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The point of TFSA
October 5, 2010
11:21 pm
ALF
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What is the point of a Tax Free Savings Account when you can only deposit $5000? If you have a 1.50% interest rate, your making about $75.00 a year in interest; but who cares if its tax free, $75 is almost nothing, go ahead tax me! You should be able to deposit as much as you wish in a TFSA.

One more thing, if you can add another $5000 every year in a TSFA, does that mean in 2010 I could deposit $10000, and in 2011 I could deposit $15000?

October 6, 2010
12:28 am
jeremywong
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...if you can add another $5000 every year in a TSFA, does that mean in 2010 I could deposit $10000, and in 2011 I could deposit $15000?

You can deposit $10K in 2010 only if you didn't make any deposit before 2010, or you did but you withdrew it all before 2010.

You can deposit $15K in 2011 only if you didn't make any deposit before 2011, or you did but you withdrew it all before 2011.

Currently, TFSA is a joke for bank accounts. At 1.5% interest, it will be 2017 before one can save $100 of tax per year at the lowest tax bracket (15%). If you don't use a TFSA until then, you can deposit $45K in 2017.

This reminds me of this past summer when some people were penalized for TFSA over-contribution, and they were outraged at the size of the penalty relative to how much interest they earned. The benefit of TFSA is not the interest earned, but the tax saved. They should have compared the penalty to how much tax they saved, which is virtually zero, and been even more outraged.

October 6, 2010
6:18 am
guest
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I agree that holding cash inside a TFSA is a waste. Banks love it when you park your cash in a TFSA because you're not likely to withdraw it soon given that you can't put it back in again until the following year (unless you have contribution room available). If you choose to transfer your TFSA to another institution, banks will hit you with a ridiculous "transfer-out" fee which will likely wipe out any modest interest you've earned in the account. Either way, the banks win, and Joe Average loses.

In my opinion, any cash you have that you want to sock away for an emergency fund or some other reason is best kept in an unregistered savings acocunt like Ally or any of the other banks Peter has helpfully posted on his website. The interest income you have to pay is minimal as others have suggested. If, for example, you have $5000 cash in an unregistered bank account that pays 2% interest and your income is in the $40K to $70K range, you'll pay around a 30% gross tax rate on the $100 of interest you earn (2% of $5000) which is about $30 (30% os $100). Big deal.

If you're fairly young and have a fairly long investing time-horizon (a couple of years at least, preferably 5 or more years), you're probably much better off opening a TFSA at any discount brokerage (e.g. Questrade, RBC Direct, etc...) and investing in securities like stocks, bonds, mutual funds, ETFs, etc... from within the TFSA. Any gains within the TFSA are 100% tax-free, so if you invest $5000 in a couple of ETFs and in 3 or so years the value of the ETFs is $6000, no taxes are paid on the $1000 profit. By the same token however, if the ETF's LOSE value, say from $5000 to $4000, you can't claim any capital loss deductions on the portion of the $1000 loss that is due to capital declines, so it works both ways.

FYI -- I practice what I preach. I have an emergency cash fund with Ally, and I have a TFSA with Questrade within which I trade a few stocks (and have managed to do quite well). Doing it this way may not work for everyone though. Talk to a financial adviser first before making any inbestment decisions.

October 6, 2010
5:59 pm
Doug
British Columbia, Canada
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I'm no financial planner but to be honest, I've only used $5000 from 2009 in my TFSA which I'm going to withdraw in December and that will give me an extra $5000 in 2011 plus my 2010 and 2011 contribution limits. CRA may also increase the annual TFSA contribution limit to inflation, rounded to the nearest, $500 but as of yet they've not done so. It's still $5000 per year. I really don't see the point in TFSAs unless you're utilizing them with equities or higher-yielding fixed income securities. The downside of using them with equities though is then you can't claim the dividend tax credit nor can you utilize any capital losses for securities held within the TFSA (though admittedly any capital gains are tax-exempt).

