THUNDER BAY, ON, ---  February 1, 2009 ----  Lately watching television these days means being bombarded by commercials touting the governments new Tax Free Savings Accounts. Be assured that there is somebody in government who has us the consumer’s best interest at heart. It might even appear as though someone is doing some serious thinking on our behalf. On the surface the concept seems like a good one, perhaps a little too late to help with our present economic difficulties but good just the same. Had I contributed $5.000 a year to a tax free savings account for the past 20 years it could turn out to be a better deal than E.I., RRSP’s and even my favourite sock. The point is Canadian’s could be saving at a healthier level. Had I amassed a small fortune, then some of life’s perils are not so catastrophic. A six month strike can set back a unionized worker $10-20,000 but if you had your own private strike fund, you could enjoy the winter sun in St. Kitts or some other winter destination while your buddies are pounding the picket line burning pallets to keep warm.

Having a private stash that you control simply gives you the owner more options. For all these reasons I laud the government’s incentive to encourage savings. But I am skeptical; I believe that nothing in life is free. Here is where I found some problems with the plan. I have been looking for information about a TFSA where I could stash securities. Having phoned three banking institutions and investment houses, I found that there is a great deal of variance in the offerings. One is for certain, these accounts are not free.

Administrations Fees: Of the three places I called about TFSA for securities, one charged $50 a year to administer the account. It’s not too bad until I find that the minimum brokerage fee to buy and sell a security is $100.00. So if I bought to get in and decided to switch stocks mid year the total brokerage/administration fees would come to $350.00. You have to earn on the order of 7% return just to make nothing on your tax free saving account. When you deal with securities you might not have to make transactions very often, but in these days of volatility chances are you might have to make several changes just to preserve you investment. Well so much for the full brokerage house. What I found was the full service brokerage house would allow you to transfer in securities from another house such as a discount broker, but then there is the transfer in fee to consider!

Hidden Fees: Well it is easy to open up a TFSA for securities; some will even do it for no fee if you chose the e-file option. So if you live on the computer this means you will read your statements on-line, there will not be a mountain of paper in your mail box. At last I thought I was getting somewhere, I found that Canada’s best known discount broker charges a $100 annual fee to open a brokerage account and a flat $29 fee for trades up to 1000 shares (based on a 25 buck stock) Given the annual fee for the on-line discount brokerage account, and three trades the annual cost would be $187, or about 3.7% on your full $5000 investment. This figure is more in line with what a professional money manager would charge a wealthy client, the difference is it will be you who has to watch and nurture your investment. Since nothing is free I expect to pay for my banking services and the TD package seemed to represent a fair deal.

Coming Soon: My personal bank which I shall call the Infernal Bank of Commerce still does not have a fee structure for a TFSA involving securities. But they do have an in-house discount brokerage firm.

Surprises: Now that the government has gone out of its way to create a savings vehicle for Canadians you can understand that they want the cash to stay in that account. Some of these accounts charge a fee for withdrawals others will charge a fee for the second and subsequent withdrawals. No matter how hard you try the banks will always be the first to collect your money!

Variety: TFSA’s come in all shapes and sizes; you can just open a plain cash savings account, one that you can put mutual funds etc. What ever funds you decide to contribute they cannot be registered such as an RRSP or RESP. You cannot write off the principal on your taxes as you do your RRSP contribution, but the interest, dividends and capital gains earned on your account are tax free.

Flexibility: Once you open your account, you are allowed a maximum contribution of $5,000 new money each year. If you can only manage a portion of that, the unused contributions levels can be carried into succeeding years. Also should you withdraw some money that amount will be added to the following years contribution room.

Cash: The focus of this article is about Securities and TFSA’s. If you just wish to deposit cash, you can do that. I would check your institutions administration costs, withdrawal fees, and what they pay in interest. Interest paid to client savings accounts is at an all time low. My concern is that if you cannot earn more than the rate of inflation, then you are giving your money to the banks. You might be better off with Canada Savings Bonds or GIC’s, it looks like there will be an extra large issue this year. In any event having a savings plan is better than having no savings.

My Thoughts: I am not sure that this is an improvement over my favourite sock. You have to be very careful that you get a plan that fits your needs, and you also have a savings strategy you can realistically carry out. If you are expecting a pink slip soon, then completing a savings plan while collecting E.I becomes a dream like winning the lottery. If you are looking to save securities then enquire about the fees for the TFSA and also your brokerage fees. Some brokerage companies may require several “commissioned” trades a year. If not they will charge an in-activity fee of $25 a quarter. So in addition to your account fees you could get charged an annual fee for your brokerage account (i.e. $100.00) and an additional $75 bucks inactivity fees.

Having a cushion gives families more options in hard times and good times as well. With a large enough TFSA you might never need to borrow again, the money saved from that alone would be awesome! The words Tax and Free trigger a certain emotional response in some Canadians. As I have shown, these things are not free, and in fact could end up costing you some real money, especially if your security should loose value.

There are many tried and true investments out there which are not Tax Free, but worth considering, I suspect that a well balanced portfolio would contain a number of assets. It will be up to you to make the best choice for you.

There are so many people out there where a good savings plan is not possible. For them the television commercials must be irritating. It is a luxury to be able to afford to put away this amount of money each year. I am smart enough to know the Harper Government does not have a special place in its heart for people like you and me, but they do for companies that will contribute to the party coffers. The TFSA will be a boon for bankers, perhaps it is the form of the Canadian bail-out for our banks. Besides government the banks are likely the next best at lifting cash from your wallet. For Conservatives this must be a match made in heaven, and because of it there will likely be a healthy reward to their next campaign fund. Nothing in life is free, let alone tax free. It would be nice if banks and governments actually worked in the public’s interest, but in the mean time some one always pays.

Bert Rowson
LakeSuperiorNews.com...