# Stash retirement savings in a TFSA first and delay RRSP contributions ?????



## leslie

There seems to be a repeated idea on this site that TFSAs should always be used to their max first, even when the funds are earmarked for an RRSP eventually. From the post at http://canadianmoneyforum.com/showthread.php/26017-What-is-In-Kind it appears as .......


humble_pie said:


> Guban pointed out that RRSP contribution room is carried forward, so a taxpayer can use it any time in the future. This is especially useful for younger investors who may not have yet achieved peak earning years. guban's suggestion was for younger investors to put even intended RRSP contributions into TFSAs first, up to the TFSA maximum. Then, when the actual RRSP contrib would be needed, it can be transferred to RRSP


*Later edit to this post:*
_The first reply post below correctly points out the error in my math. Even when I redid the example with less extreme assumptions (now showing below) I still proved myself wrong. So I take this all back._

*Second edit after creating Excel model:*
I am going back to agreeing with my original opinion below here. As showing in the image I posted below with the what-if outcomes, this is not any sure-fire straregy. 

While I agree that a short stay in a TFSA before an expected increase in tax brackets within a few years has an obvious advantage, I disagree with the extended application. The example below shows a math proof. The reason the strategy does not work is because the benefit from a lower withdrawal tax rate equals the multiple of the rate difference times *the size of the account.* Since money was delayed in getting into the account (because it was stashed in a TFSA) the account never grew to its full size and the full value of the bonus is not realized. The RRSP contribution room does not grow at the same rate as the TFSA account grows.

Try this thought experiment --------
You work 30 years at the 30% tax bracket. 
In your last year of work you are in the 40% tax bracket.
You save $10,000 a year (or $7,000 after-tax equivalent for the TFSA) all deductible at the stated tax rate.
You earn 10% before tax rates of return.
You expect to pay 30% tax on retirement drawdowns. Assume all withdrawn at once for simplicity.


*(a) Save each year in RRSP*
The ending value of the RRSP before collapse is the Future Value of an Annuity compounding at the before-tax rate of return (Pmt $10,000, 30 yrs, 10% return) = $1,644,940.
Plus the last year's contribution = $10,000 (assume at end of yr for simplicity).
Pay withdrawal tax at 30% * leaving net $1,158,458*

*(b) Save each year in TFSA and transfer as much as possible to RRSP at last minute.*
The ending value of the TFSA before collapse is the FVA (pmt $7,000, 30 yrs, 10%return) = $1,151,458.
The unused RRSP contribution room (30years * $10,000) = $300,000.
Because of the 40% tax bracket it takes only $180,000 from the TFSA (along with the tax benefit) to make the full $300,000 contribution.
Plus the last year's contribution into the RRSP of $10,000 giving an RRSP balance of $310,000.
After paying 30% withdrawal the RRSP funds net $217,000
Plus the remaining funds in the TFSA (1,151,458 - 180,000 ) = $971,458
*Leaving total wealth of $217,000 + 971,458 = 1,188,458*.


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## Woz

Why did you calculate the future value after 30 years of contributions, but only used 20 years for calculating your unused contribution room? After 30 years of contributing $10k to your TFSA instead of your RRSP you should have $300k of extra RRSP room, not $200k.

If you redid your analysis with 30 years of contribution room then you’d get the opposite conclusion. You’d end up with $539,511 using strategy (a) and $563,072 using strategy (b).

Your point is valid though. A higher rate of return, a smaller gap in tax rates between last year and working years, or a lower tax rate in retirement can skew the result back in strategy (a)’s favour.


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## leslie

Woz is correct. My math was wrong. In fact when the assumptions (as now showing) were dropped waaay down from the original extremes, the use of the TFSA still comes out ahead. The difference shrank when returns were increased, and the w/d tax rate was raised, but never closed.


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## steve41

Remember..... tax rates decrease over time. The brackets are indexed to inflation.


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## humble_pie

re Guban's Gambit:

when Guban first described this little sidestep - which is best used by young investors with low earnings who plan on carrying forward their RRSP room to future higher-earnings years - Guban added the proviso that, for the strategy to work, the investment vehicle chosen in the TFSA must not result in a loss.

me i think it's a very neat strategy. It means a small sidestep into a not-yet-maxed TFSA until such time as a) investor requires the funds for actual deductible RRSP contribution or b) the TFSA itself is maxed. Whichever first occurs.

not everyone will want to go to the trouble, because loss-proof investments in TFSA are limited to HISAs & right now these are paying piffle. So the overall dollar gains may not be impressive.

what is impressive is the clear & clever mind that invented the strategy. Yay guban.


