INTRODUCTION TO THE TFSA: Tax-free Savings Accounts

Tax-free Savings Accounts—How about some good news!

Greetings!

Two of the most “delicious words” in financial planning are “tax-free.” As of January 2, 2009, Canadians will have access to a TFSA [tax-free savings account]. The TFSA is the most exciting tax-saving opportunity for Canadians since the introduction of the RRSP. And, when properly used, there is simply no down-side to the TFSA.

"With its ability to immediately shelter investment-related income from taxation, the TFSA should become an indispensable wealth planning tool for all Canadian investors," says Doug Carroll, Vice President, Tax & Estate Planning at Invesco Trimark.

Allow me to cover the basic features of the TFSA below. With later newsletters, I will get into further details and planning opportunities.

Features of the TFSA—

-The account can be set up for any Canadian resident age 18 or over regardless of his or her income.
-The TFSA contribution is done with after-tax dollars [unlike an RRSP], but look—
-The investment income earned in the TFSA is tax-free and—
-Withdrawals from the TFSA are tax-free.
-You’ll be able to contribute up to $5,000 each year beginning in 2009 [the $5,000 contribution room will be indexed, or increased, each subsequent year].
-You can withdraw money at any time, tax-free, and then choose to “re-pay” your TFSA at any time in the future.*

Furthermore—the TFSA does not “replace” the RRSP or RESP, it supplements it; a spouse or parent can fund the contribution for the TFSA of a spouse or child; unused contribution room for a TFSA is carried forward to future years.

Here are just a few ways that tax-payers can make use of the TFSA—

-Save for a specific purpose like a renovation or recreation property, again with no tax on the investment income.
-Supplement retirement savings. In retirement, this will augment the tax-efficiency of producing retirement income.

See more examples at the very bottom under “Scenarios.”


In brief, what does the TFSA mean for investors? Beginning in 2009, any non-registered investments should be made in a TFSA within the limits allowed. And, once you’ve maximized your RRSP—or if you are in a low tax bracket—the TFSA becomes an efficient way to save additional monies for retirement or a child’s education without having to worry about tax on investment growth. The longer the time horizon for building up your TFSA, the more you will benefit from the tax-free compounding of investment growth. Finally, unlike an RRSP, when you withdraw monies from your TFSA there will be no tax.

I will be offering TFSA accounts in the new year that are free of administration and withdrawal fees. In the meantime, if you have any questions about TFSA accounts, see the supplementary reading provided below and then send me any unanswered questions.

Cheers!

Tom

Next newsletter: the RRSP versus the TFSA

Notes--
*For example, say you contributed to your TFSA and, after several years, it is worth $30,000. You can withdraw any or all of that money tax free and not lose the contribution room. So, if you withdrew $30,000 from your TFSA, you can put the $30,000 back at any time in the future. On top of this, you will receive your additional $5,000 [indexed] contribution room each year.
Supplementary reading—

Click on or enter the following links into the address bar of your browser—

1. Investor Q&A on the TFSA

http://www.advisormailout.com/Advisor/Home/1153/1685/images/TFSA%20Investor%20Q&A%20Final.pdf

2. Scenarios--how to take advantage of the TFSA

http://www.advisormailout.com/Advisor/Home/1153/1685/images/Scenarios.pdf

Reprint: Retirement fears ill-founded.

This article is courtesy of Advisor.ca
by Mark Noble


Almost two-thirds of Canadian pre-retirees are worried about outliving their money, but once they're well into retirement, the fear subsides, according to a new survey conducted by Russell Investments and Harris/Decima Research.

The survey of 2,200 Canadians found that only 40% of respondents felt comfortable about their financial health in the first year of retirement. In year two, the percentage of those who felt comfortable drops sharply to only 29%. However, within years three to five after retirement, optimism takes hold, with 58% of retirees feeling comfortable about their financial circumstances. And once they had passed the 10-year mark, only one in five was still worried about having enough money.

This rise in confidence could result from retirees making the best of their new situation, but Irshaad Ahmad, president and managing director of Russell Investments Canada, says the company has found that many retirees meet their retirement goals once they are actually retired and understand what they need. "Once they get through the first two years of retirement and they realize things are going to be OK, a lot of the concern starts to go away," he says. "Also, they start to realize the power of CPP and OAS and their pension income, if they have one. Once they figure out how much they actually need, they start to feel better. A lot of people don't know how much they need until they start to live it. We hear retirees saying things like, 'I don't have a mortgage anymore, my kids are all grown up, and this isn't as tough as I thought it was going to be.'"