It's a toss up. I'm really more focused on maximizing my RRSP contribution room each year and then reinvesting the resulting juicy income tax refund the following year. That's where I see the biggest bang for my proverbial buck. 🙂

Cheers,
Doug

October 7, 2010
10:18 am
NHL
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You can only deposit $5000 per year
If you take out $3000 in one year you cannot put that amount back plus $5000 per allowed you would be over your limit then pay 1% penalty

EXMPLE 1
JAN 2009 YOU ADD $5000
JAN 2010 YOU ADD $5000
JULY 2010 YOU TAKE OUT $4000
JAN 2011 YOU CAN ONLY ADD $5000 YOU CANNOT ADD THE EXTRA $4000 WHICH YOU TOOK OUT YOU WOULD PAY 1% PENALTY

EXMPLE 2
JAN 2009 YOU ADD $5000
JAN 2010 YOU ADD $5000
JULY 2010 YOU TAKE OUT $4000
NOV 2010 YOU PUT BACK IN $4000 YOU WILL PAY 1% PENALTY AS YOU HAD ALREADY PUT IN YOUR $5000 LIMIT AND DOES NOT MATTER IF YOU HAD MADE WITHDRAWL

Thats the catch 22 with these FTS free tax savings accounts
they are not like day to day savings accounts.

Would of been much easier and simple to have a account with $1.00 or $100000.00 or a million or what ever amount and interst earned no tax but i guess our dear politicians dont want that for us that be no good for us they are looking out for our best intrest.

Hell if you cant manage your money and finance you think some one else will do it for you!!!!:cool:

October 7, 2010
12:27 pm
guest
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You can only deposit $5000 per year If you take out $3000 in one year you cannot put that amount back plus $5000 per allowed you would be over your limit then pay 1% penalty EXMPLE 1 JAN 2009 YOU ADD $5000 JAN 2010 YOU ADD $5000 JULY 2010 YOU TAKE OUT $4000 JAN 2011 YOU CAN ONLY ADD $5000 YOU CANNOT ADD THE EXTRA $4000 WHICH YOU TOOK OUT YOU WOULD PAY 1% PENALTY EXMPLE 2 JAN 2009 YOU ADD $5000 JAN 2010 YOU ADD $5000 JULY 2010 YOU TAKE OUT $4000 NOV 2010 YOU PUT BACK IN $4000 YOU WILL PAY 1% PENALTY AS YOU HAD ALREADY PUT IN YOUR $5000 LIMIT AND DOES NOT MATTER IF YOU HAD MADE WITHDRAWL

NHL, you are completely wrong. Any withdrawals from a TFSA can be added back the next year IN ADDITION to the $5000 per year increase in contribution room.

To use your example, JAN 2009 deposit $5000, JAN 2010 deposit $5000, July 2010 withdraw $4000. In this case, you would be able to add $9000 in Jan 2011 ($5000 extra contribution room plus making up the $4000 withdrawl).

This issue was discussed at length in another thread here.

October 7, 2010
6:54 pm
jeremywong
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The average Canadian is smart enough to understand TFSA rules, but NHL's post is proof that there is continuing ignorance about those rules, even though they were published two years ago. Instead of creating TFSA, CRA should have made the first x dollars of investment income and capital gains tax-exempt. And that tax-exempt limit would increase every year, thus encouraging more saving and investing. That would be a foolproof system, obviating deposit limits which have caused mass confusion.

October 8, 2010
1:29 am
Nightowl
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Back in the 80's there was a line in the T1 general tax form that allowed you to claim a deduction of up to $1000 againt interest income. Those were the days when savers earned a heady %12.

While a one year old TFSA may evoke a "so what"...you must look at the big picture, where you could be in 20,30 or 40 years. A limit of at least $200,000 plus tax free growth from a number of investment options, not just saving accounts, over 40 years.

RRSPs don't give you a real tax refund. It's a tax deferral, just look at the withholding tax on RRSP withdrawls

Do well with your TFSA, it's all yours. Do well with your RRSP, the government is more than happy to take their cut and reduce income tested benefits. I'd rather be a TFSA millionaire than a RRSP millionaire

As for those who think $70, $30 or even less is "nothing", I would be happy to take these nuisance amounts off your hands. It is better to keep a tax free dollar in your pocket than to give it to the government.