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## Woz

The strategy should only be used if you’re in or close to the lowest tax bracket. When you work out the math it comes out that this strategy is better than contributing directly to your RRSP if:

(1-[1+i]^n)*(T[SUB]0[/SUB]-T[SUB]R[/SUB])/i + n*(T[SUB]F[/SUB]-T[SUB]R[/SUB]) > 0

Where:

T[SUB]F[/SUB] = Final tax rate
T[SUB]R[/SUB] = Tax rate during retirement
T[SUB]0[/SUB] = Initial tax rate
n = years
i = rate of return

If we assume 30 years and a 5% rate of return then it simplifies to:

(T[SUB]F[/SUB]-T[SUB]R[/SUB]) > 2.215*(T[SUB]0[/SUB]-T[SUB]R[/SUB])

For example, If you’re taxed at 32.5% and you will later be taxed at 45.8%, this strategy won’t work for you. If you're taxed at 29.7% and end up getting a higher than experted rate of return then this strategy won't work for you. If you make below $37k though it should work out.


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## humble_pie

Woz said:


> The strategy should only be used if you’re in or close to the lowest tax bracket .... If you make below $37k though it [guban's gambit] should work out.


brilliant contribution, thankx!


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## Woz

The OPs edited post does highlight a slight error in my statement that it should only be used in the lowest tax brackets. I incorrectly assumed that the tax rate in retirement would be the lowest tax bracket. 

I should have said Guban’s gambit should only be used if your present tax rate is, or is close to your expected tax rate during retirement and you expect to be in a higher tax bracket later. 

In the OPs example, Guban’s gambit pays off even at a tax rate of 30% and returns of 10% because their retirement tax rate is also 30% (T[SUB]0[/SUB]-T[SUB]R[/SUB]=0 so T[SUB]F[/SUB]-T[SUB]R[/SUB] > 2.215*(T[SUB]0[/SUB]-T[SUB]R[/SUB]))


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## steve41

It is very unusual that tax in retirement is the same as or higher than in pre-retirement.


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## My Own Advisor

Unless folks saved a bundle Steve! The minority, I know.


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## leslie

Woz said:


> The strategy should only be used if
> (1-[1+i]^n)*(T[SUB]0[/SUB]-T[SUB]R[/SUB])/i + n*(T[SUB]F[/SUB]-T[SUB]R[/SUB]) > 0.


I was distrusting the the factor (T[SUB]0[/SUB]-T[SUB]R[/SUB]), so I redid my edited example in the OP, with only one change .... The tax rate for draws in retirement dropped to 20% from 30%. The factor changed from (30%-30%=0) to (30%-20%=10%). Which means the strategy should be MORE likely to work.

And the result WAS that the strategy did not work.

*(a) Save in RRSP*
The final RRSP account of $1,644,940 + $10,000 less 20% w/d tax = *$1,323,952*
*(b) Save in TFSA and transfer*
The RRSP of $310,000 less 20% tax = $248,000
The TFSA stayed the same at $971,458 giving a total of *$1,219,458*

Or is my example's math wrong again??


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## humble_pie

guys the thread is *not* about that old, tattered, threadbare debate over whether an RRSP or a TFSA is better.

it's only about guban's gambit. 

in this manoeuvre, guban said, if you're young with a low salary but expect higher salary later in life, don't follow the conventional advice.

conventional advice says contribute those RRSP dollars now while deferring the claim to later years when earnings will be higher.

but guban's gambit says contribute those dollars to TFSA now, because your RRSP room is going to roll forward anyhow, with or without the unclaimed contribution. Then, in that future year when earnings are high enough that an actual RRSP contribution will create a significant tax deduction, withdraw the funds from the TFSA, contribute to RRSP at that point in time, & claim the contribution.

that's all. nothing fancy. no algebra. just something even a dumb crumb can understand.


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## My Own Advisor

Not so much a gambit as it is socking money away for a future RRSP contribution day.


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## humble_pie

the problem is that guban's sock is not alliterative

it's not catchy like guban's gambit
it even sounds like unfortunately his laundry went missing

if steve41 had thought of it we could have called it steve's sockittome


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## My Own Advisor

Fair enough HP 

What about "Steve's stockittome TFSA to RRSP switcheroo"?


