# TFSA Accounts



## CanadianCapitalist (Mar 31, 2009)

I know, I know, I'm not exactly early to the TFSA party but other financial commitments (such as RRSP contributions) took precedence this year. Nevertheless, I'm looking to open a TFSA account and I'm looking for a savings account to keep emergency funds. I'm *not* investigating TFSA brokerage accounts.

I have narrowed down my search to two options:

1. Outlook Financial offers cashable GICs at attractive interest rates. The early redemption interest rate is 2% and today a 5-year GIC is offered at 3.85%. The only negative is the absence of CDIC guarantee, which in my opinion is much stronger than the Credit Union Deposit Guarantee Corporation.

2. ING Direct. Offers a savings account with a 3% interest rate until Oct. 1, 2009 that may or may not be extended. They also have attractive GIC rates but early redemption interest rate is 0.5%, so a GIC ladder might be an option.

What have folks here done with their TFSA accounts? I'd be interested to hear your opinions / experiences.


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## Rickson9 (Apr 9, 2009)

I think either of your choices will work out fine.

For ourselves, we went into stocks via brokerage account.

However, having said that, having to avoid paying taxes on 1.5% interest on cash wasn't our primary concern since this would only amount to $1,500 taxible interest per $100,000 per year.


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## Sampson (Apr 3, 2009)

Hey CC, I was a little late to the game also.

I transferred some high yielding energy income trusts and REITs for my account in May. Got some for my wife's account just last week!

I had been thinking about going the GIC ladder route, but I don't feel its a good vehicle for the cash component of our investment allocation since minimums within self-directed accounts are $3500, so not much room to build a ladder.

In a few years, when the amounts are higher, I'd like to use it strictly to hold my cash portion of the account, but I think the ladder approach is best to ensure some liquidity if opportunities arise.

For our 'emergency' or short term savings (within 1-2 years) I just leave that in a high interest savings account since as was pointed out, interest income will be minimal, especially at current rates!


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## bean438 (Jul 18, 2009)

My TFSA holds 2 stocks, BMO, and PWF bought almost at the low. Far from an investment genius, I was simply blessed by mr. market, who was very bi polar, offering me a price too good to be true.

I would like to say it was easy, but I admit i was sick to the stomach after the purchase.

I was thinking of Mr Buffets advise, be greedy when others are fearfull, but i admit I was fearfull too.

Next year I am simply thinking of regular investments in the TD e series index funds, rebalancing as needed to maintain the % required.

Unless of course the world comes to an end again.


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## humble_pie (Jun 7, 2009)

i do appreciate your concern over lack of CDIC coverage under 1) in your post, and if it were myself i'd probably avoid such an institution.

the standard advice to keep interest-bearing securities in a registered plan and tax-advantaged investments in non-registered accounts doesn't apply all that perfectly to a tfsa, although it does apply to a certain extent. One might say that this rule gets skewed when it comes to tfsas.

to my way of thinking, 100% of withdrawals will be tax-free, so in the end the taxpayer will not lose the tax advantages of dividends and capital gains as he will be replacing these with something even better.

also, for at least a few more years, there is no point treating these accounts as if they held 100,000 because, with a 2009 startup date and limited to a 5,000 contribution per annum, most tfsas won't approach the 100K mark for a number of years.

like mr. bean, my own tfsa has held common stock and stock equivalents. Lady luck has favoured us. For such a tiny account - only 5,000 to start with - i've traded it aggressively, only lately easing into something more sedate by rolling more than half into BA.UN for the high yield, although this has to be watched closely and probably will have to be taken out within a year or less.

an interesting strategy that will work well in a rising market is a diagonal call spread, or its inverse, which would be a put diagonal in a falling market. The tweaked factor for a tfsa is that the long leg of the diagonal gets bought within the tfsa, while the intermittent sales of the short leg get carried out in a margin account. Thus the capital appreciation of the long leg is fully captured in the tfsa, while the hedging cost is borne in the margin and serves to offset other capital gains in the margin. The inevitable catch in all this is that one has to be right about the direction of the market.


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## Robillard (Apr 11, 2009)

I put in the paperwork to open my TDW TSFA prior to the end of 2008. Then when the new year started, I contributed some bonds and bond fund units that I had previously purchased and held in a non-registered account. It also holds a small number of equity fund units as well. Thus far I haven't used it to house my emergency funds. The cash I have contributed thus far is mostly set aside for future big ticket purchases, such as a car or downpayment on a house/condo. The market has treated my TSFA fairly well since March. 

