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Wednesday 22 February 2017

How We Cheated On Our TFSA's

Why you should never play poker on
safari. Doh! 
Ok it's confession time - we cheated...

Next week (February 28th) is the end of the 2016/2017 Tax year. That is the last date people can make deposits into their TFSA accounts for the year, and then hopefully hit their annual R30k limit.

My wife and I have a TFSA each, which means we can contribute a combined total of R60k for the year. We came close-ish this year, but we didn't quite make it.

So we had to cheat.

Because our retirement plan is 15 years long, it is very important for us to maximise our TFSA contributions each year. You see in addition to the annual R30k limit on TFSA's, there is also a lifetime limit of R500k - this means if you contribute the maximum annual amount each year, you have around 16 years and 8 months to fill up your TFSA bucket (always make sure there are no holes in it...)

So although we started with our TFSA contributions before the official kick off of our retirement plan, we are not going to be able to max out the accounts fully during our working careers (15 years if everything goes according to plan). So we have to do our utmost to hit our R30k contribution limit each and every year.

However in 2017 this proved a little tough to do, and we didn't make it....

As at the end of January I checked, and we had contributed R43 260.

This meant we were R16 740 short.

Reasons for the shortfall included:

Stealthy Junior

The little guy was causing financial havoc long before he arrived :) I am grateful that a pregnancy is 9 months - that is a decent amount of time to prepare both financially and emotionally (although to be honest nothing will quite prepare you!).

We knew we were going to need to buy some stuff (apparently babies don't sleep on the floor for example, and there is even real life small clothes for them...) We put together a cost estimate of everything we would need (still plan on doing a blog post on our cost of having Stealthy Junior), and then with each passing month we were either buying some baby stuff or putting money away.

Maternity Leave

My wife's company was pretty generous with her maternity leave (although maybe not as generous as some of these countries) - they offered her 4 months paid leave, and then the option to take an extra 2 months unpaid. We discussed it and decided that it would be a good idea for her to have a full 6 months with our son.

This meant that we needed to gather some acorns for the winter, so that when the unpaid months came around we would have enough to get through.

Unfortunately this acorn stash had to come from somewhere, and so we had to skimp on some of the TFSA contributions.

Buying Stealthville

We were faced with a very important decision last year when our landlord gave us notice to get the hell out of his townhouse - well he actually just said he wanted to sell the place, but the way I phrased it adds to the drama. 

And in keeping with the overly dramatic, we then said to him, over our dead bodies, and we strapped ourselves to the front door with signs saying "we will not be moved, can we make you an offer to buy the place instead" and went on a hunger strike.

The landlord, seeing our scrawny bodies after the 3rd week of not eating gave in and accepted our offer.

So now we needed a decent deposit, and some cash to cover the rip off the costs of buying a house. This meant taking some of our money earmarked for our TFSA, and keeping it available to cover some of the transfer costs and our deposit. 

Ok Enough Excuses, Get To The Cheating Part!

Yes, yes...

So that was the why, and now for the how....

Looking back and considering these one offs, I realised that we actually did pretty well. We even managed to make up some of the shortfall which is great... but by January this year we were still short.

What to do, what to do?

Right, time for some out the box thinking....

The below is not financial advice blah blah blah.... and I would probably not recommend this to everyone, as something like this in the wrong hands, and without discipline, could end in disaster (kinda like giving Trump the nuclear codes....p.s. if you want them drop me a mail, I know a guy...)

So I have previously mentioned the apartment we bought a while back, which we now rent out. Well, as the years have gone by, there has been some equity building up in that bond. And since this apartment is being rented, the interest portion of the Bond repayment is tax deductible.

I think you can see where I am going with this...

So I withdrew some money out of the bond (it has an access facility) and used it to max out our TFSA's. So in effect, I used a rocket launcher to kill a bird took a loan to top up our TFSA's.

Now before you start throwing rocks at me, you need to understand that this was no ordinary loan, and there were a number of advantages that made this quite an attractive proposition.
  1. The apartment home loan is at prime less 0.5% (good rate we got on that one!) So it is a low interest loan to start with.
  2. Furthermore, the interest on the loan is tax deductible in our rental scenario. So in effect the interest on the loan is actually prime less 0.5%, less my marginal tax rate. This puts the interest rate at around inflation. So this is a super attractive proposition and it would be kinda stupid not to take advantage of it. (As far as I know it is perfectly legal what I am doing? Anyone clued up on this?)
  3. The way I am viewing the apartment is a "nice to have" in my retirement plan. It is a bonus which will allow us to pay off our primary bond by 2030. So drawing money out of this bond (which is covered by the Rent) is not going to greatly affect the long term plan.
  4. This is sort of a Double win - I am using a tax deduction to fund a TFSA. I guess it is similar to using your RA rebate to top up your TFSA.
Stealthy 2 - Tax Man  0
(for now...)
Basically I went two up on the Tax man.

In short I cheated by taking a Tax deductible loan (1) to top up a Tax Free investment (2), that should return in excess of the interest rate of the loan over the longer term.

This to me seems like a very good move?

I was feeling ever so smart and a little smug because this makes a lot of sense to me - but then I quickly realised that  ideally I should not have needed to do this in the first place. I guess this was just me making the best out of a bad situation. So note to self - make sure TFSA is maxed out at all costs going forwards. We will see how my little stunt works out....

Note that I very cleverly pulled this little trick towards the beginning of February, long before this blog post was published. I did this to make sure if anyone pointed out any negatives and called me on my stupidity it would already be too late :)

So yes I am a cheater (although I am a little bit proud of it!)

How Did Everyone Else Do?

I ran a poll on Twitter to see how everyone else did with regards to maxing out their TFSA's. The results are in:

So all in all not bad - close to 60% of people have managed to max out their allocation for the year Niiiiice!

To those who do not know what a TFSA is - Google is your friend (or I can help you out with a link to a TFSA presenstation .) I recommend you get clued up.

How did you guys do with oyur TFSA's this year? Or did you rather focus on your RA and/or pension fund?

Till next time, Stay Stealthy!
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