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## Woz

leslie said:


> (1-[1+i]^n)*(T0-TR)/i + n*(TF-TR) > 0.
> 
> I was distrusting the the factor (T[SUB]0[/SUB]-T[SUB]R[/SUB]), so I redid my edited example in the OP, with only one change .... The tax rate for draws in retirement dropped to 20% from 30%. The factor changed from (30%-30%=0) to (30%-20%=10%). Which means the strategy should be MORE likely to work.
> 
> And the result WAS that the strategy did not work.
> 
> *(a) Save in RRSP*
> The final RRSP account of $1,644,940 + $10,000 less 20% w/d tax = *$1,323,952*
> *(b) Save in TFSA and transfer*
> The RRSP of $310,000 less 20% tax = $248,000
> The TFSA stayed the same at $971,458 giving a total of *$1,219,458*
> 
> Or is my example's math wrong again??


I didn't check your math, but (1-[1+0.1]^30)*(0.3-0.2)/0.1 + 30*(0.4-0.2) = -10.45 therefore, the strategy should not work. Your calculation gives the same result.

(1-[1+i]^n) is typically negative so increasing the difference between T[SUB]0[/SUB] and T[SUB]R[/SUB] makes the strategy LESS likely to work.


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## leslie

Woz said:


> (1-[1+i]^n) is typically negative so increasing the difference between T[SUB]0[/SUB] and T[SUB]R[/SUB] makes the strategy LESS likely to work.


Right. I did not catch that negative.

I created an Excel model and played around with what if's. The equation seems correct, but the outcomes are so variable that I really don't think this idea should be given out generally. I copied a variety of the outcomes with the coloured variable inputs used here. 








The idea of a short term stash instead of "contributing to an RRSP but delaying claiming the tax deduction" has been around since soon after the TFSA started. but IMO this extension into a long-term strategy is pushing it. I'm going back to my original opinon.

The excel file is at http://members.shaw.ca/PublicAccess/SaveRRSPorTFSAtsf.xls

One situation where the strategy does always work is if when you are start in the 1st tax bracket (about 22%) and you withdraw in the bottom bracket where you face 50% GIS clawbacks so your tax rate is 72%.


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## steve41

Look. The mathematics of compound interest, inflation and income tax are well known.... some people still do their T1 by hand. Why should there be a variety of solutions? Does TurboTax spit out different results with the same input?


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## Guban

Humble's post 12 pretty much sums up my thoughts.

A lot of this thread seems to be RRSP vs TFSA, and I thought that the idea was, in the absence of OAS and other benefits, the two are essentially tax neutral if the contributor's tax rate stays the same. 
My most recent post about this topic (I seem to remember posting about this a long time ago) was actually about not delaying the RRSP deduction if you have TFSA room. If you have TFSA room, and are not planning on using the RRSP deduction, then max out your TFSA first, before contributing to your RRSP. Isn't it better to have tax free growth, instead of tax deferred growth? 

The point about not losing money, and just to buy a HISA, only speaks to risk tolerance. We all invest with the expectation of making money, and over time, the probabilities are that we will with a reasonably balanced investment portfolio. Thus, I would argue that maxing out your TFSA if you are not using your RRSP deduction immediately is a prudent one for any long/medium term investor or very conservative saver (GIC's or HISA purchasers). If your time horizon is very short, this could backfire on you, but in this situation, why are you invested in something that can drop in value anyways?


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## HaroldCrump

Guban said:


> If you have TFSA room, and are not planning on using the RRSP deduction, then max out your TFSA first, before contributing to your RRSP. Isn't it better to have tax free growth, instead of tax deferred growth?


Gawd, I wish these permutations and combinations were easy.... 
The tax neutrality of TFSA vs. RRSP is based on a very key assumption - _that average tax rates at contribution time and withdrawal time are the same_.

While that assumption makes the math easier, how true is it?

Keep in mind that at its core, the RRSP is a _tax arbitrage strategy_ i.e. contribute & deduct at higher rate, and withdraw at a lower rate.
The classic case is, of course, retirement, but doesn't have to be.

Anyhow, if used in the textbook case, an RRSP investor contributes & deducts while in the highest income tax brackets during their peak working years, and withdraws after retirement when they have no (or very little) T4 style income.