Sending out an optimistic message about retirement would seem counter-intuitive to an asset management company that earns its returns from sales to pre-retirees. But Russell was already bucking the trend on conventional industry wisdom when the company suggested earlier this year that retirees probably don't need more than 60% of pre-retirement income for a happy retirement. Most people in the investment industry quote a figure somewhere in the vicinity of 75% as what is needed.

Ahmad believes it's important for advisors to have a retirement reality check for clients so they can work to create a realistic financial plan. "We saw the data of our survey and the remarkable difference between those who had not retired and those who had retired. Given the level of anxiety displayed by those who have not retired, it's evident there is a disconnect in information. We wanted to find a way to shine a light on that," he says. "If you actually help people and identify what the issues are and what they need to do to solve it, presumably people will remember and be grateful for that."

Russell has found a few common traits among retirees who felt comfortable about their financial health. These types of people--

--tend to have higher net worth, assets and income.

--are much more likely to have a pension and started planning for retirement at an earlier age.

--tend to be fortunate in terms of life experiences: they are less likely to be separated or divorced and more likely to have paid off their mortgages and to have received an inheritance.

Ahmad emphasizes that professional financial advice is also extremely important. "People who work with advisors have a higher level of financial health and feel better about their financial health than people who don't use an advisor, so clearly advisors are doing a good job in that regard," he says.

Creditor protection of RRSPs

New federal law protects your RRSPs in the case of bankruptcy

Greetings!

Clients may sometimes wonder what would happen to their RRSPs, RRIFs and other registered plans should they face creditors that are coming after assets. Let me give you a brief summary of the pertinent information [with thanks to Frank Di Pietro, Mackenzie Financial's director of tax and estate planning].

Until recently, there were no laws in Alberta to ensure that registered plans received creditor protection. Effective July 7, 2008, creditor protection is now universally available in all provinces for a bankrupt person's assets held in a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF) or a Deferred Profit Sharing Plan (DPSP).

Note that an individual would have to formally apply for bankruptcy for the protection to apply.

The new law includes a clawback period, which means creditors may still attack and successfully seize any property contributed to an RRSP, RRIF or DPSP within the 12 months preceding the date of bankruptcy. A trustee can also seize a registered plan in bankruptcy within five years of a transfer to the plan, if the client was insolvent at the time of the transfer. Therefore, any attempt to transfer property into a registered plan in anticipation of entering bankruptcy will not provide your clients with protection.

Creditor protection has always applied to Locked-in plans, including the property in LIRAs, LIFs, and LRIFs, since these enjoy the same creditor protection as Registered Pension Plans under their respective provincial and territorial pension legislation.

If you have any questions, please let me know.

Cheers!

Tom

Tom Buck, M. Ed. CFP
Certified Financial Planner
Assante Financial Management Ltd
#600, 1414-8th Street SW
Calgary, AB T2R 1J6
TEL 403.229.0128
FAX 1.866.386.9776

The forgotten element in financial planning

Greetings!

I'm going to call this newsletter "Tom versus the stock markets." I will keep this brief because I have written a lot about the stock markets recently. And then I'm going to finish with something much more important.

As a broad measure of how my clients' portfolios are doing, I track the total dollars that I manage for all me clients. With the recent market drop, I want to compare this total to what the stock markets have been doing. I have numbers for the period September 9, 2008 to October 24, 2008. For this period--

--the total dollars that I manage for all my clients has declined 15%

--the stock markets in Toronto and New York are down, on average, 26%

I believe that my "cushioning" of the stock market drop reflects my more conservative, pension-manager approach. And this approach will serve us well as poor markets come to an end followed by recovery. I don't know when this will happen. I do know that the doom-and-gloom that we find in the media will continue right through to the recovery. Stock market recoveries do not announce themselves: they arrive in fits and starts so that, only in hindsight, do we see their beginning.

So while we wait, let's turn to something more important. It's what I call the forgotten element in retirement planning. Retirement planning tends to focus on crunching the numbers to see what we have to save in order to reach our goal later. That's important, but what are we really pursuing?

We are pursuing a freedom to balance play and work in a way that is meaningful to us. For some, retirement means continuing a rewarding career but also playing as much as they want. For others, retirement means all play and no work. For everyone, it's the play that we look forward to whether it's learning to sail, travel, and so on. And what is the most important ingredient that enables play? Is it money?

I submit that the most important ingredient for play is good health. This is the forgotten element in retirement planning: without good health, play can be very restricted. If you agree with me on this, you may also agree that good health is a lifelong pursuit: you can't wait to develop good health, you must build it into your lifestyle now through exercise and good eating. Lord knows I struggle with this, but I try to remember just how important it is. All the saving in the world might not come to much if we haven't looked after ourselves.

