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Daniel

Investing

What’s the deal with the TFSA contribution limit?

UPDATE: According to CBC– The TFSA rollback is likely to be announced on Monday, with the vote taking place on Wednesday

The fate of the Tax-Free Saving Account (TFSA) contribution limit was a point of heated contention leading up to the federal election. In an effort to bolster savings for the middle class, the Conservatives raised the limit in 2015 to a non-inflation-indexed $10,000 per annum. The Liberals pledged to reduce the limit back to the inflation indexed $5,500, siting that the increase only benefitted the wealthy. Now with the Liberals in power, we’re likely to see the TFSA’s contribution limit return to $5,500 starting in 2016.

All this back and forth is confusing and left a very important question unanswered: Should I scrape together all my savings to top up my TFSA before the $10K contribution room disappears when the limit is changed?

The answer is: No, you don’t have to. There is no need to rush because the $10K in contribution room that was allowed for in 2015 isn’t going anywhere. As of right now, the contribution limit for 2014 was $5,500, the limit for 2015 is $10K, and the limit for 2016 will likely be $5,500. That means you’re free to continue saving and investing in your TFSA- business as usual- even if that means waiting until next year to make more contributions.

Related: The Beginner’s Guide to the TFSA

There have been some reports of a 2016 $1, 000 limit for those who have contributed $10K, but let’s face it: Trudeau isn’t going meddle with the limits retroactively. It would take quite an amount of effort on the government’s part with little benefit. It would be of little consequence even in the very unlikely event that the extra $4,500 was clawed back. Withdrawals from the TFSA are tax-free, putting that money right back in our collective pockets.

As of 2015, the maximum contribution room in a TFSA is $41,000. In 2016, the maximum contribution room will likely grow to $46,500 instead of $51,000 with the coming changes. It’s as simple as that. Move along. Nothing to see here.

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Lifestyle

Thoughts on the Canadian Personal Finance Conference 2015

I recently had the pleasure of geeking out at the Canadian Personal Finance Conference 2015, affectionately known as CPFC15. I had a good time at CPFC13 and the second kick at the bucket certainly did not disappoint. The who’s who of the personal finance community in Canada made their appearances and I was happy to connect with new and familiar faces. Rather than regale you with sightings of CPF royalty- if there is such a thing- I wanted to share an interesting viewpoint on interest rates that I hadn’t much considered before.

Related: Recap of the Canadian Personal Finance Conference 2013

CPFC, with the help of their new sponsors, secured Dave Chilton- of Wealthy Barber and Dragon’s Den fame- as the keynote speaker. Confession: I’ve never read the book or watched the show. But his reputation certainly preceded him; he’s an impressive speaker. Chilton has a very keen ability to engage an audience on topics that admittedly can be very dry. He shared some of his insights on the future of interest rates. His take: They will remain surprisingly low for a surprisingly long time. He is of the opinion that it’s going to be tough for inflation to take hold. On one hand there are the “traditional” challenges in the demographics of an aging population and lower prices due to globalization, but the driver, in his mind, for continued low interest rates is the significant deflationary potential of exponential technologies. He sees artificial intelligence, virtual reality, 3D printing as having huge deflationary impacts.

Interest rates will remain surprisingly low for a surprisingly long time due to significant deflationary potential of exponential technologies.

He cited the familiar examples of Uber and AirBnB for offering prices 40% less their respective competition. Chilton also had one very interesting hypothesis on the impact of 3D printing. You may have heard about 3D printing as a fringe hobby, but apparently it has come a long way. It is now possible to print with 285 different materials, and can be used printing for customized prosthetics and old discontinued car parts. The future of 3D printing, he believes, has the potential to disrupt the economy.

He painted a picture: “You own a bar. You’ve got a urinal. Some drunk guy breaks your urinal- happens all the time.”As the bar owner, you would need to go out and buy a new $450 urinal. “Not in five years, you don’t,” he said. “You print it. You print your own urinal.” Working backwards, he broke it down: if the urinal costs $450, it probably cost the seller $200 and the manufacturer about $80 including labour. That leaves a material cost of roughly $40. Assuming the material cost for 3D printing is 3x as much, he estimated that it would cost $120 to print a new urinal. If bar owners print their own urinals, what happens to the distribution channel? Jobs are going to be challenged, keeping inflation at a minimum. The Chilton forecast: low interest rates are going to stick around.

It’s going to be interesting to see how established industries cope with emerging disruptive technologies. Will changes come as quickly as Chilton predicts? I think they will…and when they do, will we be caught on our heels wondering how to react or will we have seen the signs and adapt to tip the scale in our favour? Don’t mind me while I sit here and chew on that for a little bit.

Lifestyle

What the New Liberal Government Means for Your Finances

The stunning victory for Trudeau’s Liberals in Canada’s 42 federal election finally puts to rest the speculation as to which campaign promises will affect us in the foreseeable future. Here’s what to expect from the new Liberal majority and what that means for your finances:

Saving/Investing:

  • The TFSA annual contribution limit will be reduced from the current non-indexed $10,000 to $5,500 indexed to inflation.
  • Likely future expansion of the Canada Pension Plan.