For your regular _unpensioned_ working stiff (9 to 5 till 65), the RRSP works out very well.

Therefore, if we change the assumption of same tax rates, and instead assume that tax rate during RRSP/RRIF withdrawal is significantly lower than contribution (say, 15% vs. 40%), the RRSP will come out ahead.
This is because TFSA contributions are from after-tax dollars - i.e. income that has _already_ been taxed at the highest marginal rate.

The greater the spread between your tax rate at contribution vis-à-vis your tax rate at withdrawal, the better the RRSP will perform.


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## steve41

+1


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## leslie

I was disappointed that Guban had no comment on the subject of this thread, or the equation, or the variety of outcomes I showed. After all Humble Pie says it was his idea.


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## peterk

humble_pie said:


> but guban's gambit says contribute those dollars to TFSA now, because your RRSP room is going to roll forward anyhow, with or without the unclaimed contribution. Then, in that future year when earnings are high enough that an actual RRSP contribution will create a significant tax deduction, withdraw the funds from the TFSA, contribute to RRSP at that point in time, & claim the contribution.





Guban said:


> If you have TFSA room, and are not planning on using the RRSP deduction, then max out your TFSA first, before contributing to your RRSP. Isn't it better to have tax free growth, instead of tax deferred growth?


Neat gambit. Though to clarify, I don't think it's "tax free growth "[of funds]" instead of tax deferred growth" is it?... whether the money is deposited in the RRSP at the beginning or a later date doesn't change the tax burden upon withdrawal. The neat part is that the TFSA can be emptied, and then reinvested at a later date in a higher amount due to the _growth of the TFSA contribution room _that was created using the gambit.


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## Guban

leslie said:


> I was disappointed that Guban had no comment on the subject of this thread, or the equation, or the variety of outcomes I showed. After all Humble Pie says it was his idea.


I am sorry, but I tried to clarify my suggested strategy. It is NOT about delaying RRSP contributions and just add to your TFSA, it is add to your TFSA instead of your RRSP if you are not going to claim the deduction in the current tax year. 

Your original post and calculations would then be modified to a contribution of $7k (not $10k) per year, since under my assumption, you are not claiming the RRSP deduction until later. See what effect that has on your outcome. Your equations and calculations look like the same old TFSA vs RRSP argument. 

How about an inequality for you instead of an equation?
0<x, where 0 is the future tax liability of the TFSA growth and x is the future tax liability of the RRSP growth.


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## Guban

peterk said:


> Neat gambit. Though to clarify, I don't think it's "tax free growth "[of funds]" instead of tax deferred growth" is it?... whether the money is deposited in the RRSP at the beginning or a later date doesn't change the tax burden upon withdrawal. The neat part is that the TFSA can be emptied, and then reinvested at a later date in a higher amount due to the _growth of the TFSA contribution room _that was created using the gambit.


Using the idea of putting money in your TFSA first and transferring it your RRSP later to claim the deduction is exactly tax free growth instead of tax deferred growth if your other choice is to put it into your RRSP instead and claim the same deduction later. Assuming that there is a increase in value of the money in the TFSA, in order to get the same RRSP deduction, you'd be forced to keep the increase outside of the RRSP (tax free). If the entire principal and growth are put into the RRSP, the contribution and corresponding deduction would be greater. Of course, any money in the RRSP becomes a tax burden later.

Yes, the increased TFSA room upon a withdraw to put into your RRSP is definitely a nice thing.


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## humble_pie

peterk said:


> Neat gambit. Though to clarify, I don't think it's "tax free growth "[of funds]" instead of tax deferred growth" is it?... whether the money is deposited in the RRSP at the beginning or a later date doesn't change the tax burden upon withdrawal. The neat part is that the TFSA can be emptied, and then reinvested at a later date in a higher amount due to the _growth of the TFSA contribution room _that was created using the gambit.




peterk thinggabbouddit. There is, theoretically speaking, a slight difference between funds withdrawn from RRSP/RRIF using Guban's Gambit (slightly fewer dollars) & funds withdrawn from RRSP when early pre-contributions are made directly to RRSP, ie not using the GG.

the funds temporarily saved in TFSA will earn $$ that will be tax-free forever. 

if those same dollars are contributed early to RRSP - as conventional advisors often suggest - the dollars earned during that period of early contribution only wlll be eventually taxed. They will not be tax-free as they could have been if the early contribution had been made to the TFSA.

however, as guban himself has noticed, some participants in this thread have taken the discussion back to the old, much-discussed general issue of which is better over a lifetime, TFSA or RRSP.

but guban's gambit has nothing to do with this issue. As you can see, he is in favour of both plans. He has proposed an optimization of how to dance your money forward into the plans when you are a young wage-earner who expects higher earned income in a few years.

hint: i've noticed that guban often has excellent tax suggestions. He's a welcome addition to the forum. Good idea to pay attention!