One last point. Good health, unfortunately, is not a guarantee and if we are blessed with good health at the moment, then let's take advantage of it by doing some of the things, now, that we hope for. Want to learn to sail? Whatever your passion, why not sign up and get started?

Happy sailing!

Warm regards,

Tom

Tom Buck, M. Ed. CFP
Certified Financial Planner
Assante Financial Management Ltd
#600, 1414-8th Street SW
Calgary, AB T2R 1J6
TEL 403.229.0128
FAX 1.866.386.9776

October 11, 2008--article from the Toronto Star

The following article is written by David Olive, a business columnist with The Toronto Star, who shares his take on making sense of current stock markets.

Please use the link below, or, if the link becomes inactive, I have copied the article below.

http://www.thestar.com/article/515946

TheStar.com - Business - Harper's not wrong on bargains
Markets to worsen before stocks hit rock bottom
So, in these uncertain times, what to do about your stock portfolio?

October 11, 2008 David Olive, Business Columnist

Buy on the sound of cannons.
– Rothschild family investing maxim

Some of us might be tempted by the bargains emerging in the incredible shrinking stock market. But we're waiting to exhale. Since last fall, when the looming global credit crisis first began to command the attention of the powers that be, the worldwide emergency crew of central bankers, finance ministers and regulators have, with mounting aggressiveness and creativity, experimented with a succession of more drastic rescue measures. So far, none have restored the investor confidence needed to arrest the downward spiral in stock values.

This week began for me with a call from an investment banker acquaintance urging me to join with his peers in "going to cash." By which he didn't mean GICs. He meant taking enough cash out of the bank to cover expenses for a few months. If today's plummeting share values go on much longer, "going to the mattresses" will no longer mean preparing for a war among the five families, as it did in The Godfather.

Yet, the global stock-market decline of nearly 40 per cent since June's peak is typical of severe bear markets, from which patient investors stoic about their paper losses have subsequently done very well. Just as bull markets always end, so do bears. And as an economist noted Thursday on PBS, "it's rare that you see this level of pessimism at the outset of a market collapse. It's more characteristic of the end."

Caution certainly is warranted. We're still a ways from the previous Dow Jones industrial average nadir of 7,286 in October 2002. Conditions likely will worsen further before equity markets bottom out. Investors already have been punished. I haven't seen Canadian estimates yet, but Americans are suffering a paper loss of about $2 trillion (U.S.) in their retirement savings. And it's tough to restore investor confidence when the news is dominated by the sudden disappearance of once-mighty U.S. financial institutions that controlled $11 trillion in assets.
Yet, it's too bad the expression fundamentally sound lost its reassurance value at the time of Herbert Hoover. Because the real economy is sound. Canada created 87,000 new jobs in the first eight months of this year, and 1.5 million since 2002. The jobless rate of 6.1 per cent is modest by Canadian standards. An otherwise gloomy report by the International Monetary Fund last week said that with an estimated GDP growth rate of 1.2 per cent, Canada will outperform its G8 peers, while avoiding recession.

Corporate balance sheets worldwide, outside of the financial sector, are for the most part strong. Inflation and interest rates are historically low. These are unusual signs of vigour for a downturn. The real problem is that stock markets are a slave to a global credit market in paralysis, a novel scenario in modern times. A U.S. capital markets observer last week said that "No one's afraid to lend to Berkshire Hathaway or Microsoft. It's only the financial companies they're leery of, because no one knows the true value of the 'assets' on their books." Yet, while it may be the arcane world of high finance that's gone haywire, not the broader economy, investors fret that eventually such recession-resistant firms as McDonald's Corp. will run dry of funds to pay its meat-patty suppliers.

But the point at which the real economy is starved altogether for capital is far off, and likely won't arrive. The orthodoxy-busting measures taken by world governments haven't yet had time to kick in. And it's manifestly evident that governments are prepared to do anything required to get credit markets functioning properly again, even if they have to convert post offices to state-run bank branches.

So, in these uncertain times, what to do about your stock portfolio?
Think twice about selling, because that will just lock in losses that now exist only on paper. It is a good time to evict the dogs in your portfolio and take a 2008 tax loss.

If you're invested in battered blue chips, and bought them, as Warren Buffett has long advised, because they're good companies worth owning forever, it's probably best to hang on for the inevitable upturn. There's no need to sell companies if they retain the solid balance sheets, consistent dividend payouts and dominant market-share position that drew you to them in the first place. These companies will emerge stronger from the downturn, if only for their ability to benefit from bargain-priced acquisitions and the shakeout among weaker rivals.

