# Hypothetically Speaking



## Franky Jr (Oct 5, 2009)

Let's say someone just got married at the age of 20. They sock away 10K a year into both their TFSA's. The newly weds pull off 6.5%/yr. When they retire at 60 they have 2M. Now they put that into something that pays about 5% a year, or a dividend rockstar or whatever but it is still inside their TFSA's.
This 100K that you receive every year in interest or dividends, is it completely all yours? My understanding is that it is all yours and there won't even be anything of it mentioned during tax season for the rest of your life.
If that is true, this TFSA plan from the gov. could make for some interesting retirement ideas.
Is it for real?


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## AdamW (Apr 22, 2009)

*TFSAs down the road*

You've got it.

Any money you put into, *or earn*, in the TFSA can be withdrawn at anytime completely tax free.

The other huge advantage is that you can put back whatever you withdraw. So if one year you take out money to buy a house, say $250,000, the following year your TFSA contribution room would be the allowable limit + $250,000. So if you ever come into a large sum you can shelter it again.

For young people TFSAs will be a fantastic vehicle down the road. If you can save up $500,000 in each of your and your spouses TFSA by the time you retire all that income on the $1,000,000 will be tax free. Even at 3-4% / year you're bringing in the equivalent of $60,000 + gross just from that one source of income alone.


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## DrStan (Apr 5, 2009)

I am very encouraged to learn that RRSPs and TFSAs have a relatively low rate of participation amongst taxpayers. Imagine if everyone was able to fully utilize these tools... the government would have no choice but to change the rules at some point to replenish its tax coffers. So please, stay away!

All kidding aside, the TFSA will become a cornerstone of my family's retirement strategy. My wife and I will maximize contributions every year and we have selected RioCan REIT as our investment of choice for the time being. We both have defined benefit pensions, so very little RRSP room. Every January, we will plop down $10K in total and watch the dividends roll in. I actually wrote the cheques this afternoon and will drop them in the mail on January 1st. Eventually, this will become a nice stream of tax-free income. It could be the difference between regular retirement at 55 or early retirement at 50 or 51... sweet! A very good tool for the already well-off who know how to use it best (hint: it's NOT an ING account at 1.2% interest...)


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## Ben (Apr 3, 2009)

DrStan said:


> I am very encouraged to learn that RRSPs and TFSAs have a relatively low rate of participation amongst taxpayers. Imagine if everyone was able to fully utilize these tools... the government would have no choice but to change the rules at some point to replenish its tax coffers. So please, stay away!


It is almost too good to be true, isn't it? If everyone gets a whiff of this, then the rules would have to change again.


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## Smac20 (Sep 7, 2009)

Not to try and tout my own blog but I wrote an article on which tax sheltering account, TFSA or RRSP, is best to use and how to choose: 

http://investingincanada.info/2009/11/rrsp-vs-tfsa-which-investment-account-to-use.html


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## Dr_V (Oct 27, 2009)

Smac20 said:


> Not to try and tout my own blog but I wrote an article on which tax sheltering account, TFSA or RRSP, is best to use and how to choose:


Not sure that the algorithm that you advocate, in your article, for deciding between RRSP and TFSA is necessarily correct from a numerical standpoint, since you've left out the details of the numbers. 

I found the following online calculator to be a bit more comprehensive:

http://www.taxtips.ca/calculators/tfsavsrrspcalculator.htm

Of course, that calculator doesn't account for "soft" factors, like weighing the benefits of a TFSA vs. RRSP for emergency funds.

K.


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## Cal (Jun 17, 2009)

Yes.

But the gov't holds the right to change the rules of the game at any point.


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## ssimps (Dec 8, 2009)

AdamW said:


> You've got it.
> 
> Any money you put into, *or earn*, in the TFSA can be withdrawn at anytime completely tax free.
> 
> The other huge advantage is that you can put back whatever you withdraw.


Is it correct that it can not be put back until the following year though? So say if you withdraw $x from your TFSA in January 2010, you can not put back $x until January 1st 2011?

Thanks.


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## OhGreatGuru (May 24, 2009)

Yes.


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## OhGreatGuru (May 24, 2009)

_It is almost too good to be true, isn't it? If everyone gets a whiff of this, then the rules would have to change again._

I'm convinced that rules will be changed at some point. The government cannot afford to have people living on $100K in income not paying taxes. The absence of a cap on either contributions or total capital will become a problem that anyone with brains should have foreseen. It was not the government's (avowed) intention to replace RRSPs with TFSAs.