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## leslie

Now I am completely at sea. What exactly is being proposed here? Is it only the short-term TFSA use ... in preference contributing to an RRSP at the current lower tax brackets (whether the tax deduction is planned to be taken then or delayed)? The quotes I can find from Guban imply this but never say so. 


Guban said:


> It is NOT about delaying RRSP contributions and just add to your TFSA, it is add to your TFSA instead of your RRSP if you are not going to claim the deduction in the current tax year.





Guban said:


> If you have TFSA room, and are not planning on using the RRSP deduction, then max out your TFSA first, before contributing to your RRSP.





Guban said:


> Don't do this (contribute but not claim deduction)! At least until you've maxed out on your TFSA. If you aren't going to claim the deduction, put the money in your TFSA first and then when you want the tax deduction, take the money out of the TFSA and put it in your RRSP.



But HumblePie's posts have extended the strategy into the long term, and Guban has not corrected this presumption. 


humble_pie said:


> re Guban's Gambit is best used by young investors with low earnings who plan on carrying forward their RRSP room to future higher-earnings years. It means a small sidestep into a not-yet-maxed TFSA until such time as a) investor requires the funds for actual deductible RRSP contribution or b) the TFSA itself is maxed. Whichever first occurs.





humble_pie said:


> This is especially useful for younger investors who may not have yet achieved peak earning years. It allows them to build up their TFSAs in the present while also building up RRSP "room" for their future high-earning years. Guban's suggestion was for younger investors to put even intended RRSP contributions into TFSAs first, up to the TFSA maximum. Then, when the actual RRSP contrib would be needed, it can be transferred to RRSP where it will count as a tax deduction at that time.


I agree with everyone else that the short-term strategy for a few years only is an obvious benefit. I made the distinction between the short-term and long term in the OP, making the topic of this thread the long-term strategy. Guban has never corrected this presumption either.

--------------------------------------------
If indeed the long-term is also being proposed here, then the math equation, and model I used IS valid. Guban says my model is wrong because the immediate-RRSP choice 
1) should reflect a delayed-tax-deduction 
2) while I modeled the tax deduction taken immediately at the lower tax rate. 

No one ever decided to do (1) except when they think it will do better than (2). So if this strategy does worse than (2) it will sure as heck be worse then (1). My decision to model the choice using (2) is not an excuse to dismiss the math evidence .... it is the reason you CANNOT dismiss the math.


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## Eclectic12

I'm not sure why you are at sea .... your original quote of HP included:


> ... This is especially useful for younger investors who may not have yet achieved peak earning years.
> guban's suggestion was for younger investors to put even intended RRSP contributions into TFSAs first, up to the TFSA maximum...


This to me is a clear reference to preferring the tax free growth in a TFSA until peak earnings and it's associated peak tax refund from an RRSP contribution kick in.

AFAICT - it's always been about taking advantage of what a TFSA offers in the short term so that the RRSP contributions generate maximum the maximum tax benefit. Without the TFSA, there would be lost growth but with the TFSA, tax free growth is being substituted.



Cheers


*PS*

The lack of response for the long term version might be because no one thinks it's a good idea. 
Then too, CMF-ers who have been around a long time, likely have seen enough versions of Guban's Gambit in various CMF threads to see clearly that Guban is talking short term only.

The other beauty of using the TFSA - if one discovers the raises aren't coming as quickly as anticipated, should have some growth to help counterbalance the mistaken assumption.


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## leslie

I give up. Everyone talks about something different, not what I defined as the subject of the thread.


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## Woz

Effectively, there are four options:

A.	Contribute to TFSA
B.	Contribute to TFSA with the intention of later transferring to RRSP
C.	Contribute to RRSP
D.	Contribute to RRSP but claim the deduction in a later year.

