Comments on: Tax-Free Savings Account (TFSA) – How should we use it?

By: David R.

David R. — Tue, 24 Feb 2009 05:42:55 +0000

Victor wrote:

Victor if you can afford to maximize both, do so, and don’t “save up” contribution room in your RSP. You’ll get the tax refund now, your investments will grow tax free, and you can invest the tax refund as well, preferably in a non-registered account (because you’ve already maxed out your registered ones).

Don’t aspire to join the legions of Canadians with loads of contribution room in their RSPs.

By: Ed Rempel

Ed Rempel — Sat, 07 Feb 2009 01:45:01 +0000

HI Kathryn and Four Pillars,

The common misconception for Canadians is that they will be in a lower tax bracket in retirement, not that they will have lower income. You can have a much lower income in retirement, but still be in a higher marginal tax bracket.

This is because of all the clawbacks that affect all seniors. The details are in an article: http://www.milliondollarjourney.com/tfsa-vs-rrsp-clawbacks-income-tax-on-seniors.htm .

Unlike rent subsidies and social assistance, the clawbacks do affect all seniors. They may not technically all be “tax”, but they are cash from the government that anyone can get.

Your marginal tax rate after you retire is critical to figuring out TFSAs and take some projections to figure out. On top of whatever other retirement income you will have, RRIF withdrawals would be taxed at the marginal rate each year, while TFSA withdrawals will be tax free.

TiFS-eh would be a truly Canadian pronounciation. Perhaps it’s better than TiFS-uh. :)

By: Ray

Ray — Fri, 06 Feb 2009 01:16:35 +0000

23.1628% today. XIU is a great idea too, running 3.5% with potential for a ton of cap gain too.

By: Mark

Mark — Thu, 05 Feb 2009 23:55:33 +0000

Thanks everyone.

@ Sampson: I think I will start my TD Brokerage TFSA with probably an EFT (XIU).

@ Ray: AVF.UN got 20%?

Mark

By: Remus

Remus — Thu, 05 Feb 2009 17:32:08 +0000

I’ll throw in my 2 cents here as well…
So from what is happening around the world now and from what I have been reading and reading and reading there is a chance of high inflation (some might go as far as calling a hyperinflation trend) if all this liquidity put in the banking system by central banks starts to make its way to the end user. So far it hasn’t as the banks just hoarded the cash but the latest trend I see from governments is to start stepping into banks business (maybe one day by fully nationalizing them) and try somehow to force them into lending out more money. I see provisions of TARP money linked with clauses like that: you only get money if you lend them out…
Personally I have a very low level of esteem for the ability of the FED to solve a lot of these problems (or of the rest of the central banks for that reason) so I will play a moderate card and tell myself: the risk of inflation in the years to come is worth considering.
Considering that gold is a good hedge against that (as are commodities too from what I’ve read but with the world in recession for some time I think there will be a good few years until they pick up again in price) personally I think having some exposure to that is a must have. Maybe play the gold hand for a while and later switch to commodities.
I know Questrade has been bashed really bad in users comments but their option of Gold in RSP sounds very tempting. I don’t know if they offer a GOLD in TFSA too but it’s worth looking into it.

By: DK

DK — Thu, 05 Feb 2009 14:21:52 +0000

RRSPs are great except when they grow too large because when you turn 71 you have start withdrawing roughly 7-8% of the total value each year, potentially placing you in high tax brackets in retirement.

By: Maria

Maria — Thu, 05 Feb 2009 05:17:00 +0000

Thanks for the helpful insight. I’ve been looking into TFSAs for a few weeks now and I still haven’t figured out if it’s right for me or not.

I’m a full time university student so I fall under the lower tax bracket. With that in mind (and the fact that I’m still new to investing), does this affect how the CRA tallies my OSAP? I’m thinking contributing my OSAP loans into the TFSAs and pay it back afterwords. Is this logical?

thanks!

By: Ray

Ray — Wed, 04 Feb 2009 07:45:56 +0000

I have my TFSA at TDW and have $2500 in PD.UN yielding 9.5% income and AVF.UN yielding 20.6% income for now. Not sure what I’ll pick next year, we’ll see.

By: Sampson

Sampson — Wed, 04 Feb 2009 06:14:45 +0000

@ Mark

My wife and I each have TFSA accounts at RBC Direct Investing. I’ve started doing in-kind transfers of my existing income trusts I had been holding in a normal non-registered account. My plan is to pack high yielding income trusts, and US dividend paying stocks.

For my wife, her account will be built around ETFs, so since the bonds are already in her RRSP, we’ll put the higher yielding US and international ETFs in there.

By: Ramis

Ramis — Wed, 04 Feb 2009 02:17:58 +0000

I have one with E-trade canada………currently not holding really anything but the plan is to hold either a zero coupon bond or a good US dividend paying stock (since u dnt get the dividend treatment)……i dnt want to hold put tfsa money in mutual funds most likely it will be bonds specially right now take advantage of the great spreads.

By: Mark

Mark — Wed, 04 Feb 2009 00:21:27 +0000

Good article.

I totally agree with option # 1 – try to max out both RRSP and TFSA.
Easy to say, hard to do. Certainly, if your income is > $50 K, there’s benefits in having an RRSP.

Back to the TFSA – did anyone open one via a discount brokerage account?
If so, what investments are you holding in there?

I’m thinking about holding some not so risky, but steady bond funds, bond index funds, or some other income producing investments.