October 8, 2010
11:53 am
Andrew
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Nightowl said:

While a one year old TFSA may evoke a "so what"...you must look at the big picture, where you could be in 20,30 or 40 years. A limit of at least $200,000 plus tax free growth from a number of investment options, not just saving accounts, over 40 years.


This is the key to the TFSA, every tax-free penny earned can then be used to earn more tax-free money, so the tax savings are compounded. The more gain you can secure in your TFSA, the more future gain potential you have earned. All savers should realize that the power of compounding makes the relative percentage gains more important than the absolute amounts that result.

October 12, 2010
6:45 am
guest
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Agreed about the time-value of the TFSA vs. RRSP. Taxes are going to skyrocket in the next 10-20 years to support the health needs of the ageing baby-boomer population (immigration is not the answer). If you're currently in the lowest tax bracket (generally if you make $43,000 or less, depends on what province you're in), you will almost certainly be paying HIGHER taxes on your RRIF withdrawals when you retire. People who are in the lowest tax bracket should seriously consider whether they want to use RRSPs at all. Even the income tax deduction and refund may not make it worthwhile. Maxing TFSA contributions may be the way to go (TFSA withdrawals are not taxed, and there is no impact on things like CPP, OAS and GIC payout levels). If you're in a higher tax bracket, RRSPs make sense, particularly if you're able to contribute enough to get your net income down to the low tax bracket threshold of about $43,000 (e.g. say you earn $50,000 per year and are able to set aside $7,000 for your RRSP, you won't pay tax at the higher level because you get to deduct the $7000 to bring your net income down to the lowest bracket threshold of $43,000). It would be a good idea to use the refund you get on the $7000 contribution (maybe $2000 or so) to fund a TFSA.

November 17, 2010
4:13 pm
Pablo
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Despite all the conservative advice from all financial advisors to keep the money in a TFSA and not buy equities, what is the use of having to have to confine yourself to measly returns. As an amateur (but studious) investor the TFSA was a opportunity to me to make some money.I invested $5000 for my spouse for 2 years right away in January and the $20,000 we invested in stocks like YLO, CGX.UN, IPL.UN, BCE,CU,BNS,LIQ.UN blossomed to >$25,000, a non-taxable 25%.
Stick to solid, generously dividend-payers who are tigers in their space, with a history of dividend or return increases, and watch the P/E 10 to 18 and, with patience, you will make free money.

Pablo

November 17, 2010
7:05 pm
Prag
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Even if a TFSA only saves an average income earner something like $30 in tax a year, it's still far better than nothing. That's equivalent to 4 free combo meals at McDonald's. 🙂 For someone who's frugal and only eats out once or twice a month these seemingly negligible savings make an impact.

I'm very glad the TFSA account option exists.

Even better than TFSA is the Registered Disability Savings Plan which some banks are now offering accounts for. Your first $1000 contribution per year (and sometimes even more) is DOUBLED by the government grants that are part of the program! Anyone who has an officially disabled relative or qualifies as disabled themselves (and the disability is severe enough that they gets the disabled tax credit on their tax returns currently) should be taking advantage of this new savings plan the government implemented.

Here's more info from BMO's site about it:

How Can a Plan Help?
Contributions have the potential to grow more quickly than if they were invested in taxable investments outside an RDSP. Plus, government incentives promote even faster growth. RDSP beneficiaries are eligible for Canada Disability Savings Grant (CDSG) and Canada Disability Savings Bond (CDSB) benefits. These all make a substantial contribution to a brighter financial future.

Even those who don't have the financial means to contribute to an RDSP can benefit from the CDSB program. Lower-income families may qualify for CDSB payments up to a lifetime maximum of $20,000

I should start a thread about the RDSP some time.

November 18, 2010
10:43 pm
msl25
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According to Gordon Pape's TFSA book (which i agree):

if you're a low income earner (like me), MAX out your TFSA, not your RRSP.
if you're a hi-income earner (i wish2be), MAX out your RRSP, then follow-up your TFSA.