Taxes:

  • The income tax rate for those earning $44,700 – $89,401 will be reduced from 22% to 20.5%. The reduction will result in savings of $670/year per individual, funded by a new 33% tax bracket for incomes over $200K.
  • Payroll taxes, in the form of Employment Insurance premiums, are expected to fall to $1.65 per $100 down from the current rate of $1.88.

Families:

  • The Universal Child Care Benefit (UCCB) will be scrapped in favour of a new Canada Child Benefit that promises to give families of four up to $2,500, tax-free.
  • A new flexible paternal benefits plan will be introduced, making it possible for parents to take leave up to 18 months at a lower benefit level. The plan will also allow benefits to be paid out every two weeks instead of each month.
  • Income splitting will be repealed.

Students:

  • Graduates can expect not to repay their student loans until they are earning $25,000 a year.
  • The Canada Student Grant will be increased to $3,000 per year for full-time students and $1,800/year for part time students. Income thresholds for CSG eligibility will be increased
  • Existing textbook tax credits will be cancelled.

Seniors:

  • Old Age Security (OAS) and Guaranteed Income Supplement (GIS) eligibility will be rolled back to the age of 65, instead of 67 for those born in or after 1958.
  • Income splitting for seniors will remain.

Home Ownership:

  • The Home Buyers’ Plan will be expanded so that those who experience significant life changes (job changes, death of spouse, etc) can make withdrawals from their RRSP savings against the HBP to maintain home ownership.

The Last Word

Regardless of your political stripe, there are measures in the upcoming changes that will undoubtedly help many Canadians. While I’m disappointed with the decrease in the TFSA contribution limit, I’m interested to see if the new Canada Child Benefit will be more practical than the UCCB. Whether you like it or not, this is the hand that’s been dealt and we’ll have to watch it play out over the next four years.

Do these changes work in your favour?

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Lifestyle

Departures 2.0

“Wealth is the ability to fully experience life.” – Henry David Thoreau

You may notice a few things are different around here. Let me start with a recap of what we’ve been up to and why you should care.

When last we connected, we had a rosy outlook for 2015. Fast forward 10 months later: we did a bit of the travel thing and then spent much of the summer outdoors tending to our urban garden. We are now happy parents to an insomniac 4-month-old and have been living life through the eyes of an inquisitive 3-year-old.

We’ve been able to dig deep and deliver on the goals we set out earlier in the year. We maxed out one of our TFSA accounts at the new $10K contribution limit for this year. If all goes according to plan, we will close to maxing out the other by the end of the year. We’ve been putting aside enough in our RRSP to max out our employers’ match and we just made an investment in a second RESP. We’re in the best financial shape we’ve ever been. We’ve developed a solid understanding on why we spend, what we spend on and where and how to invest our savings.

We started our urban departure as a two part experiment. We wanted to track our financial evolution and try our hand at building an online community.  As our time became increasingly pressed with the demands of balancing our extracurricular activities with work and parenting, it became clear that we would need to refocus and re-establish the simplicity we so longingly desire.

For the better part of the last year and a half, we’ve been haphazardly writing about how our finances impact our lives- hoping that you, our patient readers, would glean a lesson here or pick up a tip there. That’s fine and all, but everyone in town’s got their own two cents. Sure, we’ll continue to share our hacks, but we can do better.

“Wealth,” in the words of Henry David Thoreau, “is the ability to fully experience life.” Managing money and debt is stressful. Depending on where you live, $5 can mean a cup of coffee or a day’s wages, but the numbers in our bank account don’t dictate our ability to realize potential or nurture lasting relationships. We’re committing to explore this definition of wealth and engage- wholeheartedly- in this pursuit with the best and worst of which our financial circumstances will have to offer. Let’s work together to set our finances on autopilot so that we can focus on the things we really care about.

Urban Departures is our labour of love. Our little layover has given us some clarity as to how we are going to move forward…and we can’t wait to get started. Please fasten your seatbelts, we’re about to start the second leg of our journey.

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Investing

Grow Your Dough Throwdown: The 2014 Results

Welcome back to our irregularly scheduled programming!

We kicked off 2014 by participating in the Grow Your Dough Throwdown with the intention of learning about different styles of investing and demonstrating how simple investing can really be.

The idea was for bloggers to grow $1000 over the course of a year. Participants invested the money however they wanted and the results were compared. Well 2014 has come and gone- and the final results from the GYDT came out a while ago. Read on to find how my portfolio, The Index Strikes Back, did for the year.

Do…or Do Not

My biggest hurdle when I started investing was deciding on where to invest the money I had carefully saved. Do I pick stocks, bonds, ETFs or mutual funds? I didn’t know what stocks to pick, didn’t have enough confidence to buy ETFs and had read about the negative effect of Management Expense Ratios on mutual fund returns. Instead, I read about a special type of mutual fund called an index fund which offers broad diversification at a low cost. So it came down to a decision: let my money sit “under the mattress” or to figure out how to make it grow.

