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TFSA 101 + HISA Tax Question
January 12, 2018
8:47 pm
ciena
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Hello,
I have some basic TFSA questions for hopefully some kind souls to answer. I'm not fully versed in financial understanding, but definitely learning.

If you've never contributed to a TFSA, how much can I contribute? (Note - I realize its now approx. $5500 per year.)

If you have a larger contribution opportunity in TFSA and you're risk adverse (i.e., not keen on mutual funds) like myself, is there any argument for putting the money in a RSP instead of TFSA. To me it seems a TFSA ("high" interest TFSA like Ideal Savings 2.25%) is the way to go for flexibility and to avoid taxation when pulling your money out, but maybe I'm missing something.

General question - not tfsa related - Anyone know what I will be taxed on High Interest Savings Account? I live in BC. Is it full federal and provincial income tax on the interest?

Thank you,
Ciena

January 13, 2018
8:09 am
Koogie
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Hi,

You can always find TFSA information at https://www.taxtips.ca/tfsa/contributions.htm (or the government site).

Assuming you were 18 or older in 2009 and always a Canadian resident, your accumulated contribution room is $57,500.00, including this year.

The name TFSA is unfortunately confusing. Just like an RRSP, it is only a type of account, not an actual investment itself. Inside it, you can do or invest in most any of the normal things. You could keep all your money in cash, you could have it in an interest paying HISA, you could buy GICs, you could buy stocks, etc..
The choices are up to you and depend on how comfortable you are with risk.

I personally believe that a TFSA is superior to an RRSP and should be funded before an RRSP but that very much comes down to YOUR personal situation. There are a lot of variables including how much you earn, your tax rate, age, what the savings are intended for, etc..

Hope that helps.

Cheers.

January 13, 2018
8:12 am
James
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Hi Ciena,

Welcome to the forum! I'm sure you will get other opinions here as well but I'll try to answer your questions:

ciena said
If you've never contributed to a TFSA, how much can I contribute? (Note - I realize its now approx. $5500 per year.)

This depends on your age. The TFSA was introduced in 2009. If you were 18 years old in 2009 and had a valid Canadian SIN, and you or anyone else have never contributed a penny to your TFSA, you would be eligible to contribute $57,500 in 2018.

If you were not 18 in 2009, you need to start adding contribution room after your turned 18 using the following:

2009-2012 = $5,000 per year
2013-2014 = $5,500 per year
2015 = $10,000 for this year only
2016-2018 = $5,500 per year

ciena said
If you have a larger contribution opportunity in TFSA and you're risk adverse (i.e., not keen on mutual funds) like myself, is there any argument for putting the money in a RSP instead of TFSA. To me it seems a TFSA ("high" interest TFSA like Ideal Savings 2.25%) is the way to go for flexibility and to avoid taxation when pulling your money out, but maybe I'm missing something.

Your risk tolerance really shouldn't affect whether you use RRSP or TFSA. Each of these can store the same types of investments. So you can have your GIC or HISA inside either. The choice between them is debatable and depends on several factors. If you might need access to the money, you should definitely use the TFSA (but remember you can't put the money back in it until the next year). If you don't need access to the money right away, it depends on your income and tax bracket now and in the future (that requires a bit of predicting the future). If you think you will be making the same money now that you will when you retire, RRSPs will work the exact same as TFSAs for you. If you will be making less money in retirement, you can use your RRSP to reduce your taxable income now, and withdraw in retirement when you will be taxed at a lower rate.

Because you mention Ideal Savings, I also wanted you to be aware that they do charge a $50 fee to transfer your TFSA should you decide to move it sheltered to another institution. You can avoid this by withdrawing funds in December to contribute in January.

ciena said
General question - not tfsa related - Anyone know what I will be taxed on High Interest Savings Account? I live in BC. Is it full federal and provincial income tax on the interest?

Yes, you are correct. Investment income from a HISA is taxed as regular income so you would pay the full income tax (depends on your tax bracket).

Hope that helps a bit!

James

January 13, 2018
8:17 am
gicjunkie
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You may contribute as follows:

Year Annual Limit Cumulative Limit
2009 $5,000 $5,000
2010 $5,000 $10,000
2011 $5,000 $15,000
2012 $5,000 $20,000
2013 $5,500 $25,500
2014 $5,500 $31,000
2015 $10,000 $41,000
2016 $5,500 $46,500
2017 $5,500 $52,000
2018 $5,500 $57,500

If you have not contributed anything to date and were over 18 years of age at the start, you may contribute the entire $57,500 this year. If you are younger, you may only contribute once you turned 18. This is better than an RRSP because it is not taxed, even when withdrawn. If you remove any of these funds from your TFSA during one year, you may not replace it until the next year. You should shop around for the best financial institution to put it in, or spread it around if you want. It's a great way to avoid tax and keep liquid. You may also invest long term within the plan if you wish.