Finally, should you engage in bargain-hunting, the last thing on the minds of today's panic-stricken investors streaming for the exits? The answer is yes, if you believe, as I do, that this century will be the most prosperous in history. This century will be bereft of wealth-destroying world wars and will see developing-world economies – and not just China and India – striving for developed-world living standards. In what we once quaintly called the Third World, there will for decades be voracious demand for power plants, upgraded public-transit systems, the firefighting water bombers in which Bombardier Inc. has a global near-monopoly and the Waterloo, Ont.-designed BlackBerrys.

What to buy? The global food shortage that made headlines last summer hasn't gone away. Yet, such agribusiness stars as Potash Corp., Agrium Inc., Deere & Co., Archer Daniels Midland Co. and Monsanto Co. are all trading at about half their five-year highs.
Infrastructure giants that build power plants, elevators, construction equipment and lighting systems, including General Electric Co., United Technologies Corp., Caterpillar Inc. and Siemens AG, are trading at a one-third to 50 per cent discount to their five-year highs.
And each pays a generous divided (6 per cent in the case of GE) to cushion the short-term blow even if these stocks have a bit further to fall before rebounding. Leading chemical producers share that distinction, including BASF AG, Dow Chemical Co. and E.I. du Pont de Nemours & Co.
Some of my favourite defensive stocks are also available at fire-sale prices:
Walgreen Co., the dominant U.S. drugstore chain (about 50 per cent off its 5-year high); Rona Inc. (down about 60 per cent, and takeover bait for Lowe's Cos. or Home Depot Inc.); Big Pharma stocks Merck & Co. Inc. and Bristol-Myers Squibb Co., each trading at little more than half their 2003 price and boasting outsized dividends; and Cisco Systems Inc., the world's best-run supplier of telecom and Internet gear trading 45 per cent below its five-year high.

"There are probably some great buying opportunities emerging in the stock market as a consequence of all this panic," economist Stephen Harper, whose day job is running Canada, said earlier this month. "When stock markets go down people end up passing on a lot of things that are underpriced."
Harper was excoriated, of course, for real or perceived insensitivity to those with paper and locked-in losses, retirees in particular, during the admittedly cruel market of the past several months. But on this point, at least, Harper's empathy deficit doesn't make him wrong.

David Olive writes on business and political issues. He can be reached at dolive@thestar.ca.

October 9, 2008--Dealing with emotional times

Greetings.

I try to have a clear sense of my role as your advisor, especially during turbulent times in the markets. Communicate, answer your questions and emphasize the rational perspective in the midst of emotional times. These are emotional times and are response is not helped by the newspaper or CNN, so it's important for me to provide perspective in the midst of the noise. I hope these newsletters help, and be assured that I will keep writing them.

I attended a four hour seminar yesterday that was well-timed. The subject was stock market history and, in particular, the general behaviour of investors, economists and the media during times of bad markets [called "bear" markets]. Let me share a few of the highlights.

Not surprisingly, falling portfolio values can make us feel fearful, triggered by the question "how bad can this get?" We know that economists are not immune to this fear and so their comments are not always helpful. Thus fear can turn into panic in which people become irrational and say "sell at any price, let's just get out." This behaviour, although self-destructive to our portfolios, occurs when emotions over-rule the mind.

Another quick example of the power of fear was documented during the SARS virus crisis in Asia: one in four people thought that they were likely to get the virus and die, even though the actual probability was many times smaller.* How can we deal with fear and avoid panic?

Focusing on the facts related to bear markets helps our mind to keep the fear in check. So let's do that. The facts about bear markets are--

-Bad markets have always been followed by good markets and that is why patience is critical to success.

-Trying to time the markets to avoid bear markets, however tempting the thought, is not practical.**

-Bear markets are what we have to tolerate in order to have growth in our money over the long term and achieve our goals.

-Our mutual fund managers are always active. With this, they have lessened our loss as compared to the broad market index and are now actively buying bargain stocks which will assist the recovery of our portfolio when good markets return.

-For those investors still in the saving time of life, it's important that they continue to invest since cheap stock prices in good companies are available now. A bear market is an opportunity.

-Most investors have consistently done the wrong thing at the wrong time by buying high and selling low. We must not follow the herd. Fight the good fight

When we try to stay rational, our emotions may fight back. And what is the number one lie that our emotions will scream at us--"it’s different this time!" That lie comes out with every bear market we humans go through. And we need to recognize that this lie fuels the newspapers and the CNNs, for the simple reason that they want you coming back to hear more. Their role is not to give you good advice. But it is my role.

If you want to read more, I’ve offered some thoughts below.

