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I’ve currently got about $3,000 set aside for a tax liability that will be due in April 2009. The actual amount owing may be a little more or a little less, but that’s my conservative estimate of how much I will need to pay.
Right now, the money is sitting in my Scotia MoneyMaster for Business account and earning 2.25%. But are there better options? Here’s what I’m considering:
1) Transfer Money to a Higher Rate Savings Account - ING and ICICI offer savings rates at 3%+, so I would make a little more on my money. However, the difference isn’t huge, especially after taxes (how much longer before TFSAs are available?!?)
2) Invest in a Stock/ETF - This was my initial idea, but it didn’t fly well with my wife- her risk tolerance (very conservative) is significantly less than mine (Vegas-esque). Returns could exceed the other options, but could also underperform, leaving me looking like an idiot.
3) Pay Down my Student Debt - My (non-government) student loans are currently sitting at 5.25%. By paying down the $3k on my debt, I would see a guaranteed return of 5.25%, and unlike any interest earned in a savings account, this would be a tax-free return. The downside is that my student debt in non-revolving, so I will need to make sure that I allocate enough savings between now and April to cover my tax liability. If I’m short, I will need to dip in to my line of credit (at a rate similar to my student loans), eating in to some of the returns.
4) Invest within my RRSP - If I take this money and purchase a registered investment, I’ll increase my registered portfolio and receive a tax break to lessen my current tax liability by approximately 38% (assuming I have contribution room- I’m fairly certain I do, but I need to double check). If I transfer to my wife, who has a higher marginal rate, the initial savings will be about 42%. As with paying down my student loan, I will need to increase my savings rate to ensure I’ve got enough to pay off my tax owing.
5) Buy a Sweet TV - My current television sucks. $3,000 could get me a pretty nice setup and wow all my friends, which would almost certainly result in increased popularity, confidence, and earning potential. Plus, it would give me a great post topic for next April - I owes taxez and go no moniez OMGWTF?!???!.
So, what sayeth the personal finance gurus?
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I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog.
Tim Ramsey
Personally, I would pay down the non-government student loan. You get a decent guaranteed return (5.25% tax free), plus you are motivated to save more for your tax bill. You also have a line of credit as a backup.
The RRSP would be an OK option as well - you get the tax deduction now and hopefully a decent return over the long term. Plus, you are still motivated to save money for your now-reduced tax bill.
The high rate savings plan is inferior to paying down student loans, because of the lower after tax rate rate of return [3%(1-0.38)] = 1.86%
Any stock or stock-based ETF would be vegas-esque (little more than a gamble) if your holding period is less than a year.
I assume the TV option is just a joke.
Great post. I will read your posts frequently. Added you to the RSS reader.
Nice writing. You are on my RSS reader now so I can read more from you down the road.
Allen Taylor
I like the high yield savings option dedicated to your tax laibility, but check to see if you can get a better rate with a 6 month CD. I don’t know anything about RRSP.
Don’t you love these “no comment” comments from other sites just trying get traffic?
I would chose between options 1 & 3. If you have hich chances to save again the money you will owe for taxes go after the student loand,
… or split the money between the two and set-up a Automatic Saving Plan for the saving account to save the tax money you need.
Since the tax liability is a “must pay”, I would be hesitant to put it into the markets for the short time frame. Personally, I would buy the TV.
Kidding! If your cash flow allows you to save the $3k by April, nothing beats paying down debt now.
@Dillon - The guaranteed return of debt repayment appeals to me as well. The TV option was a joke, but I’d be delighted if someone could come up with a justification for taking that route…
@Mr. ToughMoneyLove - I had a look at CDs/GICs, but the rates for less than 1 year were actually less than those offered on high interest accounts. I won’t even try to explain the RRSP system to you, but my understanding is that it’s similar (from a tax perspective) to 401k contributions for Americans (contributions are tax deductible, and you’re taxed when you withdraw).
@MultifolDream$ and MillionDollarJourney - I’m trying to figure out if I can save the $3k again between now and April without diverting too much money from my regular savings. I think I can, but I need to break out the old budget to see for sure. If I’m just going to be taking the money from vacation savings, I’m really just foregoing a vacation for debt repayment. While that may be financially wise, it will be little consolation when I’m staring out my window at 8 feet of snow in February…
Thanks to everyone for the (real ;)) comments!
TV!!! Fo’ real!
My 2 cents:
1) Transfer Money to a Higher Rate Savings Account.
My reason for this is based on your purpose for this money in the end: your tax bill.
Investing in a stock or ETF may leave you short of funds to cover your taxes. Investing in your RRSP is locking it up for the long term. Paying down debt is a great idea, and you get a 5.25% but you’ll be short $3k come tax time (unless you can put that much aside between now and tax time).
5) Buy a Sweet TV - LMAO! Great piece of rationalization here!
Hi guys,
I am new to this forum moneygrubbinglawyer.com and hope that you can
help me with the forex - I am looking for an introduction
for noobs. I have already some knowledge about shares. (Hope this is the right category.)
Help is so much appreciated. Most important question: can a noob make money on the forex exchange market?
Thanks,
Jim
Hi guys,
just want to introduce myself on moneygrubbinglawyer.com, hope this is the right category for that purpose.
Greez,
Max