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moneysense.ca, 6/03/08
Media Articles on TFSA
Here’s a list of columns and reaction to the introduction of the Tax-Free Savings Account:
- TFSA plan tipped to benefit young and low-income earners – Jon Chevreau in the Financial Post.
- TFSA will shake up investment industry – Jon Chevreau in the Financial Post.
- Jon Chevreau also wrote a couple of blog posts on the Wealthy Boomer Blog – reaction from Gordon Pape and actuary Malcolm Hamilton who says TFSAs are a better way to save for many Canadians.
- While TFSAs are ideal for interest-paying savings, “investors have some planning to do in the lead-up to the introduction of this new program next year”, writes Rob Carrick in the Globe and Mail.
- Tax expert Tim Cestnick compares the TFSA with RRSP for retirement savings.
- The ABCs of saving taxes-free – Ellen Roseman in the Toronto Star.
moneysense.ca, 6/03/08
I love the concept of having a tax free savings vehicle but $5k isn’t very much – although it’s better than nothing, which is what we have now. If you’re saving for a downpayment on a house, it would take 10 yrs of maximum contributions to a TFSA to accumulate enough cash.
It’s probably a safe assumption that the interest on any leveraging strategies to contribute to a TFSA would likely not be tax deductible? Does anybody know for sure yet?
Phil – you will not be able to deduct interest for leveraged investments in a TFSA. That is part of the current proposal. Nothing is set in stone yet until it receives royal assent of course.
Phil: The budget document specifically states that interest on loans made for contributions are not tax deductible. However, a TFSA account can be used as a collateral for loans.
That article that compared the tfsa to rrsp is flawed. It compares putting $3000 into a tsfa to $5000 into an rrsp. But really the difference is that in an RRSP you pay tax on amount after growth (large amount) and save tax on the contributed amount (small amount), whereas with the tsfa you pay tax on the contributed amount (small amount) and save tax on the amouth after growth (large amount).
TSFA, pay tax on small amount
RRSP, pay tax on large amount
The only way that an RRSP can beat a TSFA is if the allowable contribution amount for the RRSP is significantly larger. If they are anyways close, the TSFA wins.
Eric: While there are some people for whom TFSA is better, I think RRSPs are better option for the majority of Canadians. RRSP contributions are made during working years when the tax rate applied to RRSP contributions are much higher than the average tax rate applied to RRSP withdrawals, which usually occur when people are retired and are in low tax brackets.
A OT question about US dividend stock. A part of the dividend from US stock will be withheld by CRA. Is this the same case with non-registered account or registered account like RRSP? Also, what if the withhold dividend percentage is higher than the person’s marginal income tax rate?
Offtopic but I just heard that there is a bill to make RESP contributions tax-deductible.
Eric – RRSP withdrawals aren’t going to be a “large” amount unless you are cashing it in all at once. The majority of people will be taking the money out a little at a time each year as pension income. In all likelihood it will be a smaller amount than the MTR you paid on your employment income.
My point was that eventually you’ll withdraw all of your rrsp, at which point all of it will be taxed. Granted that the tax rate should be lower at that time, you’re still paying a slightly small tax on a large number, verses a regular tax on a small number. I did a few calcs in excel, and given the same contribution size, and a reasonable decrease in MTR, the tfsa wins. (I even assumed you take your tax rebate and invest it in a taxable account verses spending it, which most people do).
I heard something about RESP’s being treated just like RRSP’s if this new bill passes as well. Anyone know if there is any truth to this and the chances that this bill will pass??
If it is true and it happens this would be huge!
Eric;
Sounds like you are comparing marginal tax rates going in to the rrsp to marginal tax rates going out. But you should be comparing marginal tax rates going in to AVERAGE tax rates going out. Your marginal tax rate going in to the RRSP might be around 36%, but the AVERAGE tax rate when you withdraw it would probably be around 25%. This is because the RRSP tax benefit is done from your highest tax rate down to your lowest (as your contribution increases) but when you withdraw from the RRSP/RRIF, you are taxed from the lowest tax rate to the highest (as your withdrawal increases). The difference between these two rates is the benefit of the RRSP.
Eric, the main benefit of the RRSP however is the tax savings at the start. In order to compare the two for your situation you need to re-invest the amount of tax savings. Also, comparing the two is kind of moot since they are designed for different purposes; RRSPs for Retirement, TFSAs for everything else.
Lets say for instance you have 5 grand to put in to somewhere and you want to figure out if you should RRSP it or TFSA it. The problem comes in that the 5K in to an RRSP in a 40% tax bracket generates a 2000 return making the comparison only valid if you compare:
RRSP Deposit of 5000 + TFSA Deposit of 2000
vs.
TFSA Deposit of 5000
Far too many variables need to be accounted for in this case to discuss here, but comparing 5000 RRSP to 5000 TFSA the TFSA will win every time because the RRSP doesn’t even have it’s boxing gloves on yet.
The bottom line really comes down to the fact that if you split your savings and retirement planning 50/50 between an RRSP and TFSA over 10 or more years you’ll be better off than probably 90% of the population . . . and that’s OK in my books.
RESP to be treated like RRSP…
Check the globeandmail…
http://www.reportonbusiness.com/servlet/story/RTGAM.20080306.wresp0306/BNStory/Business/home
Ahmed: Thanks for the heads up. It is not clear if this bill will eventually become law. Anyone know what are the chances that this would be implemented?
Eric: There is no rule that says you should make a lump-sum contribution to a RRSP. All of us have the option of signing up for pre-authorized RRSP contribution which would mean putting in pre-tax dollars. Admittedly, most people contribute in a lump-sum fashion, but even if they spend the refund, it should be accounted for. For instance, if a RRSP contribution of $5,000 was made that resulted in a refund of $1,500 that was spent, it is the same as a $3,500 TFSA contribution and $1,500 in spending. Otherwise, it is not an apples-to-apples comparison.
In that line of argument, an apples-to-apples comparison should be $5000 in an RSP plus $1500 outside of an RSP versus $5000 in a TFSA.
I used:
TSFA: $5000 contribution
RRSP: $5000 contrubution, $1500 into taxable investment account
Growth= 7%
Tax during accumulation was 30%
Tax during withdrawals was 20%
Accumulate for 20 years
Withdrawl $20k/year till empty (close to 20 years). RRSP was withdrawals included those from the taxable account where the rebates went.
TSFA gave you a few more years of 20k withdrawals.
PS.
Looking at recent market action, it probably would have been more realistic if I had included a few years of negative growth at the beginning!
Can we at least agree on the fact that we have the freedom to contribute to BOTH an RRSP and TFSA next year (if it goes through) and rejoice? The more tax advantaged investment vehicles the better, I say!