Weighing the benefits of managed accounts

A managed account is a broad term that has been used in the financial services industry to describe a certain type of investment account where the portfolio manager has the discretion to make changes to your portfolio without verbal confirmation.

There are different names and types of managed accounts which may be confusing for investors when looking at options between financial firms.

To assist you in understanding the basics of managed accounts we will divide the broad category into two subcategories: individual managed accounts and group managed accounts.

Both individually managed and group managed are fee-based type accounts, as opposed to transactional accounts where commissions are charged on activity. Individually managed accounts must be fee-based and generally have a minimum asset balance of $250,000.

Before we get into the differences between individual and group accounts we should also note that strict regulatory and education requirements are necessary for individuals in the financial service industry to be able to offer managed accounts. The designation “Portfolio Manager” is typically awarded to individuals who are able to open managed accounts. Financial firms may also stipulate certain criteria prior to allowing their employees to provide discretionary advice or portfolio management services. Examples of additional criteria that may be required by financial institutions include a clean compliance record, minimum amount of assets being managed, good character, and significant experience in the industry.

For purposes of this article, the term “Advisor” is different from “Portfolio Manager.” A portfolio manager may have the ability to offer individually managed accounts on a discretionary basis, whereas an advisor does not. An advisor must obtain verbal authorization for each trade that they are recommending. A client must provide approval by signing the appropriate forms in order for the portfolio manager to manage their accounts on a discretionary basis.

Above we noted the two broad types of managed accounts – individual and group. A portfolio manager is able to offer both individual and group accounts on a discretionary basis. The individual account is a customized portfolio where the portfolio manager is selecting the investments. Although an advisor is not able to offer individually managed accounts, they can offer group managed accounts through a third party. A simple example of this is a mutual fund which is run by a portfolio manager. A more complex example of this is the various wrap or customised managed accounts offered by third party managers. An advisor can recommend to their clients a third party group managed account.

The role of an advisor in a group managed account option is to pick the best third party manager and to assist you with your asset allocation. When looking at this option you must weigh the associated costs over other alternatives. The group managed account has set fees. With individually managed accounts the portfolio manager has the ability to both customize the portfolio and the fee structure.

Trust is an essential component that must exist in your relationship to grant a portfolio manager the discretion to manage your accounts.  Prior to any trades, the portfolio manager and investor create an Investment Policy Statement (IPS) to set the trade parameters for the investments. The IPS establishes an optimal asset mix and ranges to ensure that cash, fixed income, and equities are suitable for the investors risk tolerance and investment objectives.

Quicker Reaction Time: Having a managed account allows the portfolio manager to react quickly to market changes. If there is positive or negative news regarding a company then the portfolio manager can move clients in or out of a stock without having to contact each client individually. With markets being volatile this can help with reaction time. For an advisor to execute the movement in or out of a stock, it would involve contacting each client and obtaining verbal confirmation.

Strategic Adjustments: If a portfolio manager has numerous clients and would like to raise five per cent cash, this can be done very quickly with an individually managed account. It is more difficult for an advisor to do this quickly as verbal phone confirmation is required for each account in order to raise cash. Even with a group managed account, the advisor would have to contact each client to change the asset mix weighting.

Rebalancing Holdings: With managed accounts, clients have unlimited trades. This is important as it allows a portfolio manager to increase or decrease a holding without being concerned about going over a certain trade count. As an example, we will use a stock that has increased by 30 per cent since the original purchase date. Trimming the position by selling 30 per cent is easy for a portfolio manager as a single block trade can be done. This block trade is then allocated to each household at the same price. If an advisor wanted to do this same transaction, it would likely take a couple of days and over this period each client would have a different share price depending when the verbal confirmation was obtained.

Extended Holidays: If you are travelling around the world or going on a two month cruise then you probably want someone keeping an active eye on your investments. An advisor is not able to make changes without first verbally confirming the details of those trades with you. A portfolio manager is able to make adjustments within the IPS parameters, provided you have a managed account set up before your departure.

Not Accessible: If you work in a remote area (i.e. mining or oil and gas industry) then chances are you may be out of cell phone reach from time to time. In other situations your profession does not easily allow you to answer phone calls (i.e. a surgeon in an operating room). In other cases, a lack of interest may result in you not wishing to be involved. A managed account may be the right option for clients that are frequently difficult to reach to ensure opportunities are not missed – in these situations the portfolio manager can proactively react to changing market conditions.

If you completely trust your advisor and agree with the trades recommended in the past then a managed account may be right for you. Managed accounts greatly simplify the investing process for both you and the portfolio manager.

Many factors come into the calculation equation when determining when to convert your Registered Retirements “Savings” Account (RRSP) into a Registered Retirement “Income” Account.  An RRSP is used as a way for many Canadians to save for retirement and is essential for individuals without an incorporated business or a registered pension plan.

After all the years of saving, many people are still somewhat uncertain of when to begin drawing the savings out as regular income through a RRIF account.  Maximum deferral to age 72 can result in a shock in the rise in taxable income once RRIF minimum withdrawals begins.

To illustrate we will use Martin Hitchon, who turned 71 this year and is required to convert his RRSP account to a RRIF account before December 31 but is not required to take a payment in the first year.  Martin currently has $500,000 in his RRSP that will be rolled into his RRIF account.  Next year Martin is required to withdraw 7.48 per cent of the value of his account on December 31 of the year he turned 71.  The required annual minimum payment is stated as a percentage of the previous year end value.  These percentages increase slightly until age 94 where the maximum rate of 20 per cent is reached.  Assuming Martin’s portfolio is at $500,000 at the end of the year, he will have a minimum payment equal to $37,400 that will be considered taxable.

