November 8, 2009
November 8, 2009
Moving money out of an RSP to a TFSA will be like cashing out the RSP and taking the money as an income --- which WILL be taxed. :yell: Remember, all the money that you put into an RSP is off-set with a tax deduction. This is not the case with the TFSA. The TFSA has no tax credit going in...just tax deferred earnings.
Clear as Mud?
That is a really an individual question based on your circumstance, tax bracket, etc, etc. However, generally the answer would be invest in an RSP first for the immediate tax savings, then a TFSA once you have maxed-out the RSP contribution room. That said, you may want/need your money sooner than later, thus a TFSA may make more sense.
This is only one person's opinion...
One more thing...I manage all my regular savings, RSPs & TFSA myself through Achieva Financial online. This way I can direct money as I need it, however, always be careful with knowing your contribution room with your RSP & TFSA (or you will get penalized by CRA). Also, while moving money into an RSP is very simple, there is additional documentation and tax dedeuctions on monies transferring out. Moving money in and out of a TFSA is much, much easier --- just WATCH your contribution room.
November 8, 2009
since I have contribution room still in RSP,s I guess I would go with getting the tax break as my income is at a decent level this year. Another thought about putting "anything" in a TFSA is.... why would a bank who offers a rate of 2% tfsa let you buy a GIC that might be at 3.75% then put that into the TFSA? Doesnt that make the lower rate TFSA a waste of time?
September 11, 2010
Hi kilarney, CM is right in that if you move the money out of the RRSP and into a TFSA, it will be taxed immediately. The amount of tax taken by the bank upon withdrawal is dependent on how much you take out: http://www.cra-arc.gc.ca/tx/nd.....s-eng.html. The balance of that withdrawal will also be added to your taxable income for the year, meaning that it could be taxed MORE according to your marginal tax rate when you file your return later on.
Not only that, but the amount you withdraw is lost contribution room for your RRSP, meaning that you can never put it back. You mention that you still have contribution room anyway, so it might not bother you much...but it lowers the overall long-term potential. All around, moving funds from an RRSP to TFSA sounds like a bad idea (although it seems you've already decided against it, I just wanted to add the bit about lost contribution room since nobody had mentioned it so far). So you're best off funding the TFSA from your regular/non-registered savings.
As for having a 2% savings account TFSA vs. a 3.75% GIC TFSA, the key difference is liquidity. The savings account is more flexible, you can take the money out at any time and there is no penalty...the total value of that account earns 2% up to the day you withdraw it, and whatever is left in the account (if you didn't withdraw it all) continues to earn 2%. With the GIC, you have to leave all of it in there until maturity (right now, 3.75% is usually for a 5-year GIC). If you withdraw it before those 5 years are up, some banks will give you ZERO (0%) interest if you withdraw it early. Some will pay out a lower percentage (1.5%, for example) if you do...in either case, you'd be getting LESS interest than if you had put it in the 2% savings account. You'd have to check with your bank to see what their policy is. Keep in mind, these particular penalties are strictly set by the banks and have nothing to do with the government/CRA and taxes.
So to answer your question...is the lower rate a waste of time? Not if you need it in the forseeable future (or in the event of an unforseeable emergency...though you should have a separate account for that if you can). But if you're comfortable not having access to it for 5 years and can get by without it, then definitely go with the higher rate GIC.
November 8, 2009
these are great answers and I appreciate the excellent info. The reason I asked if a higher rate GIC could go into a TFSA is that the banks do the bait-and-switch thing by offering higher rates around tax time then dropping them after you contribute. Then you have the choice of leaving it with them for lousy returns or paying the fees to them to move it out. NOT FAIR!!! Thats whay I wanted to get a higher rate GIC to force them to keep the rate. I dont look at a TFSA as daily money and your point is well taken about losing interest for cashing a GIC early!
You are exactly right about the "bait-and-switch" or "special-offer" or "gimmick-offer" attempts made by banks and other FIs. You really need to watch for this. While I am bias towards Achieva Financial, their straight-up, no special, consistently great rate offer is one of the reason why I consolodated most of my savings with them --- I use to allways chase the specials and years later wonder why I had 10 different banking statements???
Good Luck finding the right approach for you.
My advice FWIW is to stay away from TFSA savings accounts like those proffered by ING and the other online banks. Most people earning a middle-income salary will save maybe $20 in tax for every $100 in interest earned. At today's rates, you will only earn about $100 in interest each year on a $5000 max TFSA cash contribution anyway. You'd be better off opening a TFSA at a discount brokerage like Questrade and using your TFSA cash to invest in stocks, bonds, mutual funds, etfs, etc... Put your emergency cash stash in an unregistered (i.e. non-TFSA, non-RRSP, etc...) savings account, and pay the $20 or so in annual taxes for each $5000 you have in the account. The gains you'll make from investing in stocks, bonds, etc... should more than offset the $20 in tax you'll pay.
November 8, 2009
this is from our friends at CRA.....
Julie turns 18 years old on May 13, 2011. She will not be able to open and contribute to a TFSA until that date, however, as of May 13, 2011, she can open and contribute to a TFSA the full 2011 dollar limit of $5,000.
In certain provinces and territories, the legal age at which an individual can enter into a contract (which would include opening a TFSA) is 19. In 2009 or later, in such jurisdictions, an 18-year-old who would be otherwise eligible, would accumulate $5,000 contribution room for that year and carry it over to the following year"
I have almost maxed out TFSA in a year or two.. $15,000 total (all tfsa accounts) for 2011.. $20,000 for 2012. Filling the TFSA (Questrade) first then RRSP.. PAD/PAC to savings (Hubert Financial) automatically.. There are trade offs to both account types (rrsp vs tfsa).. All depends on circumstances as another poster pointed out. For young people I say might as well use that TFSA first and then RRSP once you actually start making some money..