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## ssimps (Dec 8, 2009)

OhGreatGuru said:


> _It is almost too good to be true, isn't it? If everyone gets a whiff of this, then the rules would have to change again._
> 
> I'm convinced that rules will be changed at some point. The government cannot afford to have people living on $100K in income not paying taxes. The absence of a cap on either contributions or total capital will become a problem that anyone with brains should have foreseen. It was not the government's (avowed) intention to replace RRSPs with TFSAs.


Ya, but based on how we (as Canadian's, maybe even the human race?) save in general, or should I say not save in general, there is probably not a big issue for the foreseeable future. People knowing about ways to save money, and them actually doing it, seem to be very different. 

I guess the fundamental issue is, how many Canadians actually 'think' they have money to save? It seems not that many. We are too busy buying things we 'want' but do not 'need' and therefore think we have no money to save. There are of course a lot of families that truly do not have money to save as well. 

Look at RSP contribution rates on average; I think they are really low for a program that has been around for 'ever' and actually gives the person money back the year they use it. I would think this would make everyone say, "hey, I can invest and get my tax rate back on the money invested and buy an new TV or something with it".....

If everyone gets a whiff of the new TFSA (how can they not have already given the TV ads etc that have been put out by gov (at our expense) and all the bank ads etc), then I would agree there could be issues way down the road, but how many people have acted and how many will act? 

Its all probably a political play anyhow, so regardless of % of people that start using TFSAs, the rules will likely change when political agendas do as well.  

Now I'm starting to rant. ;(


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## OhGreatGuru (May 24, 2009)

I agree with you that the average Canadian dosen't have enough disposable income to build up ahuge TFSA account. Unfortunately the bean-counters who created the plan seem to have only looked at these "averages". 

What has become apparent is that the well-to-do can start squirrelling away $5K/yr. for themselves; $5K/yr. for the Mrs.; $5K/yr. for each of their over-18 children, grandchildren, and other dependents. The net effect is to allow the well-to-do to shelter a lot of family wealth from the tax man. When John Q. Public discovers that the TFSA has become one more tax loophole for the wealthy, change will be demanded. But no likes changing the rules in the middle of the game, so there will be a lot of acrimonious debate over it that could have been avoided with a little foresight.

(Of course the alternative theory is the government knew what it was doing all along, and deliberately created a measure to benefit the well-to-do, in hopes of reaping future electoral benefits.)


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## ssimps (Dec 8, 2009)

OhGreatGuru said:


> I agree with you that the average Canadian dosen't have enough disposable income to build up ahuge TFSA account. Unfortunately the bean-counters who created the plan seem to have only looked at these "averages".
> .......


This is a really good point. 

My initial reaction is: "So, this is different from anything else $ related how?". 

With RRSP it is capped, which pisses well to do people off I'm sure.  But to your point the RRSP cap is a good thing for John Q. Public. But the TFSA is also capped, so again I'm not sure there is much difference in the end.


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## AdamW (Apr 22, 2009)

ssimps said:


> Is it correct that it can not be put back until the following year though? So say if you withdraw $x from your TFSA in January 2010, you can not put back $x until January 1st 2011?
> 
> Thanks.


That is correct, you can withdraw at any point in the year but need to wait until the following calendar year to replace the funds. Your example above is how it would work.


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## sprocket1200 (Aug 21, 2009)

the OP mentions retirement income and not one person speaks about how TFSA income is NOT income tested against gov't programs (CPP, OAS, etc). The biggest benefit and it is simply ignored. The vast majority of Canadians do not understand the TFSA so no worries about them using it to its fullest.

As for ING, two years in a row now they have had the ISA accounts for TFSA at 3%. 6% is needed to make this three, pretty nice for just having the money sit. But of course it only sat while it was DCA'd in to the low cost mutual funds for an annual return of 20%. (yes, actual calculated) Certainly not as good as many people did, but not too bad either. Another benefit for ING, on Jan 1 at 1 second past midnight my money was in the TFSA. PLUS i get their double interest (not much this year) since Oct. 1.

No need to worry about gov't tax revenues in the future either. They will collect on CPP, OAS, etc., but the biggest tax gain will be all those gov't pensions!!! Much harder to hide and manipulate the income, just work until the numbers add up (no early retirement with full pension), then pay top tier taxes for the rest of your life. Nice!!


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