This article has 68 comments

  1. Good summary and good ending. The TFSA does offer one very important (non financial) benefit over RRSPs in that you can access it at any time, without tax. By ‘non financial’ I am referring to the fact that one can rest assured that the money is there for them for withdrawal at any life stage without a large tax hit or loss of contribution room as consequences.

  2. TFSA offers a great option for saving for a house purchase, no HBP to pay back, especially in the first few years after purchasing a house when money can be a little tight.

  3. What if you used your TFSA to contribute to your RRSP. Let’s assume you put $1000 a month into the account and you made 1% interest per month (just using that number for the math). After 5 months you would have contributed the maximum $5000 and the account balance would be $5150. Then take that money out and contribute it to your RRSP. You now get a tax refund on the $5000 and the extra $150 you didn’t ever even pay taxes on and you now have a contribution room of $5150 in your TFSA. Rinse and repeat.

  4. Okay that sounds pretty tedious but I think the principle of only making RRSP contributions out of your TFSA makes pretty good sense after a couple years when it’s been build up.

  5. But I guess the gain from that is break even if you are already making regular contributions and have filled out a T-1213. For irregular contributions I think it makes sense.

  6. I dunno. I max out my RRSP at the beginning of the tax year. I then use T-1213 to avoid the massive refund. Since I don’t have a mortgage, I suppose I could just max out the proposed TFSA at the beginning of the year as well. Let the compounding begin! 🙂

  7. I think you should have included RESP contributions into the mix.

    Big time cage match – RESP vs RRSP vs mortgage vs the newcomer from parts unknown…TFSA! 🙂


  8. While choosing Home mortgages, I personally like to suggest that Home buyers can choose from several loan terms: 15-year, 20-year, 30-year, or 40-year. Lenders offer a variety of loan options, which create affordable living. Because of low interest rates, buyers can take advantage of a low fixed rate. Furthermore, there is also the popular interest-only mortgage option for those buying homes in overpriced markets.

  9. Bryce – In order for your plan to work you would have to have some sort of guaranteed (read low ROR) investment in the TFSA. If you bought Stocks, mutual funds, ETFs etc then you face the very real possibility that the value of your TFSA account may be lower than the $5000 you have contributed to it throughout the 5 months. If this happened then you would have less than $5000 to put in your RRSP, and would sacrifice some of the tax refund you otherwise would have enjoyed. Better off putting $1000 a month directly into the RRSP and let it compound in there.

  10. Bryce, another thing, I don’t think the TFSA contribution room increases with growth. I think it’s $5k / year + inflation. So if you withdrew the $5150, and you wanted to redeposit in the same year, you would have the max contribution room of $5k.

  11. Canadian Capitalist

    FT: When you withdraw money out of the TFSA your contribution room increases by the same amount. In Bryce’s example, let’s say he contributed $5,000 at the beginning of the year and has no other room available. If he withdraws $5,150 his contribution room at the end of the year will be $5,150. Next year, the room will be $10,150.

    Mike: Yes, I think RESP vs TFSA is a match up we have to consider.

  12. I was thinking that the TFSA should replace the trust account as an alternative to the RESP for those people who don’t like the free 20% grant.

    The TFSA is clearly better than a trust account for saving money for your kids.

  13. HA! I’ve got a post up today as well flogging the same idea. *grin*

    I agree that the answer for all this is “it depends”. People may not like the answer, but it is true.


  14. The great benefit of the TFSA is that it’s a savings vehicle that (using a football ananlogy) it can play free safety for you. Put core amounts into RRSPs, RESPs, mortgage, etc. and the rest into the TFSA. Then years later you can decide whether to pay the remainder of your mortgage, top up retirement income, or pay the tutition when your child(ren) unexpectedly get accepted to Harvard or decide to pursue a PhD.

    RRSPs are no brainer if you’re in the highest tax bracket (unless you have a defined benefit pension) but things get murkier once you contribute enough to bring your taxable income down to the bracket threshhold and/or enought to start moving into the next tax bracket at retirement. Personally, I think that’s when the TFSA becomes interesting. Using rough numbers, investing the max for 20 years in a TFSA should net you a yearly tax-free withdrawl of about $10,000.

