I had a chance recently to ask York University Professor Moshe Milevsky about Tax Free Saving Plan (TFSA) strategies. Prof Milevsky is one of Canadas leading authorities on personal-finance topics, with several books and dozens of articles to his credit.
He had a contrarian perspective. I just dont see the TFSA as such a big deal right now, he said. Do the math: If you invest $5,000 in a TFSA, and the money is placed in a low-risk GIC paying 5% (at highest rates) for 12 months, then you get $250 of interest at the end of the first year. That is tax free, so you save $125 (in the highest 50% tax bracket) in the first year.
Asks Milevsky: Hundreds of news articles and stories over the equivalent of a nice dinner and a movie for two? Some will say that you can get more if you invest in stocks at 8% or more. But he rejects using equity returns because they can just as easily be -8% in 2009. The true comparison requires the risk-free interest rate, in his view.
For such a small benefit why not give every Canadian a tax credit for $125 and save the financial institutions, their I.T. departments and the rest of us the implementation hassle? Milevsky suggests (i.e. avoid more bureaucratic costscutting into what Canadians earn on their savings).
Sure, maybe in 5 years from now the sums of money I can shelter will be large enough and the compounding impact will be much greater so that the tax savings becomes worth the hassle of going to the bank, standing in line, keeping track of yet more paperwork, opening an account, etc, Milevsky admits.
But let’s see how this program changes over time. Tax policy can be just as fickle as financial markets. What limits will politicians impose on the TFSA by the time this becomes valuable? (i.e. more regulatory riskfor Canadian savers).