I think next year I will open a separate TSFA to house emergency funds.


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## MoneyEnergy (Apr 5, 2009)

I was quick to jump on the TFSA account, but have since realized that I'm not sure what strategy I will use for it. I've got a "brokerage TFSA" in TD Waterhouse. It generates cashflow, which I plan to reinvest back in the TFSA. But I wonder if I withdraw dividends, if that counts towards the "amount withdrawn" each year? I suppose it would have to. And likewise, do dividends earned count towards "money deposited" for the year? What if they just sit in your account but are not yet "reinvested"?


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## Kathryn (Apr 10, 2009)

The plan is ING TFSA at 3% for the first $10,000 each (2009 & 2010 maxed out for both of us) as our emergency fund. We'll invest the rest after that.


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## humble_pie (Jun 7, 2009)

oh my goodness. People are thinking of a tfsa as an emergency cash account, something to pay into & withdraw from like an ordinary bank account except that it has no fees.

i know there's a lot of big-name fancy financial planners on this board whereas i'm just a very ordinary kind of pie, but the fact is the government fell asleep over tfsas and gave canadians their biggest tax break since before capital gains ... a tfsa is a stunning opportunity, a far better deal than a rrsp, and my only concern is that the govt won't let them last.

the goal should be to drive this plan towards the greatest possible accumulation of funds inside the plan in the shortest possible period of time. Ideally there should be no withdrawals whatsoever until retirement, or until an exceptional life need arises. Every dollar inside a tfsa is literally a goose that will lay nothing but golden eggs.

the annual contribution ceiling is $5,000, making these early plans so tiny they're like a bonsai tree or petit-point embroidery. It's worth learning how to use leverage through double and triple ETFs and through the selling of options just to cultivate these little treasures.


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## Brad911 (Apr 19, 2009)

CC - FWIW I opened a TFSA at TDW (TD is my main bank) and currently am using the TFSA as a fixed income vehicle for my CDN FI allocation.

Now that's only $5,000 right now, but in the future I hope to hold all my CDN FI within the TFSA and all US/Int equities and FI within my RSP. Making that switch will take a few years as contribution room rises of course.

My view on using it as an emergency fund, in this low interest rate environment, didn't give me a huge incentive from an after-tax perspective. I've basically just plugged the cash into two bond ETF's for now with the intention of building a bond ladder and corporate bond portfolio within it in the future.


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## steve41 (Apr 18, 2009)

> but the fact is the government fell asleep over tfsas and gave canadians their biggest tax break since before capital gains ... a tfsa is a stunning opportunity, a far better deal than a rrsp, and my only concern is that the govt won't let them last.


Sorry, your understanding is way off. The fact is, the RRSP and the TFSA are very similar outcome-wise when projected as normal saving-for-retirement vehicles. For lump sum cash requirements, the TFSA is useful, but the normal saving/drawing down on a constant level trajectory, the RRSP and TFSA are very close. If estate issues are important, the TFSA can make sense, but I wouldn't get overly excited... the rules really haven't changed by much.


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## leslie (May 25, 2009)

I agree with HumblePie's worry that "People are thinking of a tfsa as an emergency cash account", but for another reason.

Since emergency cash has to be kept liquid, it will never earn high (or even moderate) rates of return. So the tax shelter of TFSA is wasted for this capital.

Yes, use the TFSA for income-earning savings, especially if you are savings for a specific requirement. It has two benefits over RRSPs. 1)You can withdraw (say for RE downpayment) and recontribute without penalty. 2) If you are contributing from the bottom tax brackets you don't run the risk of being taxed at a higher rate on withdrawal from an RRSP.


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## humble_pie (Jun 7, 2009)

i don't follow your argument at all, senior member steve. An rrsp is delayed taxation. Its holdings will eventually get taxed as mandatory rrif withdrawals, whereas neither the base capital nor any accrued income in a tfsa will ever be taxed in any form whatsoever.

suppose you're 77, the proud owner of both a 40-year rrsp and a 40-year tfsa, each containing approximately the same dollar amounts. And like so many middle-class taxpayers you have other income. From which plan will it be more beneficial for you to withdraw, tax-wise ...


