The Doomed

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Lost in the swirl of events this week – Sir Carney, America’s housing renaissance (hey, Phoenix prices are up 20.4%) and the on-again fiscal cliff theatre – was Monday’s jacking of a tax shelter Canadians love to abuse. This deserves a few words, especially since the increase in TFSA contributions was dissed by a bunch of financial advisors who couldn’t manage a sock drawer.

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The change was simple – you can put in 10% more next year. That means a husband and wife’s combined annual limit is $11,000 in 2013, and the total of contributions to date, since the TFSA was invented by a pathetic failed politician, is $51,000. If you can, you should do this. There are many reasons why the tax-free savings account (despite its name) is rapidly becoming the main vehicle for financing the future.

Yes, I know you get a tax deduction for sticking money into an RRSP, and you don’t with a TFSA. But seriously, this is like sex. Without that instant gratification, who would go through with long-term stuff like kids or retirement planning?

After all, by putting money into an RRSP you’re making it taxable again. This doesn’t ‘save’ anything that you’d otherwise have to pay to the government. It merely delays it until a future date when paying will hurt as much. Maybe more. Given the fact our national debt just hit a new record, do you seriously think personal tax rates won’t be swollen in two decades? Are you willing to risk it?

Remember that all withdrawals from an RRSP down the road are taxed as income, at your marginal rate. Not so with TFSAs, which can be looted without any tax consequences. Besides, you can have a fortune tucked inside a TFSA thirty years from now paying you big bucks, and it won’t even be counted as income or cause a claw-back in any of your geezer benefits. Meanwhile investments inside a TFSA grow just as quickly as in an RRSP, and you can stuff them both with the same cool stuff. Never forget, too, that you can contribute to tax-free accounts in your name, that of your spouse and your 18-year-old kids and later force them to give it all back to you, plus the non-taxable gains. This is called ‘income-splitting’. And ‘divorce without custody’.

But there are two problems.

First, shockingly few people get it. There are 8.2 million Canadians who have opened tax-free accounts over the past four years. But almost six million of them couldn’t scrape together $5,000 last year to max out. Worse, eight in ten actually put savings in their tax-free savings accounts. They believed TNL@TB and stuck their money into high-yield (LOL) deposits or those hideous GICs. Squandered. Totally.

Just another six million bricks in that giant retirement crisis wall so many people are headed for. Millions of us have yet to learn the basic lesson of modern finance: you’re way more likely to run out of money than you are to lose it. The biggest risk lies in desperately trying to avoid risk.

The second problem, tons of folks reading my comments will think I’m being elitist. They might believe the financial advisors quoted in media articles this week pooh-poohing F’s TFSA sweetener who said this is little more than a suck-up to the 1% among us. “This is Mitt Romney-eque in its public policy implications in that while you could argue that it is good public policy in principle, in practise most people will say this is neither here nor there because they can’t afford it,” said advisor John DeGoey, who is normally a smart guy. Another, Kurt Rosentreter, said his clients under 45 are too busy diddling with their mortgages to save anything.

Comments like this should scare you. A generation ago people aged 45 were saving 12% of their incomes and building liquid assets, helped along by fat interest rates. Today, middle-aged adults are often still dragging around student debt and have bought absurdly-priced houses with the lowest down payments in history. No wonder most are screwed; that only a quarter of people can find five grand a year to invest; or that a houseageddon awaits when mortgage rates normalize. As for financial literacy, forget it. When known advisors pee all over a tax shelter enhancement, it’s done. We’re doomed. Save yourself.

In a society where 70% of people are homeowners, only 40% of Boomers have saved a hundred thousand and almost eight in ten have no pension, you can see where this is headed.

If you’re a middle-aged, middle-class, employed person who can’t find $5,500 next year to invest, ask yourself why. I already know.

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avatarGarth Turner - The Greater Fool posted Tuesday, November 27th, 2012.

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