# Newbie TFSA question



## bpcrally (Sep 12, 2010)

I've been browsing these forums trying to make sure I get started on the right track. I recently opened a TFSA account and have a question:

Any time I see one of these TFSA calculators they all start at at least 2% interest, some even start at 3% and they wont go any lower. From what I can tell on the Scotia site the TFSA is currently at 1.4%, so why do these calculators (even the scotia one) start so much higher? I feel like im missing something..

Thanks!


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## jamesbe (May 8, 2010)

The TFSA suffers from a bad name. You can buy many more products than just a savings account. Just like an RRSP.

I recently purchased a bunch of ETFs and after 2 months I'm so far averaging 4.8% per month.


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## I'm Howard (Oct 13, 2010)

jamesbe, what do you have that returns almost 50% per annum, sounds very high risk to me, I would be happy with 7% return?


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## bpcrally (Sep 12, 2010)

hmm okay I'l have to look into it more.. I see I can purchase GIC but I see what you're referring to. the GIC still only yields about 2%


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## Cal (Jun 17, 2009)

As a newbie, I would recommend you looking into a few ETF's. They are basic, should return more than 1.4%, and offer diversity. There are a few threads on here about them to read up on.

If you have your money in a TFSA 'high' yield account at 1.4% you are losing money when you factor in inflaton. A TFSA should really be called a TFA (drop the savings), this account is made to hold investments, not savings. It is marketed as a savindgs account, b/c the banks who market it as such, make money off of people who deposit money to get 1.4%, to then lend it out to others for a mortgage at double that rate.

Sorry for the tirade. It is not personal, you did the right thing by coming here and seeking further info and knowledge.

Enjoy the site!

And check out www.milliondollarjourney.com he has posted a few good articles on ETF's too.


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## Eclectic12 (Oct 20, 2010)

bpcrally said:


> hmm okay I'l have to look into it more.. I see I can purchase GIC but I see what you're referring to. the GIC still only yields about 2%


Bear in mind that while jamesbe makes a good point, the wording could be clearer.

Just like the RRSP, multiple accounts of different types can be setup that will allow a wide range of investments - not just savings.

If you open a TFSA that only allows savings deposits and GICs, since these types are the only ones allowed - the returns are going to be small for the foreseeable future.


As jamesbe points out, if the type that allows ETFs or stocks/bonds is setup, there is a wider range, with better potential returns.

The part I like is that you can have both types. I've used the brokerage TFSA to earn 7% dividends. Later, when it was close to time to use the money, I sold the stock for a 80% capital gain. I was able to use my one free a year withdrawal in Dec, in Jan put it into the savings account type and earn the promotional 2.5% for the remaining months until I used it.

Just make sure if you make withdrawal/re-contributions or have multiple account to stay on top of the rules to avoid over-contribution penalties.


Getting back to the original question about why the calculators start higher than your account allows - I suspect it is to get people exciting about using the TFSA. However - limited types such as savings at the current rates will make the calculator irrelevant to what you will see.


So - I'd recommend opening a brokerage TFSA as soon as it is feasible. Just factor in that most savings type TFSAs have no fees while most brokerage TFSAs have a yearly fee unless there is enough combined assets or a promotional deal.


I hope this helps.


Cheers


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## bpcrally (Sep 12, 2010)

Great info so far, thank you.

So what I'm understand is I cant get one of these accounts through what I have set up right now, since scotia online gives me the option to deposit cash or purchase a GIC.

As you can tell I'm still very new to all this. I put a bit of money into my TFSA to get started, but I havent set up any auto-deposit since I wanted to figure out if im taking the right direction. 

So I'll have to figure out how to open one of these "brokerage" TFSA accounts and go from there. Should I try to do this through my current bank (Scotia) or something else?

I know these are probably really basic questions but I'm just trying to get my money pointed in the right direction, thank you for your patience!


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## Eclectic12 (Oct 20, 2010)

bpcrally said:


> Great info so far, thank you.
> 
> So what I'm understand is I cant get one of these accounts through what I have set up right now, since scotia online gives me the option to deposit cash or purchase a GIC.
> 
> ...


Well first I'd get the details for the account your have. Can you buy mutual funds (MFs)? What are the options (ex. if you can buy MFs - are you limited to Scotia ones only)?

Since you mentioned such low rates, I assumed that it was a "savings" type account that allows cash deposits and buying GICs only - but you should confirm what you have.

The next step is to see if the same institution offers a brokerage TFSA that you are happy with the features of. The advantage is that most places will count all of your assets, which will get a yearly account fee waived earlier.