The perfect RRSP strategy is to contribute in high income and upper tax bracket years, and to pull funds out when you’re in a lower tax bracket.  The sudden increase in income with RRIF minimums left until age 72 may result in many people being in a higher tax bracket.  Many people may be wondering if waiting until age 72 is the best decision, especially knowing that this income will be on top of CPP, OAS, and other income.   The purpose of a financial plan when you’re younger is to map out the required savings to reach your shorter term goals and projected retirement needs.  The plan may also include a protection strategy for your family.  As you approach retirement the focus often shifts to understanding where cash flows will come from and which pools of capital you should access first.

Our clients who have taxable income over $125,000 annually are typically advised to wait until age 71 to convert and to take the first payment at the end of the year in which they turn 72.  In setting up the RRIF for high income couples we elect to use the younger spouses age to obtain maximum deferral.   Once clients are in the top marginal tax bracket (43.7 per cent in BC) the best strategy is to defer the tax liability by continuing to tax shelter within the registered account.

When income is expected to be below $125,000 then the decision on whether to convert your RRSP early to a RRIF is not straight forward.  Once you convert to a RRIF you are then obligated to begin taking income out for all future years.  It is possible to convert from a RRIF back to an RRSP prior to age 71 if your circumstances change.  The following are the key items to discuss when we are talking with clients:

Watching Thresholds – The Guaranteed Income Supplement (GIS) and the allowances are not based on net worth.  Many high net worth individuals have equity in real estate, corporations, and trusts that result in personal net income being low.  The GIS and the allowance stop being paid at $39,600 and $30,576, respectively.  Pulling funds out of an RRIF early could result in you losing these benefits.  Pensioners with an individual net income above $69,562 will have a portion of their Old Age Security payments clawed back if RRIF income is taken early.  The full OAS pension will have to be repaid if net income is $112,966 or above.   Projecting your income in the future will help in mapping out a strategy factoring in these thresholds.

Ratio of Non-Registered to Registered – Ideally as you enter retirement you have savings in both non-registered and registered accounts.  The non-registered savings are already after tax dollars and can be accessed with less tax consequences then registered funds.  This is especially important as you factor in potential lump sum needs in the future (i.e. new car, roof repair).  The greater the funds you already have in non-registered funds the easier it is to manage emergencies and to smooth out your income during retirement while at the same time fulfilling your cash flow needs.  If you have limited non-registered funds then earlier withdrawals may make sense.

Liquid Assets – High net worth is often locked up in real estate or assets that are not easily converted into cash.  Often at times the number one deciding factor in whether to pull funds out of a RRIF early is a result of cash flow needs and access to liquid funds.

Tax Free Savings Account (TFSA) – People without TFSA or non-registered accounts should consider pulling $5,000 out of their registered accounts annually to fund the Tax Free Savings Account.  Growth in a TFSA can be tax sheltered while at the same time building up a reserve of funds for you to access if an emergency arises.

Pension Income Amount – Beginning at age 65, investors without any other qualifying pension income are able to effectively withdrawal $2,000 annually from their RRIF account tax free.  This is because the income would be offset by what is referred to as the pension income amount.  Couples can withdrawal $4,000 annually with no taxes.

Pension Splitting – With the introduction of pension splitting the strategy for many couples has changed.  Up to fifty per cent of eligible pension income can be shifted from the high income spouse to the lower income spouse.  RRIF withdrawals beginning at age 65 qualifies as eligible pension income.

Couples – RRIF accounts are 100 per cent taxable upon death.   Nearly half of a RRIF balance of a single individual could go to taxes.   Couples have significant less risk of paying a large tax bill as they have the ability to elect a tax free roll-over a RRIF to the surviving spouse provided their spouse is named as a beneficiary.  This becomes trickier with second/third marriages with children from previous relationships/marriages.  The tax on the RRIF would be deferred when a spouse is named until the second passing and would likely be depleted slowly over time at more favourable marginal tax rates.

Other Estate Factors – Various other estate factors can result in different strategies for your RRIF account.  Some people may leave a RRIF account to a charity which would offset the large tax liability.   Insurance (i.e. joint last to die) is often a useful tool to cover the tax liability for a RRIF’s deemed disposition upon death.  Understanding your own health and family genetics is a factor that should be considered in the timing of when to withdrawal funds from your RRIF.

Tax Free Savings Account: Three different approaches

The Tax Free Savings Account (TFSA) has been around since January 2009 and many are still confused about what it is and types of investments that can be held within it.

The TFSA is different than a bank savings account that holds cash earning a small amount of interest.  The TFSA has the flexibility of holding cash like a bank savings account, but can also hold a variety of different types of investments, similar to an RRSP with bonds, equities and mutual funds.

When the TFSA was launched, the TSC/S&P Composite Index was at 8,987.70.   Frank, James, and Clare all open a TFSA on the first day, and each had a different view on how to invest within the account.   We have outlined how each of their accounts have performed over the January 1, 2009 to January 2, 2011 period.

■ Frank opens up a TFSA savings account on January 1, 2009 and deposits $5,000.  For purposes of this article, we will assume the savings account earns 1.3 per cent every year.  After the first year, Frank’s TFSA is valued at $5,065.  Frank deposits a further $5,000 into his savings account on January 1, 2010.  On January 1, 2011 Frank deposits another $5,000.  On January 2, 2011 Frank’s TFSA is worth $15,196.

■ James opens up a transactional TFSA account on January 1, 2009 and deposits $5,000 into a three year compound GIC (maturing on January 2, 2012) earning three per cent.  At the end of the first year, James’ TFSA is valued at $5,150.  James deposits a further $5,000 on January 1, 2010 and purchases another three year compound GIC (maturing on January 2, 2013) earning three per cent.  On January 1, 2011 James deposits another $5,000 into his TFSA and buys another three year GIC (maturing on January 2, 2014) earning three per cent.  On January 2, 2011 James’ TFSA is worth approximately $15,454 and he has three GIC’s that are laddered (maturities in early 2012, 2013, and 2014).