I invested my $1000 in TD e-Series Index funds dividing Canadian, US and International equity into the following allocations. I left out a fixed income bond index, feeling it was worth the risk for the short term purpose of this exercise. With these funds, I invested in 1664 companies in multiple industries spread out all over the world.

DESCRIPTION ASSET ALLOCATION FUND
Canadian equity 20% TD Canadian Index – e (TDB900)
US equity 40% TD US Index – e (TDB902)
International equity 40% TD International Index – e (TDB911)
Canadian bonds 0% TD Canadian Bond Index – e (TDB909)

Punch It

Here’s the snapshot of the portfolio’s performance for the year, ending December 31, 2014.GYDT 2014

DATE VALUE PERFORMANCE
January 31, 2014 $1,017.46 1.93%
February 28, 2014 $1,062.64 4.44%
March 31, 2014 $1,062.67 0.004%
April 30, 2014 $1,069.86 0.68%
May 31, 2014 $1,076.29 0.60%
June 30, 2014 $1,084.32 0.75%
July 31, 2014 $1,088.98 0.43%
August 31, 2014 $1,109.05 1.84%
September 30, 2014 $1,103.13 -0.53%
October 31, 2014 $1,108.35 0.47%
November 30, 2014 $1,141.15 2.96%
December 31, 2014 $1,133.11 -0.70%
YTD 13.52%
Note *Calculated using Modified Dietz Method

After costs, my initial $1,000 investment turned into $1,133.11 for a growth of 13.52%.

The Competition

In the 2014 GYDT March Update, the Index Strikes Back was up 6.46% with a value of $1,062.67. My portfolio sat comfortably in 5th position of the 14 contestants reporting in.

By the end of July 2014, the portfolio was up 9.10% to date with a value of $1,088.98. The result was also good enough for 5th of 14.

Where do you think the Index Strikes Back will place? Oh the suspense!

The GYDT final results post revealed that the 1st and 2nd place winners came in with portfolio values of $1327.05 and $1313.55, respectively. Unfortunately, all others contestants were relegated to obscurity and a year-end chart wasn’t published. So I did a little digging around and found some year-end values from around the web. For the portfolio’s I couldn’t find, I just filled in the blanks assuming their balances from the GYDT November update as their year-end value. Not exactly accurate, but good enough.

Rank # Blog Name Portfolio Name December 2014
1 PT Money Signal Speculator  $             1,327.05
2 Dough Roller Buy it Like Buffet $             1,313.55
3 House of Rose Purple Passion $             1,133.16
4 Urban Departures The Index Returns $             1,133.11
5 Frugal Rules  $             1,121.69
6 Young Finances Gemini Portfolio  $             1,097.06
7 Good Financial Cents Prosper $             1,086.51
8 Good Financial Cents Betterment – So Easy $             1,060.82
9 Working to Live Julie’s Investment Experiments $1057.58 (Nov)
10 Afford Anything Blindfolded Monkey Experiment  $             1,057.19
11 Good Financial Cents Lending Club $             1,050.93
12 Planting Money Seeds Super Boring Dividends  $             1,038.42
13 Good Financial Cents TradeKing The Blue Chippers $             1,032.41
14 Good Financial Cents Motiff – The New Kid on the Block $             1,032.18
15 Free From Broke $1020.00 (Nov)
16 Consumerism Commentary Feemageddon  $             1,010.38
17 The Military Guide Boring Investment Portfolio $965.00 (Nov)
18 Canadian Finance Blog Canadian Dividends $960.31 (Nov)
19 The College Investor $952.36 (Nov)
20 Stacking Benjamins $915.6 (Nov)
21 Investor Junkie Grow your..Doh! $754.4 (Nov)
22 Good Financial Cents Not-a-stock-picker portfolio $                 551.73

After spending most of the year in 5th, I ended the year in the top 20%: 4th out of 22 – by $0.05. I’m going to call it.

It’s a tie for 3rd.

The Last Word

According to the SPIVA U.S. Scorecard Year-End 2014 study, the S&P 500 returned 13.69%. Using a low cost passive indexing approach, the Index Strikes Back portfolio came pretty close, returning 13.52%. Based on data from the study, that puts me ahead of 86.44% of large-cap fund managers underperformed the benchmark.

I spent about 15 minutes to invest the money in the account. I left it untouched for 12 months. It turns out I beat professional full time money managers with minimal effort. Seriously, that’s insane!

When I first started out, I had my doubts as to whether or not an approach this simple could be effective. It’s not rocket science- you get the returns of the market and if this exercise showed anything, is that market returns do just fine over time. This exercise though, was an example of investing in the short term. It’s great that the value went up for the year, but the idea of investing is to leave the money untouched for as many years as possible. How much would it grow to be if left for 10, 20 or 30 years?

With historical rate of return of the S&P 500 at 9.5% per year (according to The Little Book of Common Sense Investing), $1000 could potentially compound to $15,220.31 after 30 years. Start saving up!