In the original post, Leslie quoted humble_pie suggesting that younger investors should contribute to a TFSA and later transfer to an RRSP in a higher earning year instead of contributing to an RRSP (i.e. B is better than C for younger investors). This was referred to as Guban’s gambit. Guban has now clarified that his strategy is that you should contribute to a TFSA and later transfer to an RRSP in a higher earning year instead of contributing to an RRSP and claiming the deduction later (i.e. B is better than D).

These are two different comparisons. Leslie was trying to show that B isn’t always better than C which her spreadsheet has done. There’s no disagreement that B is always better than D.

Furthermore, it’s been suggested that the B vs C comparison is just the standard TFSA vs RRSP problem, which isn’t really true. To give an example, suppose your tax rate is 35% but you expected it to increase to 45% thirty years from now. Your expected tax rate in retirement is 30%. The standard TFSA vs RRSP advice would be that your expected tax rate is lower in retirement so RRSP is better than TFSA (C is better than A). If you defer claiming your RRSP deduction for 30 years then your tax refund would be 10% higher. A 10% return over 30 years is clearly not worthwhile so you’d claim your deduction immediately (C is better than D).

This standard approach would result in the non-optimal choice of contributing to your RRSP and claiming the deduction immediately whereas the optimal choice (as shown by Leslie’s spreadsheet) would’ve been to contribute to your TFSA and transfer that contribution to your RRSP in 30 years.


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## humble_pie

Eclectic12 said:


> This to me is a clear reference to preferring the tax free growth in a TFSA until peak earnings and it's associated peak tax refund from an RRSP contribution kick in.
> 
> AFAICT - it's always been about taking advantage of what a TFSA offers in the short term so that the RRSP contributions generate maximum the maximum tax benefit. Without the TFSA, there would be lost growth but with the TFSA, tax free growth is being substituted.



see how well eclectic understood guban's drift.

we are only talking about a paltry handful of dollars here, why is everyone getting so spaced out?

as guban himself noted when he first wrote up his idea, for the strategy to succeed, it's necessary to maintain the saved dollars that are temporarily stashed in TFSA in an investment or savings vehicle that cannot go down.

effectively this means keeping those dollars in a HISA. These are typically paying 1.25% in broker TFSAs, although folks here are reporting up to 3% at some savings institutions (be careful about their transfer-out fees, though).

given that the max contrib to a TFSA has been $5500 for any one year, given that our candidate investor is a younger person with earnings that are still less than what he hopes they will be some years hence - at 1-3 percentage point yields, we are talking about almost nothing. Sawdust, grass seeds, a handful of angel hair.

no need for the lifetime algebra imho. I liked the jokes about socks & laundry, though.


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## Eclectic12

Re: we are only talking about a paltry handful of dollars here, why is everyone getting so spaced out? as guban himself noted when he first wrote up his idea, for the strategy to succeed, it's necessary to maintain the saved dollars that are temporarily stashed in TFSA in an investment or savings vehicle that cannot go down.

It would appear a lot of the discussion and debate is around the idea of maxing the TFSA over long periods .... which is not what Guban was talking about but is what some want to focus on.


Though YMMV as to how necessary a HISA is ... if one does not have a large cash flow and wants to use up a lot of RRSP room in one go - then yes the HISA will be critical. If one has enough cash flow to fund the RRSP from the higher taxed income - one can take that into account and choose a different mix than 100% HISA.

There's probably not a lot of people in this category but like so many other things in the investing world - there's the general concept coupled with how closely one's situation aligns to it.


Cheers


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## Retired Peasant

Woz said:


> Effectively, there are four options:
> 
> A.	Contribute to TFSA
> B.	Contribute to TFSA with the intention of later transferring to RRSP
> C.	Contribute to RRSP
> D.	Contribute to RRSP but claim the deduction in a later year.
> 
> Guban has now clarified that his strategy is that you should contribute to a TFSA and later transfer to an RRSP in a higher earning year instead of contributing to an RRSP and claiming the deduction later (i.e. B is better than D).


I don't understand why B is better than D. With $10000 contribution room in RRSP:
-contribute now and let it grow in RRSP, claim the 10000 in some later higher earnings year
-contribute to TFSA and let it grow, contribute and claim 10000 in some later year to RRSP
The RRSP keeps the growth in one case, while the TFSA keeps the growth in the other. What is the gain?