■ Clare likes the idea of having a lower risk equity that pays a dividend and also has some growth potential within her TFSA.  On January 1, 2009 Clare deposits $5,000 into her fee-based TFSA and purchases 150 shares of TransCanada Corp (TRP) at a price of $33.17 per share.  We recommend that Clare sets up the Dividend Reinvestment Plan (DRIP) on TRP.  After the first year, Clare’s TFSA has three additional shares from the DRIP program, and a total ending market value of $5,525.  Clare deposits a further $5,000 on January 1, 2010 and purchases another 141 shares of TRP at $36.19 per share.  During 2010, Clare receives a further ten shares of TRP through the DRIP program.  On January 1, 2011 Clare deposits another $5,000 and purchases 133 shares of TransCanada Corp at $37.99 per share.  On January 2, 2011 Clare’s TFSA is worth $16,469 and has 433 shares of TRP.

Each of the above people put in a total of $15,000 of original contributions and took a conservative approach.  The ending market value as of January 2, 2011 for the three investors range between $15,196 and $16,469.  Not illustrated above, are those people who have decided to assume more risk within the TFSA account by holding more aggressive equities.  Given the strength in the markets over the last couple of years, some of these people have already built up a sizable TFSA.  With proper management, early contributions, and time to grow, the TFSA can become a significant account to factor into your financial plan.


Fee-Based TFSA:  If your TFSA is a fee-based account then you should have the fee’s being paid from a non-registered account.  If you have not done this already then you should be able to speak with your advisor on having an amount transferred in to cover fees.  This will enable you to avoid tax on even a greater base amount.

Dividend Reinvestment Plan:  If you choose to invest in a large company paying a dividend then you should discuss setting up the DRIP program.  Many companies also offer a discount for shareholders participating in the DRIP.

Registered Account:  The TFSA is a “registered account”.  If you have a capital loss in a TFSA, you will not be able to claim it like you could in a non-registered account.  You also will not receive new TFSA room for trading losses.  We feel it is important to factor this in when making TFSA investment decisions.

Coupons or Compound GICs:   When you are purchasing direct holdings rather than mutual funds you will have periodic income payments come into the account.  In the TFSA it may be difficult to reinvest a small amount if you purchase direct fixed income (GICs’, bonds, etc.) within your account.   Two good fixed income solutions are coupons (also known as strips or residuals) that are purchased at a discount and mature at a greater value.  Look at compound GICs that are for periods greater than a year.

Property Taxes:  If you are 55 years or older then you are able to defer your property taxes.  Often at times, cash flow is restricted and contributing to a TFSA is not easy.  One strategy that we like is for clients to defer their property taxes and deposit the funds into a TFSA. Even if invested in GICs, similar to James above, you would be further ahead.  The interest rate for the property tax deferment program for the period October 1, 2010 to March 31, 2011, is 0.50 per cent (and 2.5% for certain families with children).

Naming Spouse as Beneficiary and Successor Annuitant:  If you are married then we would recommend that you understand the benefits of naming your spouse as beneficiary and successor annuitant.  Let’s use Frank as an example from up above.  He is married to Louise who has a TFSA valued at $20,000.  Frank has named Louise as both the beneficiary and successor annuitant of his TFSA.  If Frank were to pass away, Louise would be able to roll Frank’s entire TFSA valued at $65,730 into her own TFSA.

Understanding Withdrawals:  If you require cash to live off of then the first place you should look at is your bank accounts and non-registered investment accounts.  The second place you should look is the Tax Free Savings Account (TFSA).  If you do withdraw funds from a TFSA in a given year, you must wait until the next calendar year prior to replenishing the amount withdrawn.

Pre-authorized contribution make sense

The easiest way to implement savings and investments into your routine is to set up a pre-authorized contribution – often referred to as a PAC.  Begin by looking at monthly cash-flows and determining a comfortable amount to set aside.

A PAC can be set up for most types of accounts – the most common being Registered Retirement Savings Plans, Registered Educated Savings Plans, Tax-Free Savings Accounts and non-registered accounts.

PACs can help individuals reach specific goals, such as retirement, education planning and emergency reserves.  If you are unsure of the savings required to reach each one of your goals, complete a financial plan with a list of savings required to meet your goals.

A typical financial plan may recommend that a couple each maximize annual TFSA and RRSP contributions, and save $500 per month in a non-registered savings account.

Dollar-cost averaging is used in finance to explain the purchase of the same investment on more than one day.  As an example, if you would like to purchase $20,000 of a particular stock but you feel it may be a bit expensive, one approach is to purchase a half position today at $10,000.  If the stock declines then you have the ability to buy $10,000 more without being overweight in the position.  By buying the stock on two different dates you are effectively dollar-cost averaging.

If you are contributing every month into a mutual fund then you are buying at different points in the market cycle.  For dollar-cost averaging to work it is important to continue contributions even if we are experiencing difficult financial markets.

Financial illustrations demonstrate the benefits of contributing early, even if those contributions are smaller.  The compounding effects of investment returns are an important component to consider when developing a savings strategy.

Decision 1:  How much can you afford to contribute?  Setting aside ten per cent of your monthly income may be a guideline to get some investors started.  It is important to look at your financial plan and available cash flows.  You can always start with a conservative amount and increase the dollar amount over time.

Decision 2:  How often would you like to contribute?  Most investors who establish a PAC contribute either once or twice a month.  We recommend that individuals consider their cash inflows and match the PAC accordingly.