Some account features to watch for:

a) what range of investments are allowed (i.e. stocks, bonds, mutual funds, ETFs, GICs, etc.)

b) are any of the investments limited? For example - how many mutual funds can do they offer? If it is theirs only - choice is extremely limited compared the the thousands in the Canadian market.

c) what are the costs of buying/selling the investments?

d) if there a yearly fee for having the account? Can it be waived? (Usually having enough assets or signing up for paperless statements will waive the fee for at least a year.)

e) are there withdrawal costs? For example, my savings account TFSA has no limits and a withdrawal can be done online at my whim. The brokerage TFSA requires a phone call and has a fee after the first withdrawal per year.


Once you have details - you can see which account gives you the most options with the cheapest costs.


I'd also recommend reading up on investing in general and the types of investments in particular.

Think of it as a journey instead of "I have to know everything today".



Cheers


P.S. 

I wouldn't worry about "how to open" the brokerage TFSA account. It is no more difficult than opening a bank account. You fill out the forms, the institution creates it and away you go. 

It is more important to have figured out what you want from the account and how to keep your costs as low as possible.


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## jamesbe (May 8, 2010)

Howard I bought xdv at the right time, I don't expect the gain to continue unfortunately.


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## I'm Howard (Oct 13, 2010)

jamesbe, compare CDZ to XDV, I hold some Dividend Stocks but not 100% of my assets.

Iwill be inheriting a sizeable estate in the near future, I cannot use the monies, I will set up YFSA but they will be for the Estate, 30 something sons.

20%CDZ

20%MDY

10%GDX

25%XCB

10% XRE

10%XTR

5% One Year GIC.


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## bpcrally (Sep 12, 2010)

Yeah it looks like its just a saving TFSA. It does allow me to buy GIC and Mutual funds.

After looking around I think it might be "Scotia iTrade" that I'd need with my bank.

https://www.scotiaitrade.com/splash/TFSA09.shtml (hopefully link works)

What do you think of something like this?

Edit: 

Looking at more stuff regarding the rates I'd be paying.. since I'm less than $50,000 I'd be looking at $20+$1.25 trade

https://www.scotiaitrade.com/pages/home/fees1.shtml#TP

I also see there is a Transfer out (full or partial) fee of $125. What does this mean?

For a beginner this is pretty intimidating as far as all the fees go! :S


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## Cal (Jun 17, 2009)

I also see there is a Transfer out (full or partial) fee of $125. What does this mean?

It means the institution will charge you that amount if you transfer funds to another institution. To make a withdrawl, they should give you at least 1 for no charge every year.


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## Eclectic12 (Oct 20, 2010)

bpcrally said:


> Yeah it looks like its just a saving TFSA. It does allow me to buy GIC and Mutual funds.
> 
> After looking around I think it might be "Scotia iTrade" that I'd need with my bank.
> 
> ...


It looks pretty good as there is no annual fee, the commissions are in the big bank range and as for the Transfer Out, as others mentioned - this is for moving money/investments to another institution.

I did notice a FAQ indicating some investments will affect withdrawals but I'm not seeing if like most, the 1st withdrawal per year is free and any additional withdrawals have a charge.

Here are a couple of summaries of brokerage offerings others have been kind enough to post:
http://www.milliondollarjourney.com/review-canadian-discount-brokerages.htm
http://www.moneysmartsblog.com/canadian-online-discount-stock-brokerage-comparison/


If seems like it works for you, I'd call to confirm the withdrawals. 

At the same time, confirm what accounts they will consider to get to the $50K. The TFSA has contribution limits but you may open a self-directed RRSP or cash account. If all three count - the cheaper commission fees will start earlier.


Finally, I'd ask if they have a demo section for the online trading or if you can get a demo by going into an office. It may not matter or it may convince you to check out other companies.


Cheers


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## bpcrally (Sep 12, 2010)

Thanks again for the boatload of info. These are very interesting to read.

I guess another thing on my mind are these trading fees. Should I be worried about if they're $10 vs. $20? Obviously I want to keep costs low but my main problem is I dont know how often a person "trades" 

For example being an extreme newbie at this I dont know if this is something where id pay the money and trade once and leave it? or is a daily thing? 