  15. I’ve read in a few places that the TFSA is roughly equivalent to the American Roth IRA and that the RRSP is roughly equivalent to the 401k. Most of the personal finance advice I’ve read is written from an American perspective and the advice generally goes like this:
    1. Contribute the maximum amount to your 401k that is matched by your employer
    2. Contribute the maximum amount to your Roth IRA
    3. Contribute the remaining maximum to your 401k

    Why is it that the Roth IRA seems to be the clear “winner” in the USA but the TFSA doesn’t necessarily have a big advantage over the RRSP here in Canada. I suspect it has a lot to do with the different tax structures in the two countries, but I just don’t know enough about it. Can anyone enlighten me?

    (As an aside, this is why I love this site and a handful of others like it. It’s hard to find good financial advice from a Canadian perspective.)

  16. Thanks to time and compound interest, someone who is able to put $5,000 per year into a TFSA for 50 years and earn 7% in an equity etf will accumulate over $2 million, TAX FREE. Of the $2mm, $1,750,000 will be dividends and capital gains received TAX FREE. For sure the minute a kid turns 18 he/she should start saving as much as possible in a TFSA. If at some point in the future they have RRSP room and need the tax break, some or all can be contributed to an RRSP.

    On another note: for a low income individual who has little chance of saving enough in an RRSP to make it worthwhile (considering the clawbacks of government benefits with each $ of withdrawal), this is the best way to save for retirement. They probably don’t have enough income to take advantage of the RRSP tax deferral anyway. Even saving $30 per month (that’s only $1 per day folks!) can go a long way to growing something to supplement the CPP and OAS. This may not apply to many of the readers of these forums but maybe you know someone who’s in this situation.

  17. Canadian Capitalist

    Jamie: Unfortunately, I don’t know all the rules of 401k, Roth IRA etc. Personally, I’ll first max out the RRSP because the average tax on my contributions will likely be much less than the average tax on withdrawals. Of course, we are talking about future withdrawals and who knows what the tax rates in the future will be but I can’t imagine the lowest brackets having as high a tax rate as higher brackets today.

    That said, I won’t fully ignore TFSAs because between a taxable account and a TFSA, it is a no brainer.

    TonyR: The TFSA will be a great place for other savings goals, even education savings. I think with the advent of the RESP, it doesn’t make sense to contribute more than $36K at which the full grant can be obtained.

  18. Personally, if you are ‘stressing’ about where to put all your money between your RSP and mortgage or new TFSA, then you need to have a kid or two – that will fix up your problems pretty quick! 😉

  19. Amazing! You guys are a wealth of information.
    Jon D. – very funny
    Leslie – great thoughts
    I just want to pass on my thanks to all of you PF Bloggers who sum up for the rest of us. I wouldn’t be me today if it was not for you.

  20. Jon D: AMEN! But of course once you have children the problem becomes how to catch up on RRSPs AND sleep.

    CC: Exactly. Personally, I hope to use it to fund a trailer in Arizona 20-30 years from now. Just don’t call the community a trailer park. I hear they don’t like that. 🙂

  21. The TFSA can only be used for people aged 18 and over. So unfortunatly it can not be used as a trust acount for your kids. But almost any way you do the math comparing it to RRSP’s, RESP’s or paying down mortgages it wins every time. That is the power of compounding interest and not paying tax on it at the end. The real question to be answered is how disciplined are canadians. At least the RRSP and RESP have tighter restrictions for withdrawing money making them less attractive to get a hold of the money. The real winners with the TFSA are the ones who can max it out every year and keep the money in as long as possible.

  22. Canadian Capitalist

    Someone: That’s a great point about TFSA. Because it is so flexible, there will be temptation to take money out for spending. That’s not always a bad thing because we have to balance spending today against saving for tomorrow but the question is how many are responsible about it.

    I don’t think the TFSA will be superior to a RRSP because the RRSP technically allows us arbitrage the higher tax rate during contribution against the lower tax rate during withdrawal.

  23. Im surprised no one has thought of this yet.. the TFSA is a very young thing, politically. There’s still the possibility it could be squashed by the next pary/election..

    just a thought..