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## CanadianCapitalist (Mar 31, 2009)

humble_pie said:


> suppose you're 77, the proud owner of both a 40-year rrsp and a 40-year tfsa, each containing approximately the same dollar amounts. And like so many middle-class taxpayers you have other income. From which plan will it be more beneficial for you to withdraw, tax-wise ...


You may have the same dollar amount in a RRSP and TFSA but _you did not contribute the same dollar amount_ into the two accounts. The RRSP was funded with pre-tax dollars; TFSA with after-tax. 

The point Steve is making is that, for most people, RRSPs will win out because the tax rate on contributions would be much greater than tax rate on withdrawals -- assuming the withdrawal is made in retirement or low-income years. 

That's not to say the TFSA doesn't have its uses. In the situation you describe, I would withdraw from a TFSA but if I had no income that year, I would consider withdrawing from the RRSP. Each account has its place and I'm glad to have both options available.


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## high octane (Jul 21, 2009)

> Its holdings will eventually get taxed as mandatory rrif withdrawals, whereas neither the base capital nor any accrued income in a tfsa will ever be taxed in any form whatsoever.


TFSA yeild is 100% tax free, but the base principal was already fully taxed at MTR

RRSP base principal is tax deferred, the key is compound interest tax free for years until withdrawal, when it is all fully taxed at MTR

I think of the TFSA as being just as powerful as RRSP, depending on MTR and yeild of course. If the limit continues at 5k per year it will be a big deal

How many people would ever invest non-registered if they had 5k TFSA since 18 yrs old?


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## steve41 (Apr 18, 2009)

I have seen a lot of plans, and I don't recall seeing any plan in which the later (withdrawal/retirement) phase had an MTR greater than that during which the subject was salaried. Maybe close to, but in most cases the MTR in retirement was less than the MTR in the earlier (contribution/salaried) part of the plan.


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## dotnet_nerd (Jul 1, 2009)

I think the TFSA is far better than an RRSP if you have any kind of growth.

Here's a simple example:

Invest $5000 into both accounts today. Assume a 12% growth rate for 30 years until retirement. Using the Rule of 72, your money will double 5 times giving you a portfolio of 2^5*5000 = 32*5000 = $160,000

TFSA: you have $160,000 with the freedom to withdraw as much as you like for whatever purpose you like _absolutely tax free_ .

RRSP: you're limited on how you access your funds, taxed at your marginal rate for withdrawals, have estate issues to hassle with etc. I dare you to withdraw the full $160,000 at once. You'd have CCRA drooling. The tax break on the $5000 contribution is negligible in this example.

The TFSA wins hands-down.


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## steve41 (Apr 18, 2009)

The tax break at the outset does indeed make all the difference. When making the math work, you have to have a base line of comparison. The standard comparison is to make the net after tax income identical in both cases. This allows the rrsp to grow larger than the tfsa. 

I did a simple run, and the tfsa will be only 77% as large as the rrsp at retirement. This is the major source of the discrepency. Also, the tax you pay on the rrsp once you begin drawing it down has to be looked at in future dollars

I wrote this a while ago, but the numbers still pertain. Indexed Brackets and the RRSP (note... at the time, the proposed tax free account was to be called the TPSP)


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## leslie (May 25, 2009)

dotnet_nerd said:


> The TFSA wins hands-down.


 The mistake in your model is assuming both plans end up with the same total value (B4 withdrawal) because the same amount was contributed. Work your way through this model of how the RRSP works and you will see why that is wrong.


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## steve41 (Apr 18, 2009)

The definitive description of an optimum financial plan is one in which the present value of all future taxes is minimized (where 'tax' is defined as the actual T1 algorithm and not a simplistic average or marginal tax rate)

To make the statement _"the RRSP is tax neutral"_, you have to qualify that with the following caveat... _"when you are not concerned about estate implications"_
If you have children, and are concerned about maximizing your estate should you die prematurely, the TFSA makes sense. If you expect a major cash call at some future time, rather than a smooth constant retirement cash flow, the TFSA makes sense also. Otherwise, if you are concerned purely about your own lifestyle/ATI ... the RRSP is pretty much tax neutral.


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## dotnet_nerd (Jul 1, 2009)

Blah blah blah, I understand what you're all saying. But TFSA's provide *TAX-FREE GROWTH*. With RRSP you share your growth with the government.