January 13, 2018
11:15 am
Loonie
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I think koogie covered all your questions, and I agree completely with the answers koogie has given.

As regards TFSA vs RSP, I am completely in favour of TFSA as priority. I have both. From my perspective, retired and over 70, i think that RSPs are, in the long run, a bad idea for MOST people and I would not recommend them unless there are particular circumstances that would seem to justify them. My default would be to avoid RSPs. But that's a long story. I wish I'd never gotten involved with them at all, personally, and, the more I look at them, the more I think that in most circumstances they're not a good idea. I am not really interested in getting into a long debate with people about this as there are people who are adamant that they are a good idea for pretty well everyone. But if you want to give us more details about your personal situation, I will venture an opinion. You may choose not to do this, and that's fine.
The main thing to remember with RSPs is that they are primarily an income-averaging system so that you can, allegedly, pay less tax later than you would now. But it doesn't work that way for most people. It's a cash grab for the government in the end.

January 13, 2018
12:35 pm
Bill
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As Koogie says, TFSA vs RRSP depends on your situation.

RRSPs were brought in by the government in 1957 as an income-averaging mechanism to help Canadians financially prepare for retirement. They are completely voluntary, one is not forced to participate if they feel it is disadvantageous, so I don't see it as a cash grab. RRSPs are fine if your income when you withdraw the money is in a lower tax bracket than when you put it in. For example, if you contribute when your income is $100K/yr and you withdraw it, either from the RRSP or a RRIF, when your income is $50K/yr, then they can be a good vehicle. I personally would have done better by not putting money into RRSPs, i.e. I contributed and received tax deductions when my income was much lower than when I'm going to be taking it out, but I've got no-one to blame for that but myself. However one thing to keep in mind is that as long as prices and wages go up, as long as there's at least some inflation, then it's more likely that your retirement income 30 years or so from now will be higher than what today you might expect it will be. Plus Canadians for the foreseeable future (in my view) will continue to elect parties that increase taxes (vs cutting expenditures) so that again lowers the odds that the RRSP will work out for many Canadians. But, hey, you can build up your RRSP, retire years before your pension(s) kick in and live off and drain your RRSP in the meantime - then you win the RRSP-game!
P.S. Also, there is no requirement to claim your RRSP deduction in the year you contribute, they can be carried forward. So another idea is to forgo the immediate deduction and claim it years later when the money is withdrawn to offset the tax at that time, then you don't have to worry about being in the higher tax bracket (except for the income earned in the meantime). And of course there are opportunity costs of doing that, but the option is there.

January 13, 2018
1:21 pm
Loonie
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I htink Bill is basically correct.
i would just add a couple of thoughts.

When you're thinking in terms of your tax bracket now versus later, remember you're talking about taxable income. Thus, while your gross income could be 100K or thereabouts, your taxable income might be 70-80K. By current standards, which should rise in tandem, if your taxable income in retirement was 50K, you'd be in the same tax bracket both times PLUS, onthe retirement end, you'd lose out on some of the Age Credit and possibly other income-tested benefits. So, you'd likely be worse off. Some think the time value of money enters into this; I've never found that it really made a difference when I did the math for myself. The thing is , that "middle" tax bracket is extremely wide - and can be adjusted in future as governments see fit to be even wider (or narrower). None of it is precisely predictable except the fact that the government gets to change the rules along the way. Any Registered plan is particularly vulnerable to government whims.

I would insist that RSPs do remain a cash grab for the government when people die with no surviving spouse and still have money in their RSPs or RIFs, ALL of which is then taxed at highest marginal rate, which can be very high. Participation may have been voluntary, but you can be sure the government thought of this when they invented the rules and promoted RSPs in the first place. So, if you die without a spouse, and especially if you inherited a spouse's RSP, and you're sitting on, let's say, 300K in RSP/RIF when you die, your income for that year is going to be over 300K, and your estate will be paying a lot of tax on it. You would have been better off to have taken the tax hit when you first earned the money and had full access to your funds over the years. If you'd put it in dividend stocks, as I'm sure Bill would recommend, you'd have paid very substantially less tax over the years on the proceeds.

