks (remember this is for the twenty-somethings) because at this age you are capable of sustaining short-term loss for long-term gain.

Your first step is to open a TFSA trading account with a company that offers low commission trades such as Questrade or Q-trade. Right now, you are allowed to contribute up to $15,000 to your TFSA for 2011 (or $30,000 per couple).

Next, do some research and purchase some stocks or ETFs that you are comfortable with, ideally in an industry/sector in which you have the most exposure.  This is an excellent way to start learning how to trade.

If you don’t have $15,000 to contribute yet, as I’m sure most of us don’t, then you should deposit as much as you can and make fewer trades, a good starting point might be in high-yield dividend stocks.  Remember, your objective here is to obtain the best return possible (within your level of risk tolerance), so if you were to purchase 5+ stocks with less than $5000 you could easily see a large percentage of your gains get eaten up by commissions and fees.

Another tip. If you are capable of making continuous contributions each month then you should borrow the money from your parents now and pay them back each month instead. This is an excellent strategy to maximizing your TFSA at the start of the year so that you can complete your trades now. You can then repay this money month to month interest free (I should hope).  As a side note, when money is borrowed to contribute to a TFSA the interest is not tax deductible.  Therefore, if your parents are willing to support your in this manner, then take advantage of it now.

This strategy has worked for me for several years, it introduced me to trading and saved me a lot of money in commissions by being able to make fewer trades throughout the year.

And remember, if you do need to withdraw money from your TFSA, you are allowed to recontribute that amount the following year in addition to your increased $5000 contribution allowance.  For example, if you contribute $15,000 this year, you are a great investor and make $5000, you can could withdraw $5000 in December for your Christmas holiday and would then be allowed to contribute $10,000 in 2012.

For more information on the TFSA, Realized Returns recently made an excellent post: 10 Facts on Tax Free Savings Accounts.

Happy investing!

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