Extreme example. I invest $100 in a junior mining company in both accounts. They strike gold and my $100 becomes $1,000,000

RRSP: TAXED = $1,000,000 minus what CCRA's meathooks carve out.
TFSA: NOT TAXED = $1,000,000 and not one penny less.


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## steve41 (Apr 18, 2009)

Well, I'm sure convinced. (it's the old _'everyone can win the lotto'_ approach to retirement planning... you gotta love it!)


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## CanadianCapitalist (Mar 31, 2009)

dotnet_nerd said:


> But TFSA's provide *TAX-FREE GROWTH*. With RRSP you share your growth with the government.


So do lottery tickets. The winnings are TAX FREE! But, let's be realistic here. I don't know too many people who match the market, let alone beat it by any margin.


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## dotnet_nerd (Jul 1, 2009)

I said it was an "extreme example" to get the point across.

The point is, TFSA's are a true tax shelter. Growth is never taxed. Not so with RRSP's.


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## DAvid (Apr 3, 2009)

dotnet_nerd said:


> Blah blah blah, I understand what you're all saying. But TFSA's provide *TAX-FREE GROWTH*. With RRSP you share your growth with the government.
> 
> Extreme example. I invest $100 in a junior mining company in both accounts. They strike gold and my $100 becomes $1,000,000
> 
> ...


The *REAL* Extreme example: I invest $180 via RRSP (nets to $100 by April) and you invest $100 via TFSA (also nets to $100) in the same junior mining company. 

Both grow tax free.

Your TFSA grows to $1,000,000; my RRSP to $1,800,000. If you withdraw the earnings in 25 annual installments you get 25 $40,000 TAX-FREE payments from the TFSA. While I get 25 $72,000 taxable payments from my RRSP. I'll pay 21.6% of the $72,000 in taxes (BC) =$15,552 leaving $56,448.

Since $56,448 >> $40,000, the RRSP is the better investment.

Your TFSA calculation only applies if the whole sum is withdrawn at once. Since the idea of RRSP is to fund retirement -- it is *meant* to be withdrawn over a period of time. If you apply the same expectations to the TFSA, it is less efficient than the RRSP.

If you want to do the calculations based on the income generated from $1,000,000 vs $1,800,000 fly at it! 

The problem with the RRSP is eventually you are obligated to withdraw it, whereas the TFSA could remain intact, and unspent until your death.


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## FrugalTrader (Oct 13, 2008)

It might be a worthy note that, as of right now, TFSA withdrawals do not count as income when calculating old age security benefits.


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## high octane (Jul 21, 2009)

> Your TFSA grows to $1,000,000; my RRSP to $1,800,000. If you withdraw the earnings in 25 annual installments you get 25 $40,000 TAX-FREE payments from the TFSA. While I get 25 $72,000 taxable payments from my RRSP. I'll pay 21.6% of the $72,000 in taxes (BC) =$15,552 leaving $56,448.


Now with a low income in Quebec:

In RRSP $100 effective $140 (MTR 28%) becomes $1,400,000
In TFSA $100 becomes $1,000,000 in the same investment vehicle

25 annual installments = $40,000 per year from TFSA Tax Free
From the RRSP 25 annual installments = $56,000 before tax

In Quebec that's $41,390 after tax

I didn't want to change the exemple too much but yeild would make a difference too.


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## steve41 (Apr 18, 2009)

> The problem with the RRSP is eventually you are obligated to withdraw it, whereas the TFSA could remain intact, and unspent until your death.


Yabbut... there is nothing that says you have to spend it. Those forced rrif withdrawals can be pushed out to a tfsa (after tax is paid of course)


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## Jon202 (Apr 14, 2009)

I guess the ideal situation would be for someone who has an effective MTR of 0 due to credits or low income, then putting essentially tax free dollars in a TFSA and using that to increase their income.

Or conversely any person receiving tax-free "gifts" of cash, putting that in a TFSA, like a stripper:
http://www.thestar.com/news/canada/article/684109

who said Canada ever had a boring tax system?


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## DAvid (Apr 3, 2009)

steve41 said:


> Yabbut... there is nothing that says you have to spend it. Those forced rrif withdrawals can be pushed out to a tfsa (after tax is paid of course)


Likely not $56,000 annually, though!