Warm regards,

Tom

*You can read more at-- http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_hassett&sid=aO8VJ9Y7qjrQ

**Why is timing the market so hard? Because we need the crystal ball twice: Once to know when to sell; once to know when to buy back.

My other thoughts if you want to read more-- I mentioned Warren Buffett in my last email, one of the wealthiest men at $50 billion. Did you know that seven months ago, Buffett was worth $62 billion? When markets go down, he's not immune to paper losses. Here's the question I have--if you and I lost $12 billion, how would we react? Would we be tempted to sell and run for the hills? What did Buffett do? He invested $8 billion of his money. Why? Because he saw opportunity in the bear market and did what he's done all his life: invest when others are afraid. He's sticking to the process that made him wealthy in the first place. Buffett is rare as seen by the wealth that he has accumulated.

When Buffett is asked what the "secret" of his success is, he answers that he was fortunate enough to study with the father of "value investing," Ben Graham. Among the ideas that Graham put forward is that the price of a stock today may have nothing to do with what the stock is worth. Remember that stocks trade by auction, so every time someone sells, it's because someone else is willing to buy.

Further, in bear markets—when sellers line up in a panic to sell—it follows that the buyer has the possibility, then, to buy stock very cheaply. If the buyer has done his homework and identified a fundamentally sound company, he needs then to just wait and buy when that company's stock is on sale at a good discount. No wonder then that Buffett [and the fund managers that I like to use] are busy buying during this bear market.

If this sounds simple enough, why doesn't everyone do it? Because a bear market is accompanied by fear and panic and these can paralyze rational behaviour. Buffett is rare because he remains rational even when surrounded by fear. There’s one more ingredient that goes into “being a Buffett.” Once you’ve bought stock in a fundamentally sound company at a good discount, making money requires patience while waiting for the stock price to go up. And you must continue to be patient even if the stock you’ve bought goes down in price [this requires fortitude].

Finally—and then I will stop for now—being a Buffett is not about being right all the time with your stock picks. That would be impossible. But the discipline of buying good companies when their stock is on sale is all about increasing your probability of making money. You don’t have to be right with every company in order to win in the long run. That’s what Buffett has shown and Ben Graham taught him.

Tom Buck, M. Ed., CFP
Certified Financial Planner
Assante Financial Management

October 6, 2008--US Congress supports bail-out

Greetings!

The US Congress voted for a second time on the bail-out proposal. As expected, the proposal did pass and the bail-out is now approved by both the Senate and Congress. This clears the US government, on behalf of taxpayers, to begin purchasing sub-prime mortgages from US financial companies in an effort to ease the paralysis that has prevented US institutions from lending to one-another, a practice that happens regularly under normal conditions [you may want to refresh your memory on this by reading my newsletter of Sep. 18th].

The bail-out proposal has stirred a great deal of controversy in the US with some arguing that it was a bad deal for the taxpayer and rewarded incompetent banking executives. Without addressing all aspects of the controversy, let me point out that Warren Buffett is on record saying that, given the chance [which he was not], he would have invested $7 billion of his own money in the bail-out effort. Why? For the simple reason that he things the US taxpayer will end up making a nice return on the sub-prime mortgages being purchased. That is, the bail-out involves paying pennies on the dollar for the sub-prime mortgages and Buffett believes that, in time, those mortgages will be sold for more than the US taxpayer is paying for them.

The example of the US bail-out is being followed in some European nations. Canadian financial institutions had relatively small exposure--or none in the case of TD Bank--to US sub-prime mortgages so, to my knowledge, there is no talk of a similar bail-out planned in Canada.

And what about stock markets? The TSX opened sharply lower today as sellers drove markets down about 1200 points before buyers jumped in pushing the markets up about 650 points before the closing. Sellers and buyers will continue to battle it out and the current fearful environment will probably mean more sellers than buyers for awhile yet. There is always a mob mentality that drives markets in the short term. When fear is "in the air" and splashed across newspapers and TV news, it is contagious and makes it hard to act rationally.

I'll finish this newsletter by quoting Warren Buffett, the most successful individual investor of all time who has built a net worth of over $50 billion [and is giving almost of it all away to charity]. In talking about his investment philosophy, Buffett said--

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

Bye for now,

Tom

PS--as you've probably guessed by now, Warren Buffett is one inspiration for my investment philosophy and his life story is a fascinating one [did you know that he still lives in the same modest house in Omaha that he bought for $31,500 in 1958, doesn't carry a cell phone and drives his own car?]. If you would like to read more, check out--

http://en.wikipedia.org/wiki/Warren_Buffett

Tom Buck, M. Ed. CFP
Certified Financial Planner
Assante Financial Management Ltd