Friday, February 29, 2008

My Grandmother’s Thoughts on TFSAs

Sometimes my grandmother surprises me. She is always up to date on the latest news, but I didn’t expect her to analyze the latest Canadian federal budget as carefully as she has. Here are her thoughts on what the tax-free savings accounts (TFSAs) mean to her.

Unlike RRSPs that cannot be used past the age of 71, she is allowed use a TFSA. (I won’t give away her age, but her eldest daughter is on the verge of not being able to contribute to an RRSP either.)

For my grandmother, investing means GICs at a bank, which is sensible at her age. I used to wonder if the bank took advantage of her by offering poor interest rates, but at the latest update, she left one bank to move to another where she negotiated a better rate than the best I was able to find with my discount broker.

In one way the TFSA is good for her because it lets her shelter interest income that is usually highly taxed. However, the $5000 limit is a problem for her. The great interest rates she gets are partly due to the fact that she is negotiating a rate for all of her savings rather than just $5000.

She worked out the after-tax interest rate she gets on her savings and found that it isn’t much different from the pre-tax rate she would get on $5000. The whole TFSA business would be a lot of trouble for no benefit.

So, she will have to wait a few years for the $5000 per year to build up before it is worthwhile for her. I guess there is no reason to worry about my grandmother having Alzheimer’s at this point.

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