This is probably more detail than you wanted, but i think the message from almost everyone here (and especially those of us who are retired) so far is to be wary of RSPs and concentrate on TFSAs.

January 13, 2018
2:44 pm
James
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I understand the recommendations above regarding preference for TFSAs but as was mentioned, there are also reasons to favour RRSPs. For example, do you plan to buy a house? Do you plan to go to school (or go BACK to school)? Do your profession/job or hobbies/life put you at high risk of litigation?

If none of the above apply, you need to play the guessing game as to whether you will have any years in the future, where you earn less income than you do now. The last census data on income I could find from Statistics Canada (2015) showed that for those 65 and over, $36,500 was the average annual income.
Currently $45,282 and under is the lowest federal tax bracket.
Maybe someone can give more recent statistics but that's the last one I could find officially from Statistics Canada.

I agree with the above comments as well and I think that the government should consider limiting tax on RRSPs to at most the marginal rate at the time of contribution. This way, if you need the money in retirement, you get a break on the taxes, but if you happen to be a careful investor, and a good saver, you are not punished by the government for taking care of yourself. In this case, the RRSP would essentially work like the TFSA but with the added bonus that it could also lower your taxes if you qualified in retirement.

Just my 2 cents.

January 13, 2018
5:04 pm
Loonie
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I agree that there are particular circumstances in which RSPs might be suitable, and James has identified some of them. Even so, you may not need to fill up all your RSP room or continue contributing after these particular issues have been addressed.
And, even in the case of people who go back to school, they don't necessarily tap their RSPs to do so. I didn't, but later wished I had. At that point, I still thought it was necessary for retirement and a last resort to tap. As I said earlier, RSPs should, in my view, be considered only for particular circumstances, not as a one-size-fits-all, which is the way it is currently sold.
Part of the problem, and it's a serious one, is that RSPs have been wrongly labelled. NONE of the scenarios James has listed in his first paragraph have to do with retirement income.

I don't have any more data at hand, but there is not enough here to draw many conclusions. If the average income is 36.5K, this means some are higher and some are lower, but only the median would tell us how many above and below. And we don't know whether they contributed to RSPs or how much, what tax bracket they were in when the did contribute, etc etc. The loss of the Age Credit starts to kick in around 36K, so that would also need to be considered.

January 13, 2018
6:28 pm
2of3aintbad
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It was not too long ago when there were no TFSAs, so RRSPs were one of the few options to reduce your tax bill. Also, there was no carry forward of contribution room or deductibility. For those of us in that generation, for RRSPs it was 'use it or lose it'. It is so much simpler now - max out your TFSA first, then in unusually high income years (such as for sales people or other self-employed), contribute to your RRSP and then withdraw in years of lower income. Also, it seems that no one points out the tax deferral of the income in RRSPs. In a non-registered account, you will pay tax on the income every year. It is possible that later you will be paying tax at a higher rate, but what is the total net after tax in comparison? Finally, in your later years, when you may need extra money for quality of life, will you really care that you are paying income tax at a high rate or just be happy that you saved it rather than spent it because your marginal tax rate was low at the time you earned it?

January 13, 2018
7:00 pm
Loonie
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The alternative isn't spending it; it's saving it.

I am certain that some people who think they have, let's say, 300K sitting in RIF for late-life issues will be horribly surprised when they go to take it out and discover that almost 100K of it never comes to them because of withholding tax. Come April, they will owe even more and may be completely stuck because they can't afford to both pay the extra tax that is then due and keep on paying their living and/or medical expenses.

One of the big problems with RSPs as far as I'm concerned is that it's very difficult to really know where you're at with them. You don't know how much you're really going to have until you have taken it all out. Investment advisors don't focus on this because they are primarily interested in your "investible assets". With non-registered, you know what you have. Best idea in this regard may be to convert RIF to annuity, spreading out the income in predictable fashion, but may depend on your other sources of income too. You can establish a minimum number of years if you want, for heirs to maybe get some.

Quite true that it seemed like a great idea at the time, when it first came in. But you live and learn; and it was over-sold.

Quite true that commissioned sales people may be well suited to RSPs. That's another category along with the ones offered by James, where it makes sense. Again, it's not about retirement but about income averaging.