  24. Rethink/plan your RRSP to give about 15,000$ in todays dollars per year to take advantage of the tax credits such as basic personal amount, age amount, and pension amount. Dump your refund and contribute up to 5K a year into your $ in a TFSA (if you are young, use the same types of investments).

    You will get FULL GST, will be considered low income, and if you live in Ontario, you get some wealthy ontario credits (occupancy cost because your income is so low).

    Prepare for a 30K RRSP in todays dollars, split in half with your wife so she can be a stay at home mom and still live fairly comfortably with one source of income.

  25. How does one go about setting up this savings account in order to begin the process ?

  26. Guys – Great points.

    Just wanted to also add that if you withdraw from your TFSA you will only get that contribution room back Jan 1st of the next year. So for e.g. if you contribute $5000 in Jan 2008 and withdraw $2000 in Feb 2008 you will only be able to put the 2K back the following Jan 2009 o/w you will be taxed for over contributing.

  27. It think everyone is missing the point on why we get a tax deduction for what we contribute to an RRSP. Besides giving the contributor a feel that they made contributions from “before tax” dollars, the extra refund allows the contributor to add more money to their RRSP. This compounding effect adds a temendous amount of money to the RRSP over time. But I suppose the majority of people take this extra money and spend it (or if they are wise, they pay down debt, at least).

    The TFSAs don’t give you any cash back in this regard. So, any arguement on if they are better for retirement planning is senseless. But nonetheless, TFSAs are the best savings vehicle for large scale items or down payments for homes. They will never be better than an RRSP when it comes to retirement savings as long as the refunds it kicks out are reinvested.

  28. If you borrow money for a RRSP the interest is not tax deductible…If you borrow for investments it usually is…What about if you borrowed for the TFSA ?

  29. Canadian Capitalist

    Martin: My understanding is that the rules are exactly the same as RRSPs — interest on borrowed money is not tax deductible.

  30. Martin, the rules are the same as the RRSP as CC stated, borrowed money that you use to fund a TFSA is not tax deductible.

    However, you can use your TFSA as security on a loan, which means that if you can scrounge together 5K in your TFSA and use that as security on a loan for 5K and then invest the borrowed 5K outside your TFSA the loan should then be tax deductible as it is a regular ‘borrow to invest’ situation.

  31. Martin and CC, I am 99% sure that the interest on the loan is take deductible for both registered and non-registered investments. This should be the case with TFSAs.

    It’s the interest that you’re being credited for. That’s why financial planners will tell clients who need to catch up on their RRSP to borrow the money, contribute (invest) then use the extra money from their tax refund to help pay down the loan. The loan itself when invested in the RRSP acts as the RRSP deduction. The interest payments made on the loan are an entire different animal and you are allowed to deduct those payments from your income. It works for any type of investment you make (i.e. in or out of an RRSP). Just as long as you can prove to the CRA that the loan went into an income inducing investment, you can deduct the interest.

  32. Gregors, that is incorrect. The amount deposited in the RRSP comes off of income for the year generating a refund which is used to pay down the loan. The interest payments are paid for by the client and are not deductible in that scenario. You can get the details on the CRA website regarding line 221 of the tax return forms:

    You cannot deduct on line 221 any of the following amounts:

    * Interest you paid on money you borrowed to contribute to a registered retirement savings plan or a registered education savings plan.

  33. Canadian Capitalist

    Gregors: I concur with Traciatim. Here’s the relevant CRA webpage:

  34. I stand corrected. Thanks for the update. I’m sure the Guide shows that as well (I should have mine around here somewhere)

    Ah, those Feds are too smart. Not allowing us to double dip.

    I will be very interested in seeing what happens with TFSA. With RRSPs and RESPs there is not just the tax shelter, but another benefit that goes back the investor (deductibility with RRSPs and the CESG with RESPs). With TFSAs, you just have a tax shelter.

  35. Also Gregors, in the Budget 2008 document on page 274 under the heading “Interest Deductibility and Collateralization” you find:

    “Because the investment income within, and withdrawals from, a TFSA will not be taxable, interest on money borrowed to invest in a TFSA will not be deductible in computing income for tax purposes.

    There will be no prohibition in the Income Tax Act on an individual’s ability to use their TFSA assets as collateral for a loan.”