Decision 3:  What type of investment would be most appropriate to set up as a PAC?   The three most common options are cash, high interest savings accounts, or a mutual fund.

Typically the people who contribute the amount as cash are looking to purchase individual holdings, once funds accumulate, rather than a mutual fund.  Some high interest savings accounts allow investors to set up a PAC.  If you choose to do a PAC in a mutual fund it is important to pick a quality fund and review this regularly.  Small PACs can turn into a significant nest egg over time if managed correctly. Some fund companies have policies where an initial purchase is required (i.e. $500) to establish a PAC.

Decision 4:  What type of an account would you like to set up a PAC for?  Many investors choose to PAC for their Registered Retirement Savings Account.  If an investor knows their maximum Registered Retirement Savings Plan deduction limit then a PAC can be set up to contribute one twelfth of this amount each month over the year.  Another example may be parents or grandparents who want to fund a RESP for a child or grandchild, through a monthly PAC.

One of the main reasons we like PACs is that it sets up forced savings.  With the amount automatically coming out of your bank account it also becomes part of a routine that is factored into your cash flows.  After a few months, some investors may even forget that they are saving automatically.


Check documentation when topping up your TFSA

The Tax Free Savings Account survived its first year.  The rules with respect to the annual TFSA limit after 2009 is that it will be indexed to inflation, while additions to contribution room will be rounded to the nearest $500.  For 2010, the TFSA additional contribution limit will remain at $5,000.

Studies have shown that the majority of people did not open a TFSA in 2009.  As many people still have debt, or other obligations, the TFSA was obviously not the top priority.  Based on the phone calls we received last year, some people felt that they needed to open an account up in 2009 to actually get the $5,000 contribution room.  That is not the case; if you are among the majority who did not contribute at all in 2009 then your eligible TFSA contribution room for 2010 is now $10,000.

We are seeing many situations where people do not have the documentation completed correctly with respect to their TFSA.  Two areas in particular stand out as incomplete:  naming beneficiaries and successor annuitant/holder.

Some tips:

■ TFSA Beneficiary

If you opened your account in early 2009 it was not possible to name a beneficiary on your TFSA.  Legislation has now been passed in British Columbia, but this was done after many had already opened their TFSA.  Advice given at that time was to update their wills to include the assets within the TFSA.  Most people likely felt the $5,000 was immaterial to their estates when compared to the costs and time associated with getting their will updated.

The benefit of naming a beneficiary is the ability for the assets to bypass the estate of the deceased and transfer directly to named beneficiaries.  If no beneficiary is named then the TFSA will be part of the deceased’s estate.  Assets flowing through your estate are typically subject to probate and other fees.

For our clients who opened a TFSA in the initial stages, we sent the beneficiary forms later.  Updating, or changing, your beneficiary should not cost anything.  We recommend you check your original TFSA forms to ensure a beneficiary has been named.  The form is easy to complete and will simplify the asset distribution of your estate.

■ Beneficiary is Not Spouse

If the beneficiary of your TFSA is not a spouse then the assets of the TFSA will transfer to your named beneficiary with no tax consequences to your estate.  If the beneficiary wishes to keep the assets as they were, then an in-kind transfer should be requested.  If the beneficiary wishes to have cash, then instructions to that effect should be provided.  The beneficiary has the option to transfer the assets into their own TFSA, provided that contribution room exists.  If no room exists then the assets can be transferred to a non-registered investment account.

■ Beneficiary is Spouse

There are some distinct differences to naming a spouse as your TFSA beneficiary versus another family member. We recommend most couples name their spouse as a beneficiary.  In addition to naming your spouse as a beneficiary we recommend setting up your spouse as a successor annuitant.

■ Successor Annuitant

For couples, understanding the term successor annuitant is essential.   This is a separate part of the TFSA form, or it could be another form altogether.  A spouse who is named as a successor annuitant is able to roll their spouses TFSA into their own TFSA without using up their own contribution limit.  The plan continues exactly as is with the rights being passed onto the successor.  All income will continue to be tax sheltered after the TFSA holder’s death.

An example:  Mr. Newman has a TFSA and has named his spouse as the beneficiary and a successor annuitant.    At the time of Mr. Newman’s death, his TFSA was valued at $42,000.   Mrs. Newman’s TFSA was valued at $39,500 prior to her husband’s death.  We estimate Mrs. Newman will have a combined $81,500 in her TFSA that is completely tax sheltered.

By naming your spouse as a successor holder it also ensures that income earned after the original holder’s death is not taxed.  If the successor holder is not named then legislation requires taxation of income earned in the TFSA after death.

Just to give you an idea of how new the TSFA account is, some holders have already passed away without having the proper documents completed.  We recommend spouses in this situation speak with their accountant to complete the required CRA form (RC240) to ensure that the TFSA rollover would be treated as an exempt contribution.

As you are depositing top-up contribution for 2010, or setting up a new account, you should ensure that the beneficiary is set up correctly.  If you are married, and naming your spouse as the beneficiary, you should ensure that the successor annuitant form is also completed.


  • Canadian residents age 18 or older can contribute up to $5,000 annually to a TFSA
  • Investment income earned in a TFSA is tax-free.
  • Withdrawals from a TFSA are tax-free.
  • Unused TFSA contribution room is carried forward and accumulates in future years.
  • Full amount of withdrawals can be put back into the TFSA in future years.
  • Choose a range of investment options such as mutual funds, GICs and bonds.
  • Contributions are not tax-deductible.
  • Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.
  • Funds can be given to a spouse or common-law partner for them to invest in their TFSA.
  • TFSA assets can generally be transferred to a spouse or common-law partner upon death.

