Top 4 Tax Free Savings Account Strategies

With the upcoming tax free savings/investment account in 2009, my mind has been racing about what exactly to do with the account.  Between my wife and I, we will have $10,000 worth of contribution room available to us in the first year which we intend to fully maximize.

How do we intend to use the account?  I’ve written a few ideas in the original TFSA column which I’m going to expand on below.

1. Income Fund

I am a big fan of passive income which is evident in my dividend investing endeavors.  One idea that I have for a tax free investment account is to invest for income.  The reason being is that the income is completely tax free.

With my leveraged account, I don’t invest in anything that produces a return of capital like income trusts or corporate mutual funds.  However, since taxation isn’t an issue with the TFSA, I will be looking into consistent high yielding equities to produce a tax free monthly income.  Some equities that come to mind are REITs and income trusts like Canadian Oil Sands.

Thus far (as of Jan 2, 2009), Questrade is the first and only discount brokerage to offer a tax free trading account.

2. Aggressive Trading

Another idea is to use the TFSA for aggressive equity/options trading.  This one is not as attractive as investing for income as capital losses cannot be claimed within a TFSA account.  On the other side of the coin, gains will not face any taxation either.

One lower risk options strategy is to write call options for equity positions that you already own.  With this strategy, you set the price that you are willing to sell your position for, but collect a premium in the process.  If the stock price raises above your limit before the expiry date, you will be forced to sell.  However, if the stock price stays flat or goes down during this time, the option will expire.  The result?  You get to keep equity position and your premium collected.  If you like, you can keep writing call options and collecting those premiums.

Check out this link for a detailed series on how call options work.

3. Credit Card Arbitrage

When I wrote about credit card arbitrage before, I came to the conclusion that the strategy wasn’t worth it due to the thin spread between borrowing and accumulated interest after taxes.  However, using a TFSA in conjunction with this strategy eliminates the taxation on the earned interest and makes the strategy more feasible.

Basically, take the free money that select 0% credit cards offer, deposit it into a high interest tax free savings account (approximately 3% these days), and collect the tax free returns on the free money.  The biggest caveat being to watch the dates when payments are due.

4. Emergency Fund

This is perhaps the most popular solution for the TFSA as it will allow people to let their “emergency” money grow/withdrawn tax free.  While there’s nothing wrong with using the TFSA this way, there might be a bigger potential with using the TFSA as a retirement account.

What do you plan to do with the upcoming tax free savings account?

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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7 years ago

also I am aiming to do maximum contribution to both RRSP and TFSA so for me it is contributing to both accounts and not a choice between these accounts . I am a passive investor as this is my first year of investing in Canada and not keen to open a brokerage account. Hence I would like to stick with TD e-series for the time being and hope this is the right strategy.

7 years ago

Thank you. I think now I am ready with my investment strategy for 2014.

7 years ago

@FrugalTrader Thanks for the reply. After going through the link, I understand the only difference is no foreign equity funds in TFSA. Is it because of withholding tax? So I can invest in the TD e-series index funds for both RRSP and TFSA except in TFSA I should not invest in US and international index funds. Is my understanding correct? Thanks

7 years ago

@FrugalTrader: Thanks for the reply. I am also thinking of TD e-series for both my TFSA and RRSP and I am planning to invest in TD e-series index funds – Canadian bond market index, Canadian stock market index , US Stock index and International stock index.

Is it the right strategy? should I worry about withholding taxes? I read somewhere that for TFSA , I should avoid US index because of withholding taxes. Any input on this? Thanks

7 years ago

Hi I am thinking of investing in TD eseries index funds in my TFSA account because of the low MER . Any comments on whether this is the right strategy? Thanks

7 years ago

FrugalTrader, what broker you use for TFSA to trade option spreads?

Questrade does not allow strategy option trades (vertical spreads, iron condor etc.) in the TFSA account.

8 years ago

When I chart a 200 day moving average over a moon chart and multiply by a 4 year average S&P 500 P/E ratio I get a “sell” signal. Can anyone confirm?

8 years ago

@jet. Astrology. I love your sense of humor.