Tax Free Trading Account (a “souped up” TFSA)

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It’s January, and it’s time to start thinking about contributing to your TFSA for the 2010.

Last year, I put my TFSA into a principal protected mutual fund that tracked the index.

This year, I thought I would do something different.

Questrade has been offering their Tax Free Trading Account since January of last year, when the TFSA first came out.

Some people use the TFSA as an emergency fund, and interim account where they can grow their condo fund, car fund, school fund, or emergency fund tax free.  With the conventional TFSA, such as high interest savings accounts, you can earn between 1-3% depending on the promotions going on right now (hot tip  ING Direct is offering 3%.)

But… why earn a measly 3% of interest income when you can trade without having to pay capital gains or income trust distributions?

I know, I know, interest income is taxed at 100% your marginal rate.  We all want to think smart, to avoid paying anything that is taxed at your marginal rate.

I just opened up a Tax Free Trading Account with Questrade yesterday.  I currently have a non-registered account already, and I like their low commissions, so thought I would add to that with the Tax Free Trading Account.  Besides, it’s free.  I know that some banks/brokerages charge you money to “up keep” the registered account, even if it’s self directed.

There are a few different ways people are filling in their Tax Free Trading Accounts.  Everyone has different ideas.

One of my investment advisers recommended that I fill in my Tax Free Trading Account with venture investments that have a potential for high growth.  Lets say I bought 30,000 shares of a venture stock for $0.12 and it hits $0.24 and I sell it.  I would have $3600 profit.  I would have to claim $1800 as a capital gain.  If I were at the tax bracket of 30%, lets say, I would have to fork over $530 to the government.  If I held that in a Tax Free Trading Account, on the other hand, I would be able to keep the $3600 all to myself, and withdraw it tax, free, anytime.  I think as long as you have the $5000 in your account, you are fine, and do not have to wait until next year to recontribute.

As you can see, the advantages are pretty darn awesome.  But the disadvantage is that you cannot claim any capital losses.  Yes, you cannot have your pie and eat it too.  That would be too good to be true, now wouldn’t it?  So if you LOST $3600, then you’re shit out of luck, says the government.

You would have to really do your research then, if you plan to go that route.

What I personally am planning to do with my Tax Free Trading Account is to invest in income trusts.

What are Income Trusts?

Income Trusts (aka Flow Through Entities)  are traded just like stocks, but they’re not stocks.

• These companies aren’t corporations, so they pass the tax on to you  (hence the “flow through entity” aspect).
• Investors/ unit holders get paid regularly (usually monthly) with cash distributions.
• Some of the returns are wonderful, too, anywhere between 5-12% yearly return (my retired mom loves her income trusts).
• The downside is that the distributions can be in the form of capital gains, interest income, or dividends.  Kind of like a mixed bag.  If you get  mainly interest income, then what they pay you will be heavily taxed.

Okay, so the main thing is that they will lose their tax advantages in 2011 (except for the real-estate related income trusts (REITS)- they are free from all this drama).  A lot of the companies are planning to convert themselves to corporations by the end of 2010.

So it would make sense to put these in a Tax Free Trading Account, but again, since they are traded like the stocks, you won’t be able to get any capital loss if you sold it within a Tax Free Trading Account.  So again, you need to choose them very very carefully!  Don’t get blindsided by the 12% yield.  If it’s a crappily run company, it’s a crappily run company.

Anyway, onto the good stuff.

Right now Questrade has a promotion going on to get you to open a new account with them (if you’re a current Questrade client, it won’t apply to you, sorry!).  It’s the Questrade Financial Post Stock Market Challenge But you have to act fast, the last day is January 31, 2010. If you transfer a minimum of $1000 into your new Questrade account (it can be a RRSP, TFSA, non registered account), they will:

• Waive $100 in trade commissions= 20 trades or so (that’s awesome because it’s usually $50 with other promo codes)
• Pay for your transfer out fee if you transfer a minimum of $25,000 from another brokerage (these fees can cost $250, I’ve asked!) but that won’t be applicable for the TFSA of course, because you have a max of $5000 per year
• only cost $0.01 per share, minimum of $4.95, up to a max of $9.95

So how do you get in on this offer?

Put in the promo code SMC09 when you’re on the “open an account” screen.

EDIT Febuary 6.2010: The promo code for SMC09 has ended, but there’s still the $50 in free trades promo code going on.  Just enter: youngandthrifty when you’re on the “open an account screen”.

I’ll talk more on the basics of a TFSA next time.  I kind of  got ahead of myself and talked about the Tax Free Trading Account first.  Got too excited about the promotion!

What do you plan to do with your TFSA this year?  What’s your take on Income Trusts?

I plan to give my two cents (good and bad!) about Questrade, sooo stay tuned!!

Related Posts:

• Switching to the Bare Bones Basics: High Interest Savings Accounts
• $25 orange key for ING direct
  

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Tags: income trust, questrade, tax free trading account, TFSA

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