Source: Government of Canada



How to stay ahead of inflation: Contribute to your TFSA early

One of the best features of the Tax Free Savings Account is its flexibility, such as the ability to withdrawal funds without any tax consequence.  If you need funds for short-term goals, such as buying a new car, renovating your home, or taking a holiday, then the TFSA account may be the desired choice for putting cash away for easy access in the near term.

Depending on how you look at it, this feature may not be a benefit.  A person first has to decide how they want to fund their retirement.  It may be too easy for people to dip into their TFSA.  There is no tax consequence for withdrawals and people may replenish the account in subsequent years with no penalty.

For most people, the main purpose of an RRSP is to provide retirement income in the future.  The very purpose of this account is designed for a long-term goal, and not for short-term goals.  Due to RRSP contributions being tax deductible, there is a limit to how much you can contribute.  All RRSP withdrawals are considered taxable income.  A young person withdrawing an RRSP early would have to pay tax on the dollar amount taken out.  This provides an incentive for people to leave the account for its original purpose.  Withdrawals from an RRSP account should generally be the last resort for people needing cash.

If a person makes a withdrawal from their RRSP they are not able to get the contribution room back.  It is lost permanently – it is not replenished like the TFSA.  The tax consequence and the lost room are two key reasons people are encouraged to keep RRSP funds for retirement.

In an earlier column we mentioned how we like the TFSA more then RRSPs for people in the lower income tax brackets.  We also like the idea of people beginning to save for retirement early in life.  The key thing that young people can note is that although this is a “savings” account, you should consider using this for a retirement account.  The TFSA annual contribution limit will keep pace with inflation, rounded to the nearest $500 increment.  The follow chart highlights some simple compounded growth assuming 3 per cent inflation and investment growth of 6 per cent:











 Inflation Amount

Limit (Nearest $500)

TFSA Beginning Balance

Annual Contribution        


 Investment Return

TFSA Ending Balance












      5,000.00       5,000


          5,000          5,000        300.00          5,300



      5,150.00       5,000        5,300           5,000         10,300        618.00        10,918



      5,304.50       5,500       10,918           5,500         16,418        985.08        17,403



      5,463.64       5,500       17,403           5,500         22,903      1,374.18        24,277



      5,627.54       5,500       24,277           5,500         29,777      1,786.64        31,564



      5,796.37       6,000       31,564           6,000         37,564      2,253.83        39,818



      5,970.26       6,000       39,818           6,000         45,818      2,749.06        48,567



      6,149.37       6,000       48,567           6,000         54,567      3,274.01        57,841



      6,333.85       6,500       57,841           6,500         64,341      3,860.45        68,201



      6,523.87       6,500       68,201           6,500         74,701      4,482.08        79,183



      6,719.58       6,500       79,183           6,500         85,683      5,141.00        90,824



      6,921.17       7,000       90,824           7,000         97,824      5,869.46      103,694



      7,128.80       7,000     103,694           7,000       110,694      6,641.63      117,335



      7,342.67       7,500     117,335           7,500       124,835      7,490.13      132,326



      7,562.95       7,500     132,326           7,500       139,826      8,389.53      148,215



      7,789.84       8,000     148,215           8,000       156,215      9,372.90      165,588



      8,023.53       8,000     165,588           8,000       173,588    10,415.28      184,003



      8,264.24       8,500     184,003           8,500       192,503    11,550.20      204,053



      8,512.17       8,500     204,053           8,500       212,553    12,753.21      225,307



      8,767.53       9,000     225,307           9,000       234,307    14,058.40      248,365



      9,030.56       9,000     248,365           9,000       257,365    15,441.90      272,807



      9,301.47       9,500     272,807           9,500       282,307    16,938.42      299,245



      9,580.52       9,500     299,245           9,500       308,745    18,524.72      327,270



      9,867.93     10,000     327,270          10,000       337,270    20,236.21      357,506



    10,163.97     10,000     357,506          10,000       367,506    22,050.38      389,557



    10,468.89     10,500     389,557          10,500       400,057    24,003.40      424,060



    10,782.96     11,000     424,060          11,000       435,060    26,103.61      461,164



    11,106.45     11,000     461,164          11,000       472,164    28,329.82      500,494



    11,439.64     11,500     500,494          11,500       511,994    30,719.61      542,713



    11,782.83     12,000     542,713          12,000       554,713    33,282.79      587,996



    12,136.31     12,000     587,996          12,000       599,996    35,999.76      635,996



    12,500.40     12,500     635,996          12,500       648,496    38,909.74      687,405



    12,875.41     13,000     687,405          13,000       700,405    42,024.32      742,430



    13,261.68     13,500     742,430          13,500       755,930    45,355.78      801,286



    13,659.53     13,500     801,286          13,500       814,786    48,887.13      863,673



    14,069.31     14,000     863,673          14,000       877,673    52,660.36      930,333



    14,491.39     14,500     930,333          14,500       944,833    56,689.98    1,001,523



    14,926.13     15,000  1,001,523          15,000    1,016,523    60,991.38    1,077,514



    15,373.92     15,500  1,077,514          15,500    1,093,014    65,580.86    1,158,595



    15,835.13     16,000  1,158,595          16,000    1,174,595    70,475.71    1,245,071



    16,310.19     16,500  1,245,071          16,500    1,261,571    75,694.26    1,337,265



    16,799.49     17,000  1,337,265          17,000    1,354,265    81,255.91    1,435,521

We caution everyone who looks at the above table to understand projections, returns, and inflation.  The term real rate of return factors in taxes and inflation.  As the TFSA has no taxes, the real rate of return above is three per cent (six per cent return less three per cent inflation).  The inflation component can be illustrated by looking at the inflation amount in the year 2050.  We project that in 2050 one would need approximately $16,799 to purchase the same equivalent items that $5,000 could purchase today.  In other words, young people today will have to become millionaires in the future to fund a modest retirement.