I haven't seen any breakdown on losses due to being taxed at higher bracket on income from non-registered versus RSP, but expect results would be similar to whatever your situation would be with RSP when all is said and done. Further, for those who invest in the stock market, tax on capital gains and dividends is lower than interest, sometimes substantially lower, depending on income and province. RSP income is taxed at same rate as interest, no matter what you had it invested in. There is no tax benefit from investing RSP money in stock market, as there is with non-registered.

January 13, 2018
7:33 pm
2of3aintbad
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Agreed, an RSP is the wrong place to invest in equities. Since OP said she was "not keen on mutual funds", I assumed that we were talking here only about fixed income or HISA.

January 13, 2018
7:41 pm
Loonie
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2of3aintbad said
Agreed, an RSP is the wrong place to invest in equities. Since OP said she was "not keen on mutual funds", I assumed that we were talking here only about fixed income or HISA.  

Agreed. I thought the conversation had moved on to a broader consideration of RSPs. She/he might decide on equities later. Best to consider all possibilities in advance, i think.

January 14, 2018
12:12 am
Rick
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Knowing what I know now, if TFSAs were available when I was in my twenties, I would have chosen them over RRSPs no question. My 2 cents.

January 14, 2018
6:40 am
Bill
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Lots of good info here re the downsides of RRSPs for the younger folks here. Problem is we do not know the future so some of our many financial decisions will inevitably be wrong in hindsight. I remember when I was contributing thinking vaguely that this might not be a good idea but I liked the immediate tax refund plus, as it was registered, it was a way of forcing us to squirrel away some money where we couldn`t get at it very easily and we liked that aspect at the time.

If millennials are correct and their employment continuity is more precarious than previous generations, or else they really are going to prioritize work-life balance or following their passions over constant, steady employment, then the fluctuations in their work-related incomes year-to-year might make RRSPs a useful vehicle for those years of lower or no other income.

It should be noted that withholding ``taxes`` are not additional taxes (this is the impression given often), they are just a prepayment, like a source deduction or instalment payment, of your regular income taxes for the year. When you file your return for the year, based on your taxable income any excess amounts withheld previously with be refunded at that time. They may cause a cash flow issue, but they are not additional taxes.

I have no recommendations re what to invest in inside an RRSP, up to you.

January 14, 2018
6:45 am
Top It Up
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Bill said

It should be noted that withholding ``taxes`` are not additional taxes (this is the impression given often), they are just a prepayment, like a source deduction or instalment payment, of your regular income taxes for the year. When you file your return for the year, based on your taxable income any excess amounts withheld previously with be refunded at that time. They may cause a cash flow issue, but they are not additional taxes.   

CORRECT

January 14, 2018
1:36 pm
James
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Loonie said
If the average income is 36.5K, this means some are higher and some are lower, but only the median would tell us how many above and below.

Just for fun: the median income during this time was $26,600 for those 65 years and older (in 2015 constant dollars). 🙂

January 14, 2018
2:12 pm
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James said

Just for fun: the median income during this time was $26,600 for those 65 years and older (in 2015 constant dollars).  

Geez, I just don't know what to make of that number

January 14, 2018
2:31 pm
Rick
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Bill said
Lots of good info here re the downsides of RRSPs for the younger folks here. Problem is we do not know the future so some of our many financial decisions will inevitably be wrong in hindsight.

Nobody can tell what the circumstances will be when they retire. Income tax was a "temporary" measure to finance the war. I'll bet that when there are billions upon billions sitting in tax free savings account, RSP plans slowly get cashed and dissipate, some future government will salivate over the potential revenue gained by eliminating and/or taxing TFSA accounts. It will start small with an estate tax, or some such, and morph into a withdrawal tax, and expand until it is eventually all fully taxed. All we can do is play by the rules of the day and deal with the consequences of our spendthrift politicians.

January 14, 2018
8:12 pm
Norman1
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ciena said

If you have a larger contribution opportunity in TFSA and you're risk adverse (i.e., not keen on mutual funds) like myself, is there any argument for putting the money in a RSP instead of TFSA. To me it seems a TFSA ("high" interest TFSA like Ideal Savings 2.25%) is the way to go for flexibility and to avoid taxation when pulling your money out, but maybe I'm missing something.

According to Ed Rempel (a CMA and CFP), the optimum mix of TFSA and RRSP depends on six factors. See my previous post for links to his process for calculating one's optimum mix.

In that same discussion, I also showed a case where there is still an advantage to an RRSP even when the withdrawals are taxed at a higher rate than the contributions reduced taxes. In that one case, the RRSP gains were taxed as if they were capital gains (½ of tax on income rate), regardless of what the gains actually were.

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