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Make TFSA Work For You

Here’s an idea that might work for you and other farmers. On the cash basis, it’s often easy for a farmer to create a zero tax year, or even a loss. If you can break even this year and if you have an RRSP, you could take say $5,000 or $10,000 out to cover your personal exemption and then you’d have $10,000 for two year’s worth of your Tax Free Savings Account (TFSA).

I say two year’s worth even though the usual deposit is $5,000 per year. Deposit more and there’s a penalty of one per cent per month until the coming January 2010. But the way I see it, if you use our investment strategy of selling covered calls, odds are pretty good you will make much more than one per cent per month. Many of our readers of StocksTalk are up 20 per cent for the year, so paying one per cent per month for the next three months isn’t such a big deal. In StocksTalk, I teach readers how to sell covered calls on decent stocks and cash money has been rolling in very well with this strategy.

An example is 300 shares of Teck Resources (TCK. B). As I write the shares cost $28 to $29. When we sell a covered call, it’s as if we rented out our stocks and we can get paid every month to do this. As I write in late September, the cash we could collect for October $29 strike price is just over $1 per share, which is the premium — the “rent” — for four weeks. That’s just over three per cent return for four weeks and if the stock goes above $29 it will get sold for $29.

So if we put $10,000 into the TFSA, we could buy 300 shares and sell calls and collect $300 of “rent” for one month. We can do this every month. Maybe not with TCK. B every month, but with one stock or another.

Here’s another example. I own 4,000 shares of an exchange-traded fund (ETF) on natural gas with symbol GAS. It’s trading at $6.20 as I write so if a person has $10,000 in a TFSA, he could buy 800 shares with half the money ($5,000) and sell a call for March strike price $6 and collect $0.90 per share or something over $700 for six months which is 14 per cent. Then he or she could do something else with the money for the next six months such as buy another stock and sell calls again.

The other $5,000 can be used to buy another stock or another 800 shares of GAS and double those numbers. These numbers change every day. GAS has been rising rapidly so it might even pay to NOT sell calls for a while. Selling calls might limit your gains for now, but then a lot of people would be quite happy to lock in 14 per cent returns on their money twice a year.

WHY A TFSA?

A Tax Free Savings Account lets you contribute $5,000 per year without penalty and money you make will be tax free. Don’t think for a minute that the government is giving you a big fat gift with this strategy. First of all, most people, if they put $5,000 into a TFSA they won’t put $5,000 or something close into their RRSP. That means those people won’t get a tax refund of say $1,500 or they will pay more income tax. So the government gets to keep more tax dollars. Then most people might invest that $5,000 into a term deposit, which pays 3.0 per cent tops or $150 per year, so the government keeps $1,500 tax dollars and gives up taxes on maybe $150 per year.

Readers of StocksTalk have made some very good money in their TFSA by selling covered calls and I hear 20 per cent returns quite often so far this year. Maybe 20 per cent per year is too high to believe, but if you go to the Montreal Exchange website www.m-x.caand find an option chain for any one of the 110 or so Canadian stocks that have options, you can see for yourself how much money many covered call options pay per month.

FIND A CHEAP BROKER

Most investors have a choice with their TFSA. We can go with a firm that sells term deposits into those accounts, so fees are low. We can go with a full service industry that might offer some advice and charges commissions to match when we buy stocks and sell covered calls. Or we can find a cheap broker that gives no advice so we figure this out for ourselves and pay a low commission. I have gone the cheap commission path and figured out what to do with my money. Suit yourself.

BENEFITS OF A TFSA

If we make good money over a bunch of years, we will either build our estate or have the equivalent of a life insurance policy without the premiums. We can set things up so a surviving spouse takes over if something happens to the other spouse, which extends the life of the TFSA.

I think the government sees economic life getting and perhaps staying tougher than it has been for the baby boomers, so it’s encouraging Canadians to save for the future. A car payment of $300 a month is a lot easier to make if it comes from tax-free dollars compared to coming from after tax dollars.

Setting up a TFSA for your children can be a pretty good estate management strategy. First, parents need to learn how to sell covered calls well enough to be confident. So they build their own TFSA.

Next they gift $5,000 to each child over 18 who lives in Canada and set things up so they can sell covered calls in their childrens’ TFSA accounts. This can be with trading authority or just get the account number and password.

There are no tax consequences on giving money to children over 18. If we give $5,000 to a child and that money makes money in a TFSA, the income is tax free. Of course the child could spend the money and kill the golden goose so to speak, but readers of StocksTalk who are doing this say instead of the children spending the money they actually develop a much healthier interest in stocks and investing.

Andy lives in Winnipeg. He gardens, plays with granddaughter Anastasia and manages his own investments. He also publishes a newsletter called StocksTalk where he explains what he does almost day by day. If you want to read StocksTalk free for a month Google “StocksTalk.net”and fill out a few lines and click submit. Or send an email to [email protected]

About the author

Freelance Writer

Andy was a former Grainews editor and long-time Grainews columnist. He passed away in February 2017.

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