I really need to watch someone do this to get a better grasp of what to do, when to do, and WHY


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## Four Pillars (Apr 5, 2009)

bpcrally said:


> I guess another thing on my mind are these trading fees. Should I be worried about if they're $10 vs. $20? Obviously I want to keep costs low but my main problem is I dont know how often a person "trades"
> 
> For example being an extreme newbie at this I dont know if this is something where id pay the money and trade once and leave it? or is a daily thing?


Some people trade 20 times a day - others trade once a year. It really depends on what type of investor you plan to be.

Another big cost is currency exchange fees - there is a wide variety of charges and options, so unless you are planning to invest mostly in Canada - be aware of those too.


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## ChrisR (Jul 13, 2009)

How much are you planning to contribute to your new TFSA?

If you're planning on contributing less than the max (currently $15K), and you're not an experienced trader, you may find that its best to hold off on the brokerage account until you have a chance to figure out what kind of investor you'll become.

Also, keep in mind that you are under no obligation to hold your investments with your current bank (although some banks may give you a discount on banking services if you do). I'm a Scotia iTrade user (because they bought out my old brokerage). The online tools are alright, but I don't see any reason that I would pick iTrade if I was opening a new brokerage account.

I think you should consider opening a bank TFSA to hold low cost index mutual funds. The advantages are:
- No trading fees
- No yearly account fees (unless your bank is run by crooks!)
- Very little knowledge or time input required - just show up at the bank and tell them you want to open a TFSA that holds mutual funds. They'll do everything for you.
- It can be converted to a brokerage account when you have more money and feel more comfortable choosing investments - again, just show up at the bank and tell them you want to convert your TFSA to a brokerage account. This time they'll bend over backwards for you!

If you think you might go this route, I recommend reading some of CC's blog posts on the Sleepy mini-portfolio:
http://www.canadiancapitalist.com/sleepy-mini-portfolio/

If you really want to keep your money with Scotia, you can do pretty much the same thing with their index funds although it will cost a little more in yearly expense costs (You do not pay these costs directly, rather they are paid by the fund so lower your expected return). 

These would be the best funds to set up a sleepy index portfolio at Scotia:
Scotia Canadian bond index fund - 20%
Scotia Canadian index fund - 20%
Scotia US index fund - 30%
Scotia International index fund - 30%

The weighted MER for this portfolio is 1.02% (which stinks), but you can always switch to a Scotia iTrade account later when you're ready.


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## humble_pie (Jun 7, 2009)

hello bpcrally,

please pay attention to ChrisR's post. It's highly appropriate for you, i believe, since you seem to be in more of a learning stage than a hands-on investing stage at this moment.

scotia itrade or any other good discount broker is fine for later on, when an investor begins to approach exchange-traded instruments such as etfs.

many new investors take the td e-funds route, since these have exceptionally low mers (management expense ratios.) More choice & probably a better deal than scotia indexed. 

other new investors open their first tfsa accounts at ing, because the rates for ultra-safe savings vehicles are slightly higher and there are absolutely no fees, including no transfer-out fee. Their website is ingdirect.ca, perhaps you might like to have a look or contact them.

it's true that your savings would be pulling in a puny return for six months to a year. But you won't be making any mistakes, and you won't be losing any money. Meanwhile, you could use the worry-free time to seriously bone up on all the intro-to-investing topics. There are good links & websites mentioned for you in this thread. 

also, right now there's an active thread farther down in this topic called Recommend me some good investing/finance books. Some of these volumes are advanced, but there's also good basic stuff listed.

not to offend the wise & insightful ChrisR, but i'd like to say that i don't agree with the proportions of his suggested funds. I would prefer half short-term bond fund or high-interest savings and half senior canadian stock fund. And that's it, for a self-described extreme newbie investor with 15k or less.

no international or US funds, especially not in a beginner's tfsa. Reason No. 1: tricky tax & currency side effects. There's plenty of time to learn about all these later. In the meantime best to avoid.

reason No. 2: senior canadian companies are nearly all multinationals with collective expsure to every nook & cranny on the planet. I for one think that the corporate CEOs of big canadian engineering, ag, railroads, finance etc are a lot smarter at managing their foreign businesses than are the managers of the noticeably dull, plodding international funds out there. 

reason No. 3: owning this first senior canadian stock fund should be a learning experience for the new investor. It's going to be a lot easier for him to relate to fund discussions about companies he already knows, companies whose products he even consumes (for example scotiabank) than to companies headquartered in faraway brazil or south korea.

best wishes, crally. Please stay in the forum. It's true that it's chaotic at times, but it's worth it because you will keep stumbling upon really useful information.


