Comments on: Media Articles on TFSA

By: Phil S

Phil S — Fri, 07 Mar 2008 17:22:00 +0000

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!

By: Eric

Eric — Fri, 07 Mar 2008 13:38:14 +0000

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!

By: Eric

Eric — Fri, 07 Mar 2008 13:31:58 +0000

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.

By: Phil S

Phil S — Thu, 06 Mar 2008 22:25:44 +0000

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.

By: Canadian Capitalist

Canadian Capitalist — Thu, 06 Mar 2008 21:27:24 +0000

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.

By: Ahmed

Ahmed — Thu, 06 Mar 2008 21:09:56 +0000

RESP to be treated like RRSP…

Check the globeandmail…
http://www.reportonbusiness.com/servlet/story/RTGAM.20080306.wresp0306/BNStory/Business/home

By: Traciatim

Traciatim — Thu, 06 Mar 2008 20:24:44 +0000

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.

By: nobleea

nobleea — Thu, 06 Mar 2008 20:07:43 +0000

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.

By: Ryan

Ryan — Thu, 06 Mar 2008 20:04:35 +0000

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!

By: Eric

Eric — Thu, 06 Mar 2008 19:56:07 +0000

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).