November 29, 2010
11:08 pm
bob watford
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Of course the TFSA is ideal to use for trading stocks. For anyone who buys stocks this is a PHENOMENAL addition. Think of it this way....for someone who is 18...odds are they aren't going to have any significant money until they are at least 27-28 years old. At this point they will have $50,000 in TAX FREE investment space? Unreal. No, these accounts are somewhat limited for 2% interest savings....but for anyone with moxie to invest in stocks it's an amazing account. At 38 years old you have $100,000 BASE room for tax free gains. BOOOOYAAAAHHHH:eek:

November 30, 2010
1:16 pm
jeremywong
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In 10 years, everyone "will have $50,000 in TAX FREE investment space," not just stock investors. Even if an 18-yr-old earns no interest and owns no stock, at 38 he will still have "$100,000 BASE room for tax free gains."

TFSA isn't really ideal for stocks, because capital gains are only 50% taxable. I would argue that TFSA is ideal for MICs, because they pay 8% interest and that is all taxable.

November 30, 2010
1:59 pm
guest
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In 10 years, everyone "will have $50,000 in TAX FREE investment space," not just stock investors. Even if an 18-yr-old earns no interest and owns no stock, at 38 he will still have "$100,000 BASE room for tax free gains." TFSA isn't really ideal for stocks, because capital gains are only 50% taxable. I would argue that TFSA is ideal for MICs, because they pay 8% interest and that is all taxable.

Yeah, but stocks generally provide much higher returns over the long run. If you gain say 10% on some stock over one year with an initial capital outlay of $10,000, that's a capital gain of $1,000 of which $500 (50%) is taxable at your marginal rate. If you instead "invest" that $10,000 in a one-year GIC at 2%, you get $200 of interest income, 100% of which is taxable at your marginal rate (i.e. the entire $200). So if the stock was sheltered in a TFSA, you avoid paying tax on $500 of income. If the GIC was sheltered in a TFSA, you avoid paying tax on $200 of income. Of course, there is no guarantee that the stock will rise by 10%, and it is entirely possible that the stock could LOSE value. Having a losing stock inside a TFSA sucks because you can't claim a capital loss to offset any other capital gains you might have.

November 30, 2010
2:21 pm
jeremywong
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I agree that there is little advantage in holding "a one-year GIC at 2%" in TFSA (too little income). But I disagree that "stocks generally provide much higher returns over the long run." "Much higher returns" than what? Since 2000, stocks haven't outperformed corporate bonds, MICs, or even government bonds.

December 1, 2010
5:23 am
guest
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Okay, fine. Let's say that "stocks have the POTENTIAL to provide much higher returns...". When I said "long run", I meant over a person's total investing time-horizon. This can vary of course, but say someone starts an RRSP at age 35, converts to a RRIF at age 71, and dies at age 85. That's a total of 50 tax-sheltered investing years. Stocks han fluctuate dramatically in that time frame, or not do anything at all for 10 years like between 2000 and 2010 (forgetting the financial crisis and recovery). Also, dividend-paying blue-chips like IBM, AT&T, etc... outperform government bonds and most corporate bonds, so pick your stocks wisely. Choosing a market-capturing ETF is probably best for the average investor. As for MICs, they can have big payouts, but those payouts can stop immediately if the underlying asset gets in trouble. In this case, the underlying assets are mortgages, and many of those mortgages are commercial mortgages or even worse, speculative bridge-financing instruments that can collapse at any minute. As the saying goes... "let the buyer beware".

December 1, 2010
10:06 am
mike
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guest said:. "As the saying goes... "(stocks) let the buyer beware".


I think that says it all very well.

I'd like to add, if you don't need the higher returns you don't need to take the risk either. I've seen GIC's and savings accounts starting to go up these past 2 months, won't be long before we see 3% GICs/accounts then 4..5...6, all at no-risk.

Have a great day

December 1, 2010
10:49 am
guest
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Problem is that many boomers for whatever reasons didn't or couldn't save up enough for retirement, so many are now piling into stocks at the last minute to try and capture some decent returns before they retire. Others are investing in funds with unsustainably-high returns, like Dividend 15 Split Corporation, etc... Both of these scenarios could turn out badly. While the days of 10% yearly stock returns are behind us, 4% to 6% isn't unreasonable. This may not seem like much, but interest rates on GICs and government bonds aren't likely to increase beyond 2-2.5% in the forseeable future dut to the cash flooding into the market from the US Fed printing press.

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