Choosing the right savings account

This year we have a new reason for people to update their financial plan.  The new Tax Free Savings Account should be factored into your savings, especially if you intend to use some of these funds for retirement.

Most financial plans encourage people to contribute to a Registered Retirement Savings Plan.  The number one advantage of RRSP accounts is the tax-deferred growth over time.  The second benefit is the initial deduction for making the contribution.

The new Tax Free Savings Account offers the same tax-deferred growth advantage of the RRSP.   The one downside to the TFSA is that no tax deduction is given for contributions.  The offsetting benefit for the TFSA is that withdrawals are not taxed like they are with RRSPs.

The idea behind an RRSP is that you should be in a lower income tax bracket when you retire than when you put the money in.

Let’s use Jack who is in the 30 per cent marginal tax bracket while he is working.  When he retires he anticipates he will be in a lower tax bracket, say 20 per cent.  If Jack’s income really is in the 20 per cent range at retirement, then the RRSP contributions worked the way he planned.

Unfortunately, we see the opposite happening. People are making contributions when they are in relatively low marginal tax bracket (10 or 20 per cent) while working and pulling the funds out at retirement at a higher marginal tax bracket.

At retirement you’re likely to have income from different sources, although your employment income may be lower.  Most Canadians will be eligible for CPP retirement benefits and the OAS pension.  Most people will have to add other income sources including, investment income, rental income, part time work and registered account withdrawals.

The best part about the TFSA is that it enables people to tax shelter investment income.  It also enables people to have more flexibility to choose when to pull RRSP funds out. Having both a TFSA and RRSP may allow people to take amounts out of both accounts at retirement.  The TFSA is the buffer needed to manage cash flows without the income tax consequence.

Most financial planning software packages do not yet have the TFSA factored in, as it is too new.  Once the software programs are updated we would anticipate savings to be split between RRSP and TFSA.  The deciding factor is likely to be your level of income to determine what type of account you should direct your savings to first.

Low Income

Consider setting up a monthly pre-authorized contribution for the TFSA only.  The reason for this is that you may have little disposable income for savings.  We would recommend you avoid RRSP contributions if your income is below $38,000.  Your RRSP deduction limit will grow so you may utilize deductions in the future when your income is higher.  If you have set up an RRSP monthly pre-authorized contribution, talk to your advisor about changing these monthly savings to a TFSA.

Medium Income

Consider setting up a monthly pre-authorized contribution for the TFSA.  If you have excess cash to invest then making periodic RRSP contributions may make sense.  Prior to making an RRSP contribution you should ensure that the funds are committed to your retirement plan.  It is often people who fall in this category who make last minute RRSP contributions.  The last day to make a 2008 RRSP contribution is March 2, 2009.

High Income

If you are in the top marginal tax bracket then it generally makes sense to take advantage of all tax deferral type accounts.  Most high-income earners will benefit from maximizing both the TFSA and RRSP.   Consider making a lump-sum contribution early in the year for both the TFSA and RRSP.  The maximum 2009 RRSP contribution limit is $21,000.

To summarize the above, nearly everyone should have a TFSA.  People with average income should have a TFSA, and possibly an RRSP provided the funds are committed for retirement.  High-income earners may benefit from contributing the maximum amounts to both an RRSP and TFSA early each tax year.

The first decision you will have to make is the type of investment account to put your savings in, and then decide which investments to purchase in that account.  Over your life, the direction of your savings may change primarily based on your income level.  With each significant change, your financial plan should be updated.


Tax-free savings enhance pensions

The simplicity of the Tax Free Savings Account is a great advantage because it is easy to explain.  Your contribution limit is the same whether you are a member of a pension plan or not.  This provides one of the first opportunities for people who belong to good quality pension plans to tax shelter additional savings from tax.

The RRSP contribution room formula is designed primarily to assist those individuals without a pension. The formula is straight-forward – you are able to contribute 18 per cent of your earned income.

Let’s look at Alice who works for a company without a pension plan.  Last year Alice earned $60,000 so her maximum RRSP contribution limit would be $10,800 (18 per cent x $60,000).

Alice’s husband Peter also earned $60,000 last year working for a company with a pension plan.  The main difference is Peter is a member of a pension plan.  Peter’s maximum RRSP contribution limit this year is reduced by a pension adjustment of $6,940.  Peter’s maximum RRSP limit is $3,760 ($10,800 – $6,940).   The pension adjustment varies depending on many factors.  The better the pension, the greater the adjustment on the RRSP room.  The key point is that Alice will be able to contribute more to her RRSP.

Employees belonging to municipal, government, or private pensions may benefit the most from the TFSA.   One of the disadvantages to belonging to a pension plan is the above illustrated pension adjustment (PA).  The PA grinds down the amount you can tax shelter in your RRSP.  For people who belong to a good pension, this leaves very little room to contribute to their own RRSP.

The TFSA will benefit people like Peter who have not been able to shelter all of their savings from tax.  Several strategies could be used to implement the TFSA for early retirement.  Different bridging options are generally available as you near retirement.  The TFSA can certainly be a source of cash if you choose to take a reduced pension or retire early.

Many of the good quality pension plans are starting to disappear.  These are often referred to as defined benefit plans.  With a defined benefits plan, you as the employee do not have to make investment choices.

In the future you will see less of these types of plans.  Instead, companies may provide defined contribution (money purchase) plans with you as the employee making the investment decisions.  Companies would rather shift the level of investment risk to their employees rather then incur the risk of poor markets.  This essentially means that people who belong to defined contribution pension plans have to assume more of the responsibility for their investment decisions.