    That is what lead me to offer the solution above of putting funds in the TFSA and using that to secure a loan to invest.

  36. And there’s the answer. Thanks Tracia.

  37. Clearly the solution would be to have a limit based on income earnings. Or, no limit?
    hopefull ^^ thinking

  38. Clearly the real solution is contribute to the RRSP and use the tax return to invest in your TFSA

  39. How should I go about choosing a financial instution for my TFSA? Right now I want a low risk 3% interest type, but later may want to move to something else. Can I change financial institutions later??? Thanks to all you brilliant bloggers

  40. Carmasem, if you really just want a regular high interest savings account until you figure things out I would recommend you take ING up on their offer to double your interest until year end and then automatically switch your account to a TFSA as soon as the new year comes around. After that you can simply wait until the dust settles on the new account and shop for your pick of accounts that suits your needs of investing/saving.

  41. I much prefer the TFSA account and agree that it is important to save in RRSP, but i beleive that unfortunally life doesn’t always go as plan. OK, my RRSP Reality check shows that by saving 150$/bi-wk i’ll get close to 1million @ 65 yrs old and then be able to withdraw something around 37 000$/yr ’til i’m 90 yrs old…and thats it if i don’t want to jump MTR.What if i get to save all that money in TFSA and still get the 37 000$/yr and when i want to do something very special( or most likely out of my control like sickness) the money is there and i can just call my financial advisor and ask please withdrawal this much $$$, without thinking of taxe consequences. The only question left for me about TFSA is: Is it taxe free for my beneficiaries when they inheritate it? because as far as i know if something happens to me it goes to my spouse taxe free but if something happens to my spouse, my kids will pay 50% MTR wich is more then my present and probly future MTR

  42. Firstly, the $150, biweekly only costs you about $85 – $110, depending on your tax bracket.

    A quick internet search indicates that a TFSA is treated the same as an RRSP on death — it can be transferred to the plan of a spouse, or becomes taxable in the estate. There is the possibility of gifting your children cash from the sale of the TFSA prior to your death.

    Speak to a tax accountant before acting on this advice.


  43. I just wonder if Mr. Flaherty invented this investment tool because of a possible disaster in the the pension system in the next 10-20 years. With the majority of the population going into receiving pension rather than contributing towards it.
    Can this be a here’s something for you to start saving for this without the government having to say we have a coming problem? Just my 2 cents.

    This account came out of nowhere – Why?

  44. Dear Joe,
    A little research on the CPP will indicate that most actuaries feel it is now sound. This was not the case some years ago, but it was revamped about a decade ago to ensure it would be able to meet its’ obligations into the future.

    The TFSA is similar to the Roth IRA in the States; it is not a new idea.


  45. I am looking at cashing out my rrsp. I have a company pension plan. I want to pay down my mortgage sooner. I plan on using my realestate to support my retirement. Iam thinking after my mutual funds taking a beating this year I wonder how much interet I could have saved on my mortgage.

  46. Hi David,

    Thanks for the response.

    Oddly enough today there was a special on CNN “I.O.U.S.A.” just on that subject. The panel is pretty convinced that at least for the US this will be a big problem because they are currently using a surplus of money collected for their social security and over the next 15 years will completely reverse. This will be compounded by the budget deficits that are expected to try to stimulate the economy. (What they showed looked like a total disaster).

    So you are saying you have seen data that Canada is going o be o.k. ? Can you send me (post) a link to where this info can be seen please? Thanks.

  47. On a second note my plan for my TFSA is to purchase $5000.00 worth of Index funds – One i am looking at XIU i-shares has taken a beating. I feel it is on sale and will bounce back starting in 6 months. I will most like get 2 or 3 different types of I-shares anyway to diversify.

    So my question is :

    Any money gained by the fund including dividend payouts, (XIU has dividend payouts), I am to understand all the growth is 100% tax free. So hypothetically if it doubles in value in a year or two and pays out a little dividend it’s all mine?

  48. Joe,
    Try here


  49. Thanks again,

    I guess Canada does have some definite advantages over the US. That being one of them – a 75 year CPP cushion works pretty good for me.

  50. playing with the #s

    Say you have $1000 in pre-tax income, and your tax bracket is at %40.

