Posted by Canadian Dream on June 17, 2010
Well if you’ve been following the media lately you would have likely seen a few articles/posts on people who got big tax bill because they didn’t understand how their TFSA accounts work. When you take money out of a TFSA you don’t get your contribution room back until the following year. So you if put in $5000 to start and then took out $3000 and then try to put back the $3000 in the same year you would be over contributing by $3000 and end up with a 1% penalty per month on the over contribution amount. If you are in that situation you might have a hope of not paying the tax bill, see this article by Rob Carrick which points out which form you will need to fill out.
I think perhaps people lost sight that this is a savings account and the government what’s to keep people from trying to use it as a chequing account. They want you to save, not just for next week, but rather next year or longer. Hence the odd rules. To be fair about this situation, the rules were not all that well explained when these new accounts were introduced.
I don’t think I even understood them exactly. In my case I just screwed up my math and ended up over contributing by $10 to my TFSA because I didn’t check the amount of my last contribution. I realized this after about two months and then took the over contribution out. So my tax penalty is a whole $10 x 1% x 2 months = $0.20, so needless to say I’ve not received a letter from the government as the postage they use on the letter would cost more than what I ‘owe’.
Yet what I found particularly interesting was on my notice of assessment it showed my 2010 contribution limit to be $5010. So if I understand it correctly then my over contribution actually resulted in me gaining contribution room the next year (actually this was my fault I realized later on…I took out $20, not $10 to fix my overcontribution). Obviously this just sounds wrong, since if this is correct you should in theory you could ‘buy’ extra contribution room. For example, you over contribute by $5000 in Nov, then take out the excess in Dec. Pay your $50 penalty and end up with an extra $5000 in contribution room the following year.
So after reading a little on the government’s TFSA site I think I understand why my $5000 example won’t work. If you deliberately over contribute to your TFSA, you will likely trigger the ‘advantage’ clause and get nailed with losing that extra contribution room. Yet based on my own experience there is some grey area, so I wondering if anyone else generated extra contribution room from their ‘screw up’? If so, how much? I’m curious to see if there is a set limit or not.
Posted by Canadian Dream on June 16, 2010
There is a bit of downside of having a well developed budget, I tend not to look at it all that much anymore. As such I’ve noticed an interesting problem lately. I’m developing some financial blind spots. I don’t look for savings anymore as such I’ve had some creep of spending in areas where I’m wasting some money. The amounts are minor so I suppose that is why I’ve been neglecting looking at them.
Here are a few examples:
- The Second Cable Box - We have two cable boxes in my house. Why? We just decided to hook up both TV’s when we moved in. Yet here is the thing. I don’t really watch much TV. So 99% of the time I’m using the second TV to watch a movie. So I’m paying $3.50/month for something I use perhaps once a quarter if that.
- Food Waste – As a family we used to be really good about not letting food go to waste, but now it seems every garbage day that something is going into the trash. It’s become rather systematic lately and I’m not entirely sure why it is happening. I suspect it has to do with poor meal planning and making sure to use up things before they go bad. I would estimate perhaps we waste $15/month in food.
- Eating Out – A secondary fall out from our poor meal planning is we have been spending more money on eating out. We used to eat out perhaps twice a month. Lately it’s been at least double that. I know I’m partly to blame for not planning some of my lunches so I end up eating out from a lack of being organized. Estimated wasted spending $40 a month.
- Not Putting Aside the Raise – I recently got a small raise at work and I’ve managed to forgot to adjust my saving amounts to capture that raise. As such the raise is currently vanishing into the regular budget and getting spent. Estimated waste $60/month.
Each item itself isn’t that much money yet when you add it up it is $118.50 a month that I’m letting slip between my fingers. It’s time to get back into a habit of checking in on my spending every few months to reduce wasteful spending.
Have you ever developed blind spots because your are too comfortable with your budget? If so, what are a few of your blind spots? If not, how do you managed to keep track of the little items like these?
Posted by Dave on June 15, 2010
Has anyone ever told you that your house is the best investment you could ever make? I’ve heard this several times in my life and was always skeptical about it. For something that costs as much as it does, you’d hope that it would be a good investment, but to me it really isn’t.
I don’t look at my house as a great investment, or really as an investment of any kind. I look at the significant money it is costing me to pay down a mortgage as a prepayment for housing that will hopefully take me through the rest of my life. I have to live somewhere, whether it be some sort of rented room, an apartment or a box (which really isn’t an option if I want to live in Canada – unless it’s a really nice box). All of these housing options are going to cost me money. Renting a house or apartment will cost money forever – if I don’t pay my rent, I won’t be welcome to stay. From a cash-flow perspective, a large upfront cost is much more palatable to me than payments to perpetuity.
In the same vain, buying a house will cost money in the form of property taxes and maintenance, but once a house is paid off, these costs are fairly low. For me, monthly expenses would amount to approximately $300 per month (property tax and condo fees) to live.
My end goal is to have a house that is worth as much money as it cost me to attain it (up-front costs plus improvements and interest). Part of the reason I have accelerated the payments on my mortgage is to significantly reduce this cost of ownership. One year ago, I amortized my mortgage over 35 years, and so far have cut approximately 20% of these years out, with the intention of paying the entire house off in around 6 years. If I paid regular payments over the entire 35 year amortization for this place, I would have to pay for the house twice.
I understand that I could invest the almost $200,000 I’m going to end up spending on my house and be making a reasonable return, but I’d much rather be debt-free after 6 years than shackled with an enormous debt. Having no debt would provide a significant amount of freedom in my career and lifestyle that would not be afforded by having to pay my lender over a longer period of time.
With all this being said, after a year do I regret buying a house? From a spending perspective it’s pretty crappy to be allocating 25% of our spending to paying down the mortgage every month, but when I look at it that over the past year, I have pre-paid approximately 2-3 years of rent in my city.
I’m wondering how you look at your house? Do you utilize the tax-free capital gains afforded to your residence to gain on sales? Is your house your best investment?
