# Confused: TFSA or Cash Account?



## Sixth_Circle (Nov 22, 2010)

I have an RRSP and TFSA with ING, both self-directed and invested in Streetwise index-tracking funds. Hold your fire--I'm way late to the DIY party and still learning the ropes. For now, with the $-amount of holdings and my lack of investment savvy, a self-balancing "no-brainer" portfolio suits me fine. 

Now, in anticipation of learning more about investing by actually "doing", I recently opened a TFSA with an online discount broker. Why another TFSA? I thought I could buy a few individual stocks or ETFs and protect any gains from taxation. But now I'm wondering if I should have opened a plain old cash account and let the capital gains/losses play themselves out.

Does anyone see any pros and cons in having two TFSAs? One as my so-called serious account and the other as more of a learning tool? I do not plan on having more than $5,000/year to invest in all accounts, so the contribution limits are not really a factor (unless I win or come into some serious dough). 

Any thoughts appreciated.


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## Rysto (Nov 22, 2010)

If you're only going to be investing $5000 per year, do it all in TFSAs. There's no point in leaving unused TFSA contribution room and paying taxes on your non-registered investments.

Just be careful to track your contributions and not overcontribute. Getting it straightened out can be a hassle and you'll pay a 1% penalty tax on the overcontributions for every month they remain in your TFSA.


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## Eclectic12 (Oct 20, 2010)

Sixth_Circle said:


> I have an RRSP and TFSA with ING, both self-directed and invested in Streetwise index-tracking funds. Hold your fire--I'm way late to the DIY party and still learning the ropes. For now, with the $-amount of holdings and my lack of investment savvy, a self-balancing "no-brainer" portfolio suits me fine.
> 
> Now, in anticipation of learning more about investing by actually "doing", I recently opened a TFSA with an online discount broker. Why another TFSA? I thought I could buy a few individual stocks or ETFs and protect any gains from taxation. But now I'm wondering if I should have opened a plain old cash account and let the capital gains/losses play themselves out.
> 
> ...


I'd start with what IMHO is the bigger issue - being late to learn about DIY investing. 

When you are learning things like what risks you are comfortable with, how you will evaluate the stocks/ETFs and the quirks of the online trading system of the broker, the number of losses are likely to be higher than the gains.

This is key with a registered account (TFSA or RRSP) as unlike a non-registered account:

1) losses are losses without the ability to use them to reduce other gains.

2) the contribution limits make it difficult to replace a loss or take 
advantage of a buying opportunity. 

So I'd recommend doing your learning in a non-registered account until you have your learning done and your strategies worked out.

I do believe more people should take some risk in their TFSA but not as a place to learn investing.


As for having two TFSAs - the only cons I've had are it's twice the work (i.e. two statements to check) plus I have to make sure across both accounts the totals don't exceed my contribution limit.

The pros are that one pays interest and is easy to get money out if, if needed while the other has a broader range of investment options. I use one for the long-term investments and one for the "remainder" of my contribution limit.


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## Eclectic12 (Oct 20, 2010)

Rysto said:


> If you're only going to be investing $5000 per year, do it all in TFSAs. There's no point in leaving unused TFSA contribution room and paying taxes on your non-registered investments.
> 
> Just be careful to track your contributions and not overcontribute. Getting it straightened out can be a hassle and you'll pay a 1% penalty tax on the overcontributions for every month they remain in your TFSA.


While there is no point in leaving unused TFSA room, bear in mind that US dividends are subject to the US with-holding tax in a TFSA. If it were in an RRSP, it is with-holding tax exempt due to the US - Canada tax treaty. In a non-registered account, the Foreign Tax Credit can be claimed to get the tax back, if it is properly being charged at 15%.

http://www.canadiancapitalist.com/withholding-tax-tfsa-investments/



Also - while minor over-contributions will be subject to the 1%, the rules are being changed to allow a much more significant penalty. It seems some were intentionally over-contributing, paying the 1% and when the investment say doubled, withdrew the over contribution. The net effect was that for the price of 1% per month of the over-contribution, large gains left significant amounts in the TFSA, tax-free.

http://www.fin.gc.ca/n08/09-099-eng.asp

I believe the one article said that one of the options was a 100% penalty of the over-contribution. Though, I'm sure for being over a couple of hundred dollars, they would stick to the 1%.

All the more reason to track the contributions and make sure they are correct!


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## Y&T2010 (Dec 29, 2009)

I have two TFSA's too, one with HSBC with a fund, and one with Questrade. It's not too bad to keep track, as long as you put in a lump sum of $5000 (if you can) and take out a lump sum, and remember that you can recontribute next year in January.

I put some the income trusts in TFSA's and came out with +30% return from January, tax free (it was an awesome feeling, I tell ya!).

I agree with learning to DIY in a nonregistered first, unless you really really do your research to find some value stocks, because you won't have capital losses to fall back on.


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## Eclectic12 (Oct 20, 2010)

Y&T2010 said:


> I have two TFSA's too, one with HSBC with a fund, and one with Questrade. It's not too bad to keep track, as long as you put in a lump sum of $5000 (if you can) and take out a lump sum, and remember that you can recontribute next year in January.
> 
> I put some the income trusts in TFSA's and came out with +30% return from January, tax free (it was an awesome feeling, I tell ya!).
> 
> I agree with learning to DIY in a nonregistered first, unless you really really do your research to find some value stocks, because you won't have capital losses to fall back on.


Yes ... tracking the contributions and verifying the statements aren't difficult, they are just more work - tedious but more work.

I've both purchased and transferred trusts into my TFSA. The transfers cut down on the constant Return of Capital (RoC) and Adjusted Cost Base (ACB) calculations - as well as the potential for reporting RoC as a capital gain.

Then too, when I considered that most of my trusts are paying 9% or better in distributions, it makes more sense to shelter them than the cash at 1.5% or less.

One of my top picks from Mar 2009 is paying 31% but since it's leveraged to write-off interest, I won't be moving it over anytime soon.


As for learning in a non-registered accounts so that losses don't hurt as much, I'd say that's in the top five mistakes new investors I've met make.


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## Canadac (Nov 24, 2010)

TFSA in my opinion. its tax free..


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