My wife and I just opened up Tax Free Savings Accounts (TFSA) at E*Trade. I’m still not sure what I am going to invest in, but my requirements are that the initial capital has to be protected because we will most likely be taking the money out for a down payment in the next few years. We might just buy some shares of iShares’ Short Term Bond Index Fund (XSB). The only other possibility I had considered was to open a Tax-Free GIC with ING or a hight-interest savings account at President’s Choice, but interest rates are so low, I figure I can’t do any worse with short term bonds. The disadvantage with XSB is that I would have to pay commission every time I buy and 0.25% MER on top of that. But I think it’s worth it for the diversification it offers. Building a bond ladder yourself would involve a lot of commissions and a lot of work, so something like XSB is really the cheapest way to invest in the bond market. Real return bonds are also a possibility, and not a bad one, since they virtually guarantee that you’ll at least beat inflation.
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If you need the money in a couple of years then just do ING. XSB will probably not get the same return and with the hassle of purchases and commission costs – it’s not worth it.
I think you’re right. If I get 3% on $10,000 ($5000 in each account) over 1 year, that is $300. If I get 4% on $10,000 over 1 year, that’s $400. The commission would be $20 x 2 (one $5000 purchase in my TFSA and one in my wife’s TFSA) when I buy and $20 x 2 when I sell for $80 total. So only about $320 total and that’s IF I get 4%. I think you’re right I’ll check out ING or PC.
Thank you for “thinking” out-loud here for the benefit of all of us. Because you have already gone down this road it saves many others from being un-informed while doing the same thing. F.P’s comment adds a helpful context to your already informative post.
Just curious: are you both maxing out your RSPs? Because it seems to me that’s probably a better place to save for a house down payment (at least the first $40k = $20k for each of your RSP), since it’s real dollars instead of after tax. (I’m also making the assumption you don’t already own a house, and qualify for the Home Buyer’s Plan)
Sean, yes we are both maxing out our RRSPs.
But realize that saving in an RRSP is identical to saving in a TFSA if your tax bracket is the same when you deposit the money in the RRSP as when you take it out. In this situation, an RRSP is identical to a TSFA. The fact that dollars put in to an RRSP are pre-tax dollars is irrelevant as you will be taxed on it when you take it out. To re-iterate, TFSA=RRSP when your tax bracket when you take out the money is the same as when you put it in.
One might argue that money in an RRSP is pre-tax so it’s more than the equivalent post-tax amount, so it can make a bigger dent in your mortgage, for the purposes of the HBP. That is true, however, you have to take into account the fact that you will be in debt to your RRSP. That will in turn impact your monthly cash flow and mean that you will have to take on less mortgage.