By: Larry MacDonald
I had a chance recently to ask York University Professor Moshe Milevsky about Tax Free Saving Plan (TFSA) strategies. Prof Milevsky is one of Canada’s leading authorities on personal-finance topics, with several books and dozens of articles to his credit.
He had a contrarian perspective. “I just don’t 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 costs cutting 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 risk for Canadian savers).
3 Responses to “ Milevsky on TFSAs ”
I think Milevsky is missing the point. This isn’t about the rich. It is about training people to save; particularly the young and those who have spent the last twenty years blowing every cent they make.
This is a particularly great opportunity for those who park and drive their money. I am thinking of university students and young people in particular. Removing the funds doesn’t remove the opportunity to return the funds to the garage. Even if you can’t park the 5k permanently, you can drive it out and return later… leaving a really big parking garage available for future earnings once they leave university.
By goldeneye on Feb 9, 2009
Don’t think the regulatory risk is any greater than a tax credit would be. To follow Milevsky’s logic, in year 1 the tax credit would have to be $125, year two $250, year 3 $375, etc not to mention the compounding effect. The real power of TFSA is long-term tax-exempt compounding. Get rid of the RRSP with all its complications, far greater than those of the TFSA, and triple the contribution room for the TFSA, now that would be useful.
By CanadianInvestor on Feb 10, 2009