The article “How to Cut Through the Noise of Financial Promotions in RRSP Season” was originally published on The Financial Post on January 30, 2015.
During the first three months of the year, the financial industry battles for your attention. Plenty of promotions pop up, as new TFSA room becomes available, RRSP season gets underway and many employees receive their bonuses.
Most messages come from marketing departments to grab your attention in 140 characters or less, to get you to act quickly. Cut through that noise; don’t rush your financial decisions.
Save your precious free time to focus on whether to make an RRSP contribution, lock in a fixed mortgage rate or check you’re not missing any deductions on your tax return – tangible things that will actually put more money in your pocket.
Lots of money moves around right now, so make sure the grass is actually greener on the other side. Here are four examples of current promotions, and one “hidden” promotion that could be to your advantage:
1. Earn 2.5% until March 31
Limited-time offers leave something to be desired. It’s like a theatre offering free popcorn and the fine print says only the first kernel is free.
Forget these teaser offers. They’re often not worth the trouble of opening a new savings account at a new institution, because 2.5% over the next 60 days is only about $42 on a $10,000 deposit.
If you really want to earn higher yields on savings accounts and GICs –- think the next 60 months, not the next 60 days – consider smaller institutions like trust companies and credit unions. They have to be more competitive to attract clients and are still protected by CDIC guarantees.
2. 100-free-trades offer, for 60 days
This offer occasionally comes with a cash reward, too. But 100 free trades? Really? If there’s one thing a do-it-yourself investor should be avoiding, it’s becoming a day trader.
According to Morningstar Direct, the average asset-weighted portfolio turnover for a non-index U.S. stock mutual fund in 2011 was 51%. If you’re trading more than the average professional, you’re probably setting yourself up to be less than average. Stick with a buy-and-rebalance ETF portfolio.
3. The TFSA quandary
Those who haven’t contributed have $36,500 of room that has accumulated since the accounts were introduced in 2009. New room becomes available every Jan. 1. But for most Canadians, Tax-Free Savings Accounts are a step back. If you have debt, RRSP room, haven’t maxed out your kids’ RESPs or have inadequate disability insurance coverage, think twice about a Trap For Savings Accounts.
Paying down high-interest debt, getting a tax refund of up to 50%, getting a government grant of 20% or protecting your future earnings may be more pressing than saving a bit of tax on your investment income.
The worst part is that stats show most people use their TFSAs as savings accounts, sitting on cash at 1%. If you have debt, you’re falling behind. And if you want your savings to keep pace with inflation, 1% won’t cut it.
4. RRSP loan at prime
What a great option for the bank. You borrow money and pay them interest. You invest said borrowed money and pay them fees. You’re probably better off just investing in bank shares to profit from all the people paying the bank both interest and fees.
I’m lukewarm on RRSP loans. If you can’t find the money to make your RRSP contribution in the first place, how are you going to find the money to pay your loan payments? Yes, your contribution gets you a refund. But that refund is 50% of your contribution at best – and more like one-third for the average Canadian.
At least prime went. You can now get an RRSP loan at a 0.25% lower rate.
5. Account minimums rising March 2
Okay, so some unlimited chequing accounts are raising their minimums from $3,500 to $4,000. Yes, it seems like $3,500 is already a lot, in order to have your $14.95 monthly fee waived.
But think about it this way – $14.95 a month in fees is $179.40 a year. If you can avoid $179.40 a year in fees, that’s 4.485% more money in your account after 12 months. That’s kind of like earning a 4.485% tax-free interest rate on your bank balance.
Compared to the 2.5% interest-rate promotions that only last a short time anyway, this is a pretty good rate that the banks aren’t advertising.
Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto, Ontario.