    In the first year
    TFSA = $600 ($1000 – $400 in tax)
    RRSP = $1000 (no tax, spent refund)
    RRSP + return = $1400 ($1000 + $400 tax refund invested immediately)

    After 20 years at %5.5 compounded annually, you pull the money out at a tax rate of %40

    TFSA = $1751 (no tax)
    RRSP = $1751 ($2918 – $1167 tax)
    RRSP + refund = $2451 ($4085 – $2451 tax)

    So the results look like a tie if you spend your refund, but if you don’t the RRSP is the clear winner.

    If your really want to nickel and dime it you could borrow the $400, putting $1400 in to you RRSP right from the start, getting a $560 refund (%40 tax), with a net gain of $160.

    If you put the $160 in to your RRSP for the next year, and the $64 (%40 x $160) refund from that etc. etc. you gain an addition $264 from refunds after 5 years (at that point the refund is less than $1 so I stopped)

    Put this in the equation and when you take the money out at the end of 20 years you have:

    RRSP + invested refunds = $2875 ($4792 -$1917 in tax)

    A $1875 increase from your initial $1000 vs. a $751 increase from the TFSA.

    So the RRSP + invested refunds beats the TFSA by $1124, or a ratio of 2.5:1

  51. Steve,
    Bad math example. You are double claiming the taxes. If you are talking about pre-tax income, there are no tax refunds, as no tax has been paid. If on the other hand, you start with $600 (post tax) then you can see refunds, but on a smaller dollar figure.

    If you have $1000 in hand to invest, you can put it in a TFSA and pay no further taxes. If you put it in an RRSP you will get your tax return of $400; your choice of what to do with it — spend or invest. If you spend, that makes your RRSP investment out-of-pocket cost $600, but both investments start at $1000. If you invest the return, you will see the best result, as you described, as you start with a $1400 investment that cost you $1000.

    If you don’t have $1000 in hand, then you need to recalculate. You might have $600 (post tax), borrow $400, put $1000 in an RRSP and use the $400 tax return to pay the loan, but that is an entirely different calculation that you proposed.


  52. David, you’re right, I goofed, there is no refund back for the $1000, I’d simply pay no tax on that amount.

    It should be

    Say you have $1000 in pre-tax income, and your tax bracket is at %40.

    In the first year you invest
    TFSA = $600 ($1000 – $400 in tax)
    RRSP = $1000 (no tax, no refund)

    After 20 years at %5.5 compounded annually, you pull the money out at a tax rate of %40

    Used PV*(1+R)^N
    where PV is present value, R is the interest rate, and N is the number of investment periods.

    TFSA = $1751 (no tax)
    RRSP = $1751 ($2918 – $1167 tax for the withdraw at 40% tax)

    Looks the same to me.
    The only benefit would be if you take the money out at less than 40% tax.

  53. Steve,
    However, most folks have a lower tax rate on withdrawal that contribution, either because they are in a lower tax bracket, or their average tax rate is lower. See This site for a clear example.


  54. ING Direct Canada is offering a $13 bonus for opening a Tax-Free Investment Savings Account (TFSA).

    This offer is obtained via an Orange Key which you type in during sign-up.

    The Orange Key is 32997073S1.

    This is the link to open a TFSA:

    Tax-Free Investment Savings Account details: (2.5% interest)

    With the introduction of the Federal Government Tax-Free Savings program in 2009, all Canadian residents over the age of 18 will be able to have their money working harder for them without having to pay tax on the interest earned. Add tax-free to the usual benefits of having an Investment Savings Account like no minimums, no service charges and no fees and you’ve got a Savings Account that can’t be beat.

  55. Jonathan said: “ING Direct Canada is offering a $13 bonus for opening a Tax-Free Investment Savings Account (TFSA).”

    This is a great deal for those starting out with small contributions to their TFSA. For those maxing their contribution , it would amount to a 0.26% increase in the interest rate, and other options should be considered, including splitting your TFSA allotment among a number of products to get the best benefit.


  56. If anyone wnats to open a TFSA I would recommend an investment firm such as Nesbitt Burns or Td Waterhouse. stay away from the bank branches as they offer limited products. With an investment firm a financial advisor can provide you with hundreds of investment options, including stocks, mutual funds, a variety of portfolios and many more. At a bank all you’ll get is a 2% savings account, GIC or maybe a bank mutual fund.