Although there’s merit in having your $5 K in a PCF TFSA earning ~ 3.75%, I want to make more than that…

I would be interested in learning if any folks have opened a discount brokerage TFSA.

Keep the good posts coming,
Mark

By: chris

chris — Tue, 03 Feb 2009 20:44:45 +0000

ive heard the term TIS-FA thrown around a few times. less of a mouthful than T-F-S-A

By: Tanya

Tanya — Tue, 03 Feb 2009 19:57:02 +0000

I am using the TFSA to save now while I am in a lower tax bracket. =)
I like that it is MY money….the government has no way of putting their sticky fingers on it now or when I retire. Tax-free may not make you the big bucks, but it is YOUR bucks. Your life time of working and savings guaranteed to you with no surprises. What could be better than that?

By: Ramis

Ramis — Tue, 03 Feb 2009 19:08:36 +0000

good article……here are couple of other methods to use it. If you are in lower tax bracket and expect to be in a higher in the future, instead of making contributions to your RRSP you could contribute to TFSA instead enjoy the tax free growth and then top up on ur RRSP and get the higher tax return.

Also one of the ways I am planning on using TFSA is to use it in retirement for lumpsum purchases and use RRIF as income. Since TFSA is not taxed it would be much more efficient to use it for one time expenses like trip, car purchase etc….

just some ideas

By: Traciatim

Traciatim — Tue, 03 Feb 2009 17:31:47 +0000

You also forgot to mention option 4 for the TFSA, use it to split income with a non-working spouse.

By: Traciatim

Traciatim — Tue, 03 Feb 2009 17:26:48 +0000

I agree with FourPillars on the “Can you believe they tax some low income seniors at 72%?” point.

If you were to make a comparison and include the loss of the GIS because you are being taken care of you would also have to include the loss of income tested benefits of rent subsidies and social assistance to a regular income earner making 40K a year.

Lets look at a family of 4, with 1 child under 6. They make 40K a year and one spouse stays home with the kids. This in contrast with a family of 4 on social assistance in the apartment next door with their rent subsidized. The going rate for the apartments will be $700 per month.

Family 1, 40K income. On this income they will pay:
8400 Rent
5470 Income Tax
1807 CPP
692 EI

They will also receive:
2529.36 CCTB
1200 UUCB

So, 40000 – 8400 – 5470 – 1807 – 692 + 2529.36 + 1200 = 27360.36 to live.

The social assistance at $1000 a month will pay (Extended rate in NB, 4 person):
8400 Rent

and they will also receive:
4800 in rent subsidies (to make rent 30% of income)
7180.92 CCTB
1200 UUCB

So 12000 – 8400 + 4800 + 7180.92 + 1200 = 16780.92 to live.

The difference being that the 40K person was giving up the 4800 in rent subsidies, 4651 in CCTB, plus pays 7969 in taxes and fees that they would not had they not gone to school to get a good job. That totals 43.55% they pay in “tax” just to work. Oh, and I almost forgot the 12000 that they would have received for social assistance income, making their new “Tax” rate 73.55%. So essentially nothing changes in retirement. The people who don’t plan ahead get rewarded and the people who do get punished.

By: Victor

Victor — Tue, 03 Feb 2009 16:55:25 +0000

While I have no expectations of making more during retirement than during my career, I’m currently in the first 5 years of my career and thus hope to be making more in retirement than I do now.

I can afford to max both my TFSA and my RRSP contributions, but lately I’ve been thinking that this may not be the wisest choice. I’m frugal and have the self-control to invest in non-registered funds and not withdraw the money.

Any comments on whether it might be worth saving up the RRSP contribution room until I’m making significantly more than I am now?

By: Kathryn

Kathryn — Tue, 03 Feb 2009 15:23:50 +0000

Garett ~ Interesting calculator. Thanks for posting it. For our situation it said that TFSAs are better than RRSPs, which is good because that’s what we plan on using. :-)

By: Garett

Garett — Tue, 03 Feb 2009 14:50:15 +0000

Taxtips.ca has a handy calculator to determine which option or combination is best for your particular situation. Check http://www.taxtips.ca/calculator/tfsavsrrsp.htm for background info and a link to the calculator.

NOTE: I am not associated with TaxTips in any way, other than my firm having a listing in their directory. However, I do use their site and various calculators from time to time and have really benefited from it.

By: Four Pillars

Four Pillars — Tue, 03 Feb 2009 14:47:20 +0000

I have a few problems with this article:

1) How do you figure that seniors that make over $37k will be paying 43-72% marginal tax rate? That’s just not true.

2) The idea that the rrsp is only beneficial if your marginal rate in retirement is less than your current marginal rate is also not always true. When you make contributions the tax saving is at the marginal rate – when you withdraw – the tax is spread out over the entire years withdrawal.

ie Let’s say I contribute $10,000 per year and save 40% tax on those contributions. Later on when I have enough saved (let’s assume no other savings, income etc) I’ll retire and will withdraw money each year – let’s say $60,000 per year. At that point my marginal rate might be 40% but my effective tax will be the amount of tax paid over the $60 which will be much less than the marginal rate.

The fact is that it is possible to withdraw money in retirement at a higher marginal rate than when you are making contributions and still come out ahead.

Obviously if you have a good pension then this scenario doesn’t fit.

3) Who makes more money in retirement than when they are working? Unless you love your job and don’t want to retire then that is just bad planning.

4) “TiFSA”? Nobody calls it that. :)