Image via WikipediaIn January, Canada introduced (What the banks like to call) the "Tax Free Savings Account". It is, in every sense of the words, a TAX FREE "INVESTMENT" ACCOUNT! (similar to a Roth IRA in the U.S.)
When I say it is the best investment vehicle ever built for the "average working stiff", (arguably, the rsp is a close second) that is because it has a limit of $5,000 per year that you can put in the account. Large and institutional investors aren't very interested, but I sure am, and so should you. Now here's why!
In this "after tax account" you can put cash, GIC's, money market funds, mutual funds, stocks, bonds or just about anything trading in the capital markets. Now here is the "Golden" part: Every single dollar you make in this fund is "TAX FREE" when you draw it out. Let me repeat that and expand upon it. In Canada, where the nominal tax rate for many middle class workers is 42%, your savings (read investment)income will not be taxed!!
You can put a maximum of $5,000 into this account every year and in the years which you find yourself short, you carry that amount into the proceeding years. In January I opened two such accounts one for me and one for my wife. We transferred the limit into each. In one account I bought stock in my favorite company (see previous posts) and since January, I have to date, booked a gain of 61%. That money is TAX FREE when I take it out!
Now even if you use this account in a more conservative fashion, let's say you buy an Index fund, or any mutual funds and you book 8% per year. When you draw it out it is, as I enjoy saying, "TAX FREE".
One of the best strategies for increasing wealth is to reduce your tax burden where you can. I have never seen a better vehicle for this strategy, for the average working stiff, since the advent of the RRSP (u.s. equivalent 401K).
If you haven't already, go (no run!) to your nearest bank or investment house and set up one of these accounts immediately. Fill it with your yearly quota faithfully, every year. Spread your investments around in it so that your retirefund is not all in one basket (buy stocks, bonds, mutual funds etc) (let me correct that, stay away from bond funds this year) If you are in your 20's (those who are truly in the "drivers seat"! more in future blogs) and you don't know much about investing, buy index funds initially. Do it every year, and your retirement will be sweet indeed.
Even if you are just saving up for a major purchase like a car, a home etc, this is the vehicle to use. So, USE IT!!