You can hit a nail with a monkey wrench, but that doesn’t mean it’s the best tool for the job.

There has been some excellent discussion of the new Tax-Free Savings Accounts (TFSAs) and how they compare to Registered Retirement Savings Plans (RRSPs), in particular relation to retirement income and tax efficiency (i.e.: in which account do you end up saving more).  The simple answer is that it depends on what your tax rate is when you are putting money into the accounts versus your rate when you are taking it out in retirement.

However, I don’t think this is the right, or at least the only, way to look at these two options.  Like the monkey wrench analogy above, the TFSA and the RRSP are two different tools, not designed or intended to do the same job.  I recommend you seriously consider using both for the jobs for which they are built.

RRSP = Retirement

TFSA = Savings

The TFSA is a savings account.  Yes, you can use it to save for retirement, but you can also use it to save for a house, for a car, or my personal favourite: for that unforeseen emergency that usually ends up on our credit cards or taking a chuck out of our RRSPs.

So how should you use your TFSA?  If you regularly max out your RRSP and still have money left to invest, then it’s a ‘no-brainer’.  Even if you are unable or choose not to use all your RRSP contribution room, the TFSA is a very smart choice to put (or start building) your 3-month emergency fund, savings for your children’s education (beyond the optimal RESP maximum), or any other financial goal more than one year in the future.

There are a number of downsides if you ever choose to take money out of your RRSP before retirement.  Chief amoung them is the tax hit (your withdrawal is considered income), or at best you are locked in to a repayment schedule (as with the Home Buyer’s Plan).  Neither of these apply to withdrawals from your TFSA, which makes it a far more efficient and flexible choice for any pre-retirement financial goals/needs.

To get your TFSA started quickly, there are a few easy strategies you could consider:

• Move your current emergency fund into a TFSA ($5,000 maximum this year).
• If you make bulk annual deposits into your RRSP, put 10-15% into a TFSA.
• Deposit your tax return in a TFSA.
• Start a $25/month automatic deposit.

My first recommendation to most people is to always have that 3-month (minimum) emergency fund in safe, liquid investments (such as a high-interest savings account, GIC, or bond/money-market fund).  You want that money to be there if/when you need it.  Beyond that, it is worth having a conversation with your advisor to help you determine an appropriate portfolio for your time horizon and risk tolerance.  If it would help you keep your goals straight, you may even want to consider opening two different TFSA accounts; one for your emergency fund and the other for your savings (new home, renovations, car, big vacation, wedding, etc.)!  Remember, you can still only contribute a maximum of $5,000 combined for the year (unused room does carry over).

Retirement planning with your TFSA is worth a article on it’s own, but suffice to say that the closer you get to retirement, the more you want to have built up in your TFSA.  One big reason: income-tested benefits and clawback.

The Tax-Free Savings Account is an excellent tool for all of us to add to our financial plan.  To quote one of my favourite movies that was on TV over the weekend: “Would you like to know more?”

Pick the right tool for the job, and you'll be all smiles!

Photo credit: “Out of line” by j / f / photos and “The Astronaut Twins” by oskay

The sun is starting to peek through the clouds for Canadians who hold AIG policies

Last week it was announced that AIG would be selling it’s Canadian life insurance arm to Bank of Montreal for $375 Million.

This will hopefully come as some relief to those of us that held or sold AIG insurance policies.  AIG was one of our top providers, and we have a number of clients with AIG plans.  While there was never much risk of these plans not paying out (AIG is a member of Assuris, an organization built to protect policyholders from the impact of financial failure of an insurance company), nobody enjoys uncertainty in their financial plans.

There will most likely be a “re-branding” of the services offered, though any AIG policies you have now will not need to be replaced, nor can the coverage be altered by BMO.  If you have any questions or concerns, please contact us.

BMO buys AIG’s Canadian unit – The Globe and Mail/Report on Business
BMO pays cash for AIG’s Canada unit – Toronto Star
AIG selling Canada life-insurance arm for $308 million – The Wall Street Journal/MarketWatch
BMO buys AIG’s Canadian life insurance unit – The National Post/Financial Post
BMO’s $375M purchase of AIG Canadian insurance could herald more deals – The Canadian Press
Independent Brokers Celebrate BMO Purchase of AIG Life of Canada – PRWeb
AIG To Sell AIG Life Insurance Company Of Canada To BMO Financial Group – PR-USA.net

On December 15, 2008, Great-West Life announced a temporary suspension on withdrawals and transfers out of its Canadian Real Estate Investment Fund.

This fund is unique in Canada, as it directly owns physical properties across the country, as opposed to the much more volatile Real Estate Investment Trusts (or REITs) which trade on the open market like an equity stock (REITs are to properties as Mutual Funds are to individual stocks).  The benefit of the GWL fund’s structure is long term stability and dependable growth; so much so that we have long made it a significant part of our recommended portfolios.

Unfortunately, that same stabilizing structure also makes much less “liquid”, or able to respond rapidly to major changes like those that have come about in the last few months.  Because the fund directly owns property, requests for money to be moved out of the fund require a buffer of cash be kept available.  With the recent market volatility, the fund was at risk of exceeding the cash available and being forced to sell assets at very unfavourable conditions.  This potential downward spiral would have put all unitholders at significant risk, so the decision was made to temporarily freeze redemptions until a time at which the fund has sufficient cash available.

While this is certainly a frustrating and unprecedented event for most of us, this decision was made to best attempt to protect the assets of investors in the Real Estate Fund.  We have begun contacting all of our clients that hold this fund, but if you have any questions at all please contact us.

FYI, here is the letter being sent out from Great-West Life to all unitholders:

We want to bring to your attention some changes regarding the Great-West Life Real Estate Fund in your segregated fund policy that may affect you.  Please read the information below carefully and contact your financial security advisor if you have any questions.

We announced a temporary suspension on withdrawals and transfers out of the Real Estate Fund effective 4 p.m. EST, Monday, Dec. 15, 2008.  This temporary suspension was not an easy decision.

Given the current economic environment and the unprecedented events in the capital markets, withdrawal requests have increased.  Real estate assets are generally less liquid than other major asset classes – such as common stocks and bonds – and cannot be rapidly sold.  Therefore, rather than sell quality assets at unfavourable market values, it was determined that the best way to balance the long-term interests of unitholders was to institute a temporary suspension on cash withdrawals or transfers out.

The Real Estate Fund is a segregated fund that holds a diversified portfolio of high-quality, income-producing properties.  As part of a well-diversified portfolio, the Real Estate Fund continues to be appropriate for unitholders with a long-term investment horizon.  It has performed well over time and substantially outperformed common stock investments during 2008, with a marginally negative return, compared with larger drops for many common stock indicies.

At present we don’t know how long the temporary suspension will continue.  Our goal is to re-establish an appropriate level of cash in the Real Estate Fund to meet client withdrawal requests.  We will update you and your financial security advisor on progress.

The Real Estate Fund is still open for new contributions, subject to the suspension on withdrawals.  If you are currently contributing to the Real Estate Fund, those contributions will continue unless you instruct us otherwise, and will be subject to the current suspension on withdrawals and transfers out.  You can change your allocation of future contributions at any time by contacting your financial security advisor or calling our Client Service Centre at 1-800-665-5758 from 8:30 a.m. to 6 p.m. EST.

We thank you for your patience and reiterate this temporary suspension has been made to treat all unitholders equitably.