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## Eclectic12 (Oct 20, 2010)

bpcrally said:


> Thanks again for the boatload of info. These are very interesting to read.
> 
> I guess another thing on my mind are these trading fees. Should I be worried about if they're $10 vs. $20? Obviously I want to keep costs low but my main problem is I dont know how often a person "trades"
> 
> ...


From the sounds of things, I like the ideas of either sticking to the guaranteed savings account while learning the basics or sticking to one or two low cost funds.

One of the features to learn about/understand for registered accounts such as the TFSA or RRSP is that the driving force is the contribution room. This makes it a bad place to make mistakes resulting in losses. For losses, there are only two ways are available to recover - growth of existing funds/investments already in the account or new contributions. If the contribution room has been used up - until new room is earned/given, only one way remains. 

A non-registered account is a better place to test one's strategy or learn as at least a loss can be used to reduce other gains and there aren't any contribution limits. 


Returning to your question about commissions - the investment strategy and number of investments will influence how important the commission is. If you are planning on two contributions a year split across three mutual funds, the lower commission may not be that important. If you plan on buying two stocks/funds each day and selling by end of day - a lower commission likely will be very important.


I'd recommending keeping it simple for now and learning the basics over the next several months.



Cheers


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> [ ... ]
> 
> best wishes, crally. Please stay in the forum. It's true that it's chaotic at times, but it's worth it because you will keep stumbling upon really useful information.


+1

Even where I don't immediately apply the information - learning something I'd overlooked or new information makes future decisions with confidence a lot easier. I can focus on the details instead of the concept and/or new terms.



Cheers


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## realist (Apr 8, 2011)

bpcrally;

I don't think you said (unless I missed it) Are you investing for retirement/long term, or a shorter term? I am currently using a basic PC TFSA to save towards a house down payment. I am pretty happy with the returns even though they are probably not great compared to other investments but since a) I am somewhat risk intolerant to start with and b) I may need that money in the next year or so, I want to protect the principal and I am therefore willing to accept lower returns.

My tactic so far has been to read a fair bit on these forums and other investing information sources even though I am not necessarily implementing all of it right away. Once I have saved for the house, my focus will be more long term and thus require a different strategy. 

If you want to get more into mutual funds and stocks/equities I would recommend proceeding cautiously until you feel comfortable that you understand the impact of MERs and trading fees on your investments. Much of the discussion here and elsewhere focuses on minimizing those costs. 

Good luck!


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## bpcrally (Sep 12, 2010)

Hi everyone,

Thanks again for the help and info. Perhaps I should sit back and take it all in rather than jumping in with both feet. And i apologize, i didn't really explain my background.

I'm 23 and rent a basement apt with my girlfriend. I only make just under 35000 a year so I'm in the low tax bracket. I have zero debts, i worked to pay for school, i bought my dream car and paid it down in 11 months. I've been slowly accumulating money and basically looking for the best places to put it that would be most beneficial to me.

My goal is saving for a home. Not sure when this will be because I don't know where I'll end up just yet. Right now the girlfriend and I are just aiming to get experience under our belts. But I would hope in 3 years or so I could get a home with a hefty downpayment. I'm a bit of a "Debt-a-phobe" so I have a hard time even wrapping my head around a mortgage right now. A friend of mine who works with me just bought a townhouse/condo with his girlfriend and they've mortgaged 185,000 for 35 years, a situation like this scares the living daylight out of me!


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## Financial Cents (Jul 22, 2010)

@bpcrally,

First of all, I must commend you on being so focused on saving/investing. This is excellent at 23. I wish I had this focus at your age, I didn't start getting my financial house started until about 26. 

Anyhow, back to you, I would suggest for now opening a high-interest savings account (HISA) and parking your TFSA money there until you learn the ins and outs of investing, and more importantly, like another commenter said, who you are as an investor. 

The beauty of all this is, you have lots of time. One year of money in a HISA is not going to hurt you. Your principle won't go anywhere and with the HISA you'll keep close pace with inflation as you probably know. 

My wife and I used a PC HISA to save for our condo downpayment, saving money with it in 2003 and 2004. We made our 10% downpayment on a $245,000 condo in downtown Ottawa in early 2005 and lived there for 3 years. Up until two years ago, we didn't know what we wanted to do with our TFSAs when they were introduced by the gov't in 2009. Without knowing then what we wanted to do, we kept our TFSAs with PC for almost one year until we figured it all out. 

Although planning is personal, I would recommend to anyone to take their time to understand who they are and how they want to invest before deciding on investment choices. 

Good luck and keep learning


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