    Secondly I know your idea sounds great Bryce but why would you take money you’ve contributed after taxes and withdraw it from a tax free account and put it into an RRSP where now you will be taxed on it upon withdrawal.

    The best thing to do is max out your RRSP’s, take the money you receive from your RRSP credit and put that into a TFSA. That way the money that is being tax deferred is being invested tax free. It’s a win win.

  57. I would suggest though in case anyone is afraid to invest in any of the products Tom suggests just above to at least open a TFSA. Put what you can in even if you have to take it out again so you can carry over that “cap room” to next year or later when you are more comfortable doing some more conventional investing with some risk.

    The potential this kind of account as you accumulate products in it year after year has is too good not to max out if you can. A couple doing this doubles all the benefit as well.

    But I wonder one day a few years down the road, will the government change the rules? A possibility! Maybe start taxing withdrawals if many people accumulate a lot in these funds over time.

  58. I don’t think most working canadians will ever invest in a taxable account again. 21k RRSP (or 18%), 5k TFSA, 5k RESP (2 kids?), something on the mortgage, and some pesky living costs gets through most budgets.

    We should be very clear – RRSPs d0 not avoid tax, they defer it. The taxman has a claim on the entire RRSP balance as you withdraw it. This means he gets to tax you on the artificial inflation component too. In an RRSP or taxable portfolio the taxman is like a hedge fund maager, he takes a cut of your profits (even the inflation component).

    The TFSA is huge because it is after tax. Really, we should put our best investment ideas in the TFSA so that those big gains are completely tax free.

  59. use the tfsa in lock step with rrsp and the stock market. When the market crashes you sell stock in the rrsp and buy it in the tfsa and when the market takes off you sell it in the tfsa and buy it in the rrsp.

    That is my plan. I will let you all know how it went in 30 years.

  60. I have a work pension but have some rrsp’s saved up my plan is to max out my TFSA. I have seen my relatives become obsessed with their RRSP some saying now it was such a scam to have them. They have pesions too and virtually all the money they take fom an RRSP is taxed at a high rate.

    If they did get a tax break say 30 years ago when they started to contribute it is much less value than at today’stax rate 30 years later AND they are also paying the tax on the interest that accumulated for 30 years. RRSP Does not make sense to me at all now especially for someone with a pension.

    Not one post here seems to take into consideration what your tax rates will be say 20 yrs from now when you are taking the RRSP money back out and you really need to consider what hat percent might be in the future.

    Sure I got a 20% tax break when I put it in but it is going to cost me 25% to take it back out and I need to pay tax on the interest earned too !!!

    Is my scenario flawed I’d like to know if I am completely out to lunch here and would love to hear other points.

    • Canadian Capitalist

      @icu_nxtime: I disagree that RRSPs are a scam. It all boils down to planning. If you have a largish RRSP, just retire early. If you already have a great DB pension that will more than fund your retirement, save in a TFSA account and then a non-registered account.

      The point that RRSP contributions does not make sense for Canadians in the low tax bracket has been made repeatedly on this blog.

  61. Re the TFSA I think it works best for people that are having cash on hand, or people that can take out some out of an investment account. (Every year I sell $5000 stock in my investment account and re-purchase it in the TFSA account. Make sure it is something that grows, as losses cannot be written off!)
    Within 10 years and with a account size of $50,000 per person, most people won’t pay taxes on their investment income.
    That will be the latest when the government sees the foolishness of this system (for tax income) and will cancel or castrate it.
    Lets enjoy while it lasts!

  62. I’m not trying to stray from the topic too much but there’s something I really need to know that’s relevant to this topic (or let me know if there’s a better thread for this). I plan on using borrowed money to invest in something that will bear dividends eg REITS, dividend stocks, funds/trusts, etc. Would it be better to hold this in a tfsa or a regular non-tax sheltered acct? TFSA is tax-free. But w/ regular acct, I can get the dividend tax credit and deduct for borrowing money to invest (cra line 221). I’m hoping that someone w/ a better understanding of rules and math can help me out w/ this. Using average/typical numbers, which method is better financially? Thx.

