Programming note – a while back I had mentioned that readers of this blog were going to get the chance to ask questions to Peter Aceto, CEO of ING Direct Canada. Just a quick update since it has been a while since that was first posted: the interview will be a video interview and I expect it will be completed in the next few weeks. Any questions that don’t get answered in the interview, Peter has agreed to provide written answers to. I suspect we will get it posted by November 1 – so thanks for your patience.
ING sent me a press release indicating that they are offering 2010 TFSA Kick Start Accounts (as of right now). Essentially, for those who have maxed their current TFSA room and want to get a leg up on putting money into their TFSA for 2010, you can open a 2010 TFSA Kick Start Account. This is essentially just a “regular” high-interest savings account, but since the interest earned between now and the end of the year is subject to tax, ING is offering to double the interest earned in these accounts until the end of 2009. Once we hit 2010, they will then transfer the account automatically into a proper TFSA account.
Essentially you are getting the after tax equivalent of being able to make your 2010 TFSA contribution a few months early. In fact, the lower your marginal tax rate is below 50%, the greater the value add.
For example, if you had a $5000 balance earning 1% per year for 3 months in a TFSA, you would earn $12.50 in interest. It would be tax-free interest income inside a TFSA, since a TFSA is a tax sheltered account. But the Kick Start account is not a tax-free environment. So you are going to be subject to tax on this $12.50. IF you had a 50% marginal tax bracket you would lose $6.25 to the taxman, leaving you with $6.25. However, since ING Direct is doubling the interest you would earn $25 instead of $12.50. That $25 is subject to your marginal tax bracket and in this case $12.50 goes to the taxman leaving $12.50 for the client. Now, if you are in a lower tax bracket, say 30%, then you would only lose $7.50 to the taxman in this case leaving you with $17.50. So the lower your marginal tax bracket, the better this deal is for you.
If you already have an ING account, then setting up a kick start account looks pretty compelling. Since we are in such a low interest rate environment, it seems that ING Direct is hoping that this extra juice (orange juice?) is enough to get those who’ve been procrastinating about opening their first ING account once step closer. If an ING account hasn’t been on your radar, then you have to weigh whether $12.50 or so is enough incentive to put them on your radar.
An ING TFSA might be good for an emergency fund, but I think the tax advantage is much better for higher return investments. Saving tax on $50 interest is hardly worth the hassle.
I’ve had great success this year loading my wife and I’s TFSAs up with REITs. Up 51-53% this year, all tax free!
An ING TFSA is good according interest rates.
have a chance for investors to invest to get some interest on money