We encourage people to look closely at the quality of their plan and the different investment options available.   When speaking with clients with defined contribution pension plans we ask them to provide us copies of periodic pension statements, along with the investment choices they have.

The main reason we ask for this information is to ensure that we are looking at their complete investment holdings.  Often at times we see that people do not fully understand the investment choices they have made within their pension.  Prior to doing any investing in a non-registered account, RRSP, or TFSA, it is important to obtain an understanding of the investments within your pension.  The biggest reason to do this is to ensure that all of your investments are combined for purposes of determining your asset mix (percentage of cash equivalents, fixed income, and equities).  This exercise often reveals improvements for your portfolio, including strategies to minimize tax, reduce investment costs, and avoid duplication within accounts.  Having a complete picture enables your investment advisor to discuss risk and design an appropriate strategy.

Members of pension plans should consider working with an investment advisor to assist them in mapping out a comprehensive financial plan.  The plan should include the TFSA and possibly an RRSP.  Payments from a pension plan are fully taxable (other than the pension income amount currently at $2,000 annually).  If your spouse is not receiving a pension then you may split the income with your spouse.  Add some tax-free withdrawals from a TFSA and you should be able to considerably enhance your after tax cash flow at retirement.


New Tax Free Savings Account is so good we bet it won’t last

The Tax Free Savings Account is the best opportunity for investors today to minimize tax during their life, and into retirement.   The younger an investor is, the greater the benefit of the TFSA.  The long-term benefits of the TFSA seem almost too good to last.   The government has stated that withdrawals from a TFSA are tax-free.  Not only are they tax-free, they will not impact income-tested benefits, such as the guaranteed income supplement or Old Age Security claw back.

In 2007, the mandatory RRIF conversion age was moved from 69 to 71, with the first required minimum payment at age 72.  Pension splitting was also introduced in 2007.  Another minor benefit was the increase to the pension income amount from $1,000 a year to $2,000 a year.  This essentially allows investors to pull $2,000 out of a RRIF account each year tax-free beginning at age 65 (assuming that the pension income amount is not applied to other eligible income).  People should modify their financial plans based on the above announcements and new TFSA.

By combining all the factors noted above, the benefits for people who have a savings plan in place are excellent.  We will use Stephen, who turned 19 on January 1, 2009, to illustrate our point.  In our calculations, we assume inflation of three per cent and annualized rate of return on investments of six per cent.  We also assume that Stephen’s ten highest earning years will be when he is 55 through 64 (when he is in the 30 per cent income tax bracket).  Stephen plans on retiring on his 65th birthday.

Early Years

Stephen should contribute the maximum amount annually to his TFSA every year beginning at age 19 until age 64.  If this discipline is set early Stephen will have accumulated close to $1.9 million in his TFSA by his 65th birthday.  Between 19 and 31, any extra savings should be accumulated for a down payment on a home.  By purchasing a personal residence Stephen will be taking advantage of one of Canada’ best tax-exempt investments.  When Stephen is 30 he meets Sharon and they soon get married.  Sharon is the same age as Stephen.  For illustration purposes, and to keep this scenario realistic, we will assume that they only have the cash flow to fund Stephen’s TFSA (or half in each).

Age 31 – 56

Together they buy a home when they turn 31.  In their middle earning years they should focus on first paying down the mortgage.  By removing their non-deductible debt as soon as possible, they will save thousands of dollars in interest costs.  Assuming a 25-year amortization schedule, they will be mortgage free when they are 56 years old.  Sharon has twins when she is 36 years old.  Sharon has directed some of her excess savings into starting a family Registered Education Savings Plan (RESP) for their children.  During this period we recommend contributing $2,500 for each child for fourteen years to maximize the Canada Education Savings Grant of $7,200 per child.

Age 57-64

After the mortgage is gone and RESP contributions cease, Stephen and Sharon will have a little extra cash flow.  Both Stephen and Sharon should redirect the cash flow previously dedicated to mortgage payments and RESP contributions to making their first RRSP contributions.  We assume Stephen has the higher income.  In today’s dollars, we recommend he contribute approximately $7,000 for six years between the age of 57 and 62.  This should fund two life annuities beginning at age 65 paying $2,000 a year each.  This is equal to the pension income amount and should essentially be tax-free.  The cost of these contributions is approximately $4,900 annually as Stephen will receive a tax refund of $2,100 for each of the six years (30 per cent x $7,000).


When Stephen and Sharon are 64 they should convert their RRSP accounts to RRIF accounts and schedule to take their first payments at age 65 ($2,000 per year each).  Both should apply for Canada Pension Plan (CPP) retirement benefits.  Stephen is eligible for the full CPP; however, Sharon worked part time and qualifies for a lower CPP amount.   Stephen and Sharon should make an application to share CPP, this will reduce the household tax liability.  In addition, they should both apply for OAS to begin once they turn 65.

At the beginning of retirement, Stephen and Sharon will have accumulated approximately $1.9 million in their TFSA account.  Readers should factor in inflation when looking at this number.  $1.9 million in 46 years will not be worth the same amount as it is today.  With a three per cent real rate of return, the equivalent amount (in today’s dollars) is approximately $488,000.  In today’s dollars, Stephen and Sharon will also have $26,900 and $28,500 in their RRIF accounts, respectively.  If we assume that both Stephen and Sharon have life expectancies of 90 years, then the TFSA should fund annual tax-free cash payments of approximately $137,600 (the first payment is approximately $35,173 in today’s dollars).  If Stephen and Sharon were both able to take advantage of the TFSA then the TFSA should fund annual tax-free cash payments of approximately $275,200 (first payment is approximately $70,346 in today’s dollars).  In addition, they will also each receive income from CPP, OAS, and the RRIF annuity.