  63. Hi, A little off topic from the TFSA but I’m a 21 year old university student and have been investing since I was 16. Recently I took a $10,000 student line of credit and have since invested most of it in stocks. The dividends cover the monthly payments and are paying down the principle on the student line of credit. I only work in the summer months, and do not earn enough to pay income tax so I was wondering will this line of credit be considered taxable income? Also will I be able to take advantage of the dividend tax credit? Can I also deduct this student line of credit for borrowing money to invest? Similar to Showtime’s question.


  64. I think that when you are young, paying off the mortgage is a smart move. There is the school of thought to max out the RRSP and use the tax refund to lump sum on your mortgage each year.

    Personally, I like the TFSA, invest in dividend stocks and use the income to overpay your mortgage. I think for anyone to retire, paying off their mortgage is an essential step along the path.

    Maybe the best idea is to put your home on a HELOC and use the excess cash flow generated to buy RRSPs, then use the tax deduction to buy a TFSA, use the excess income to pay down the principle on the HELOC. I know, confusing, but makes some sense!


  65. Since it is tax season lets talk taxes. RRSPs hurt in many ways… line 300 for 2010 is $10,382 for 2009 it was $10,320. If you do some research you may get hit by paying more taxes in the future assuming the trend (line 300) does not keep up with inflation.

    For 2010, the maximum amount that can be claimed as an Age Credit is $6,446, but this amount is reduced by 15 per cent of your net taxable income in excess of $32,506 and disappears completely once
    your taxable income reaches $75,479.

    OAS is a monthly benefit available to most Canadians age 65 or older. However, you will be
    required to repay 15 per cent of the amount by which your net income for tax purposes –
    including your OAS pension – exceeds $66,733. If your taxable income exceeds $108,152, you
    will lose your entire OAS benefit to the clawback.

    OAS payments are clawed back when individual net income is greater than $60,806 (as of 2005).

    Most people don’t understand taxes or understand how rules change with respect to government payouts do not work in your favour.

    Also the history of taxes and rule changes like CPP payments for example, early changes to the Canada Pension Plan that will be phased in from 2011 to 2016. They will affect people who start receiving payments early, or who delay getting them until after they are 65.

    Under the proposed changes, if you retire before 65, your pension will be cut by 7.2 per cent for each early year, instead of 6 per cent under the old rules. That means if you start collecting CPP at age 60 (the earliest you can), your monthly benefit will be cut by 36 per cent instead of 30 per cent.

    The TFSA is better if you think taxes will be higher, or the same in the future. However, if one wants better protection grow money tax free (like a TFSA) then believe it or not permanent life insurance makes sense, as an added bonus if you become disabled, the policy can be funded up age 65, not so with an RRSP or TFSA.

  66. The discussion concerning tax rates is legitimate, but not the only factor to consider, and may indeed be a red herring, even a dangerous distraction. The entire point of retirement savings is, well, to have enough to retire on. This should be the key focus, not necessarily a tax rate RRSP vs TFSA which is in any event only speculation twenty, thirty or forty years prior to retirement. The calculation one should be making is: with which vehicle will I achieve my goals? It is very possible that the TFSA, with its lower contribution limit, will fall short, meaning a supplement will be needed – the RRSP. Also, consideration should generally be given the higher maximum contribution rate of the RRSP. For someone in a tax bracket that allows for a larger retirement contribution under the RRSP than the TSFA, the RRSP makes more sense to reach the retirement goal. Even better, for those that can, maximising contributions to both the RRSP and TFSA is ideal. The RRSP is paid for with after-tax dollars but combined with a tax refund which can be re-invested now, while the TFSA is paid for with after-tax dollars period, and the tax benefits arrive many, many years later and cannot be re-invested. Has no one cynically analysed the government’s reasoning for the TFSA? The government saves billions by eliminating tax refunds and making us pay for the TFSA with after-tax dollars. Financial journalists in Canada need to get a little more hardnosed! And should focus on the real point: accumulating the right size nest egg!

  67. At the current low mortgage interest rates, is it better to pay as much downpayment as one can afford, or pay 5-20% and invest the rest, hoping for higher than 3.5% returns?