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## Eclectic12

^^^^

In both cases (B and D), the RRSP deduction is not being claimed - this limits the difference between choices B and D as they are both using after tax dollars to fund the contribution. As I understand it, the main difference is that choice B's growth will be tax free (as will be the withdrawals). Choice D on the other hand, has tax deferred growth - which will be taxed as income when withdrawn.


It will take a particular set of circumstances for D's tax deferred growth to be preferred over B's tax free growth.


Cheers

*PS*

Bear in mind that in a Guban's gambit style situation - this is a low income earner who is expecting their income (as well as their taxes) to grow significantly in a few years time. An example of someone along this line is a recent poster who wrote they were making about $45K but expected to be changing jobs so that their income would climb to $65K.


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## humble_pie

it's baffling. Guban's Gambit clicked in my mind like a key turning in a lock the minute i saw his first post.

yet some people are having so much trouble!

it's not a huge deal, so perhaps the best way to leave this matter is to say that them as understands, can & should do.

them as doesn't should perhaps stick with their RRSP.


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## Retired Peasant

'them as doesn't should perhaps stick with their RRSP'

Well e.x.c.u.s.e me for trying to understand. I thought that's what these forums were about - helping people to learn.

As a long time member, I'm sure you tire of the newbie questions. Perhaps you should take a break, or at least not respond to 'stupid questions'.


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## humble_pie

guban's gambit has been explained over & over & over & over again. How it works is clear as crystal. Clear as daylight. Clear as glass.

as has been explained several times, this thread is mixed up between those who want to talk TFSA vs RRSP over a lifetime & those who are sticking strictly to the GG. Guban himself has appeared to confirm this. What a reader has to do in this thread is read the posts carefully & grasp which camp the poster belongs in. Once a reader learns to do this, all the confusion will disappear.

me i've gone to painstaking lengths - a lot of patient volunteer time - to publicize the gambit in several threads. It's a tiny, elegant, perfect little manoeuvre. It can help young people. Just upthread i re-explained to an individual who has a good chance of understanding. Plus he's at the right age & income level.

as i recall, you yourself appeared out of the blue & vindictively misquoted me some time ago, during the olympic games, for no reason whatsoever. You do seem to be a somewhat unhappy person. Perhaps you are the one who should take a break?

PS i adore newbie questions. This forum is studded with some incredibly amazing young people. So sweet, so bright, so thoughtful, so talented. It's a real honour to be able to try to help them.


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## steve41

Eclectic12 said:


> An example of someone along this line is a recent poster who wrote they were making about $45K but expected to be changing jobs so that their income would climb to $65K.


OK.... I am going to run an example. Before I do, someone suggest an ROR, a current age and a 'die-broke age'


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## Woz

humble_pie, I think both of us feel like we’re beating a dead horse a bit, but if you’d just entertain me a bit longer I’d like to explain why the second part of the discussion isn’t a TFSA vs RRSP comparison and how it applies to Guban’s Gambit.



> B. Contribute to TFSA with the intention of later transferring to RRSP
> C. Contribute to RRSP
> D. Contribute to RRSP but claim the deduction in a later year.


With Guban’s gambit we know B > D.

Therefore, if D > C then B > C (i.e. B>D>C therefore B>C).

However, if C > D then we have no way of knowing if B > C without doing the second analysis (i.e. B,C > D therefore we don't know if B > C). The spreadsheet is that B vs C comparison. 

To say it more simply, guban’s gambit as its defined is only applicable when you’ve determined that contributing to your RRSP and claiming your deduction later is better than claiming the deduction now. However, with the “second discussion” in this thread it’s been shown there are select cases when guban’s gambit strategy can be effective even when contributing to your RRSP and claiming the deduction now is better than claiming the deduction later.


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## Eclectic12

steve41 said:


> OK.... I am going to run an example...


Is it really necessary to run numbers?

Unless I'm missing something ... the difference is figuring out whether something like six to twenty months of growth should happen tax free in the TFSA or tax deferred in the RRSP. Even if I pick the extreme of some of my relatives - where the withdrawal tax rate is five levels lower - for the growth amount, it's $0 taxes for the TFSA versus $# taxes when withdrawn in retirement.

I also seem to recall the poster said he was twenty four years old so likely the RRSP contribution amount is not large and likely well under the TFSA contribution limit of $31K.

Bear in mind here ... the RRSP contributions are going to total up to the same, the trade off is when the RRSP growth starts. 