The TFSA brings planning for low taxable income at retirement to new levels.  People who use the TFSA will pay more annual taxes during their working years from not maximizing RRSP contributions.  This sacrifice will be rewarded at retirement when taxes will be extremely low.  Stephen and Sharon will not have to worry about having their old age security being clawed back.  In fact, if they plan right, their income may be low enough to qualify for medical benefit assistance and/or other income tested benefits.  Better yet, they may qualify for the tax-free guaranteed income supplement (GIS).

After doing the math we came to the conclusion that the TFSA is such a good deal for Canadians that it likely will not last long term in our opinion.  If it does last more than ten years then possibly some of the rules will change.  In the meantime, it makes sense to consider how the TFSA can benefit your overall retirement savings strategy.

Tax-Free Savings Accounts have arrived

Beginning in January 2009 all Canadian residents over 18 will be able to contribute annually to a Tax Free Savings Account (TFSA).

For 2009 the limit is $5,000, and although you do not receive a tax deduction for contributing, all income within the TFSA grows tax-free and there is no tax on withdrawals.  In the following years, the annual limit will be indexed to inflation and the annual additions to contribution room will be rounded to the nearest $500.

Nearly everyone should have a TFSA.

Why?  You can save tax-free and still have the flexibility to withdraw your savings at any time, for any purpose.  The new TFSA should be a very important component of all financial plans and investment strategies.  Although initial contributions may be small, it will grow into a substantial amount over time.

Contributions to a TFSA may be the best option for many people, replacing RRSPs as the first place to save money.  Others may find that the TFSA compliments their RRSP savings.  It really comes down to what your taxable income is today and what you project it will be in the future.  A couple who each save $5,000 a year (at the beginning of each year) for 25 years would have combined accounts of approximately $676,000 if the investments earned a seven per cent annualized rate of return.

Nearly every financial firm today has a campaign marketing these new accounts.  Although small at this stage it is important to map out your strategy for the TFSA and how it fits into your overall financial plan.   Here are 10 tips to consider for the TFSA:

1) Financial Plans – The first step prior to setting up a TFSA is to see how it fits into your current financial plan.  After you go through some future contribution and growth numbers you will see that the TFSA will be one of the most important components of your financial plan.

2) Low or High Risk – Many people are torn between choosing conservative cash equivalents and fixed income investments, or choosing higher risk options such as equities.  The underlying investment options are extremely important.   We would encourage people to look at both short-term and long-term goals when choosing investment options.  The choice should be suitable given your risk tolerance, other investment holdings, and cash flow needs.

3) Investment Flexibility – It is likely that the investment you choose may change over time.  Ask the financial institution, where you are considering opening up a TFSA, what types of investment options they have.  It may be that you are limited to savings accounts, term deposits, and/or proprietary mutual funds.  You may find that direct equities, index shares, bonds, or non-proprietary mutual funds are a better option.  If you deal with a firm offering all options, it provides more flexibility this year.  This is especially important if you feel you may want to make investment changes in the future as your TFSA grows.

4) Understanding Fees – Watch for annual fees, transaction fees, withdrawal fees, and transfer fees (if you move your TFSA to another firm).  Some financial firms may have different account options available including transactional, fee-based or managed.  It is important to obtain an understanding of the account type and all current and future fees.

5) Contributions – Not everyone will be able to deposit $5,000 in early January.  Consider contributing $200 as an initial investment in early January then set up a monthly pre-authorized contribution of $400 per month at the end of every month.  This is a perfect pay-yourself investment account.  Care should be taken not to over contribute to your TFSA, as a penalty tax will apply on the excess amount.

6) Beneficiary – Carefully select the beneficiary of your TFSA.  We are encouraging couples to name each other as beneficiary to take advantage of the tax free roll-over.  If you are single, you should obtain an understanding of what happens to your TFSA is you name someone other than a spouse as a beneficiary.  It is possible to name your estate as beneficiary.  However, fees such as executor and probate are often avoided if a beneficiary is named.

7) Withdrawal – One of the most attractive components to the TFSA is that it may be replenished if a withdrawal is made.  Some restrictions apply relating to replenishing a TFSA in the same tax year.  We envision multiple reasons why someone would need to make a withdrawal, such as: education expenses, home purchase or renovation, vacation, health care expenses, car purchase, etc.  Another reason a person may make a withdrawal is to shift funds into an RRSP.  If you are in a low income tax bracket, it likely makes more sense to contribute now to a TFSA.  If in the future you are in a higher income tax bracket (making greater than $38,000 annually), and can commit the funds for retirement, it may make sense to roll some funds from your TFSA into your RRSP to obtain a tax deduction.

8) Low Income Years – The TFSA will immediately benefit seniors who are currently receiving income-tested benefits and we encourage those with low incomes to take full advantage of the TFSA.  Higher net worth individuals may consider using the TFSA for withdrawals to fund the first few years of retirement.   As an example, a person could have $500,000 in an RRSP at age 65 and $300,000 in a TFSA.   By using the TFSA for the first five years it may be possible that you will also receive income tested benefits (i.e. guaranteed income supplement, old age security) provided the rules do not change.

9) Sheltering Income – If you follow Tip 8 then chances are you have the ability to contribute funds back into your TFSA when you begin pulling funds out of your RRSP and RRIF accounts.  Although the RRSP and RRIF withdrawal is taxable, the proceeds may be deposited into the TFSA to tax shelter the future investment income component.

10) Talk To An Advisor – We encourage you to speak with a financial advisor to discuss opening a TFSA.   An advisor should obtain an understanding of your cash flow needs, taxation matters, goals, and risk tolerance.  With this knowledge they should be able to guide you in the right direction.