From what I can tell ... if it does play out as the poster expected, I see a benefit to using the TFSA and almost no impact on the RRSP.


Cheers


*PS*

I'm not against running numbers ... I'm afraid that people will be distracted by the assumptions and lose sight of the "grow tax free or tax deferred" trade off.


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## steve41

The size your rrsp and/or TFSA attain, and the taxes you'll pay over time are meaningless. The only metric that counts is the after tax income you get to enjoy (beer&groceries) and how long before your capital runs out.


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## Eclectic12

^^^^^

That's all well and good for me personally ... but since there weren't a lot of details provided by the poster who was considered using the TFSA to wait until the higher income kicked in and then RRSP ... I'm not sure what assumptions or predictions are closest to the truth.

That's why I was focused on what I knew .... which is that the choice was use the TFSA to keep the growth tax free until the higher salary kicked in versus the other suggestion - contribute to the RRSP and take the deduction later.


Cheers


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## Retired Peasant

humble_pie said:


> misquoted me some time ago, during the olympic games


Ahh, now I understand your response; you're still holding a grudge about a misunderstanding in an 8 month old post!


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## humble_pie

Retired Peasant said:


> As a long time member, I'm sure you tire of the newbie questions. Perhaps you should take a break, or at least not respond to 'stupid questions'.





> Ahh, now I understand your response; you're still holding a grudge about a misunderstanding in an 8 month old post!



not a grudge at all each: it's rather that you've sniped nastily at too many other forum members in the same way. Out of the blue. For no reason.

i've never addressed any post to you, RP, other than as a response to a deliberate harassment such as your message No. 36 above. I would appreciate it very much if you would kindly stop posting messages to me. Please accept my thanks in advance for this cooperation.


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## humble_pie

Woz said:


> ... To say it more simply, guban’s gambit as its defined is only applicable when you’ve determined that contributing to your RRSP and claiming your deduction later is better than claiming the deduction now. However, with the “second discussion” in this thread it’s been shown there are select cases when guban’s gambit strategy can be effective even when contributing to your RRSP and claiming the deduction now is better than claiming the deduction later.


 

woz i thought your work - & steve41's & leslie's & eclectic's - was beautiful. Perhaps over our heads each: but beautiful nonetheless.

what hangs me up about very long-term projections is the inability to predict a) future tax rates or b) what, exactly, will be an investor/taxpayer's net wealth, which will affect his non-pension income, after retirement. There are too many large events that can shake up (b), such as divorce settlements, significant inheritances or family members who are suddenly diagnosed with permanent, disabling, expensive-to-treat medical conditions.

for me, creations such as steve41's program serve best as enlightened guidelines, showing a likely or approximate path forward to a possible future, based only on what we know today.

another thing i believe which can never reflect in any math - which has nothing to do with math - is that people should develop resilience, including financial resilience. It's a psychological thing as well as a financial thing imho.

one thing we're all agreed on, though, is that guban's gambit not only does no harm, but it's a good thing, right? anything that will aid tax-free or tax-deferred savings is great, right? 

so many thanks to you & guban & all the others for shining light upon this one small step in the savings process.


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## Guban

Woz said:


> humble_pie, I think both of us feel like we’re beating a dead horse a bit, but if you’d just entertain me a bit longer I’d like to explain why the second part of the discussion isn’t a TFSA vs RRSP comparison and how it applies to Guban’s Gambit.
> 
> 
> 
> With Guban’s gambit we know B > D.
> 
> Therefore, if D > C then B > C (i.e. B>D>C therefore B>C).
> 
> However, if C > D then we have no way of knowing if B > C without doing the second analysis (i.e. B,C > D therefore we don't know if B > C). The spreadsheet is that B vs C comparison.
> 
> To say it more simply, guban’s gambit as its defined is only applicable when you’ve determined that contributing to your RRSP and claiming your deduction later is better than claiming the deduction now. However, with the “second discussion” in this thread it’s been shown there are select cases when guban’s gambit strategy can be effective even when contributing to your RRSP and claiming the deduction now is better than claiming the deduction later.


The B vs C is exactly the TFSA vs RRSP question. Hasn't that been discussed before?
B. Contribute to a TFSA with the intention of transferring to RRSP later
C. Contribute to RRSP (and deduct right away) - brackets are my addition.

Does it matter about your intention at a future date for option B? At that later date, I would only care how much after tax money I own.


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