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## steve41 (Apr 18, 2009)

OK, OK.... stick into some other form of 'outside the rrsp' (nonreg or equity) investment.


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## dotnet_nerd (Jul 1, 2009)

DAvid said:


> The *REAL* Extreme example: I invest $180 via RRSP (nets to $100 by April) and you invest $100 via TFSA (also nets to $100) in the same junior mining company.


No, you're not comparing apples to apples. In my example we invest exactly $100. That's all I'm willing to invest in a speculative venture.

So let's adjust your REAL example to make it REAL.

TFSA: I contribute $5000
RRSP: I contribute $12345 (some arbitrary amount based)

In each case I decide to mix my portfolio so I invest $1000 in speculative growth stocks (mining, pharmaceutical, technology, etc). That's all I'm comfortable with. The rest goes towrds more "conservative" plays like bonds, blue chips, preferreds. etc. You can't gross-up the $1,000 to $1,800. I've decided to cap my exposure to $1,000

TFSA: $1000 speculative growth stocks + $4000 other stuff
RRSP: $1000 speculative growth stocks + $11345 other stuff

[Fast forward 40 years.....]

In each account the $1000 growth stocks have parlayed into $1,000,000. We'll ignore the rest of the portfolio and focus and the $1,000,000.

TFSA: I net $1,000,000 since it is truly tax free
RRSP: I net $1,000,000 minus the amount gouged by our friends at CCRA

I'm not sure which part is so hard to understand here.


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## Sampson (Apr 3, 2009)

dotnet_nerd said:


> No, you're not comparing apples to apples. In my example we invest exactly $100. That's all I'm willing to invest in a speculative venture.


I think what DAvid and most others are alluding to, but I don't think they ever state explicitly, is that if you invest $100 into your TFSA, this is after tax dollars so it IS equivalent to investing ~$160 into your RRSP (due to the refund). 

(otherwise what would you be doing with the refund? - if you didn't put money into the RRSP, that $160 would become the $100 you put into your TFSA). Better yet, if you invest $100 into your RRSP, take the $60 refund, use that in your TFSA.

My take on funding the accounts is that you gotta take a bit of both worlds - best if you can fund both fully  For my family the TFSA is great, but certainly not a game changer. The $5000 annually is simply insufficient to build the capital I would need for early retirement.


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## fransiskawitanto (Aug 21, 2009)

*TFSA vs RRSP*

Sorry to jump into the middle of your debates. 
in my opinion, choosing TFSA or RRSP is a matter of your MTR and your purpose of savings as well as your financial situation. there is nothing called absolute 'perfect' answer that can be applied to every situation.

If your goal is to save money for retirement then you may consider which one is suitable for you :
1. if you believe that your MTR when you are retire (i.e. when you start withdrawing money) will be lower than your MTR when you are still making contributions, then choose RRSP. otherwise, choose TFSA.
2. if you believe that the MTR will be the same, use either one. 

However, other factors should be put into consideration, for example, your goal. With RRSP, as most of you know that withdrawing money from RRSP would trigger taxes, you will reconsider of doing that many more times than withdrawing money from TFSA, which taxes are not an issue. As a result, putting money in a TFSA may encourage you to withdraw money at anytime you need and therefore will erode capital faster.

If your goal is to build net worth for your mortgage, you may think of using TFSA as it is easier for you to withdraw the money.

TFSA's room contribution is only $5000 a year which may not suitable for high income people whereas in RRSP you could contribute 18% of earned income or limit of $20,000 in 2008 and $21,000 in 2009.

In addition, most of cases, people have less income in their retirement which means lower MTR. Also, speaking of taxes, you can always use the tax-efficient tools such as converting part of your RRSP into RRIF (you have to be at least 65 years old to be eligible) then withdraw from that RRIF $2000 per year tax-free. As well, there is also strategy to minimize taxes such as income splitting and other tax efficient vehicle which provided by the government (please visit CRA website for more information).

In conclusion, everything should be put into consideration (i.e. your age, your financial situation, MTR) especially your goals.


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## steve41 (Apr 18, 2009)

The problem is, that in order to make a valid comparison, you must make each plan equal. The only normal measure which makes an apples to apples comparison is one in which both scenarios deliver you the identical after tax lifestyle. After all what the heck is the point? Plan 1 and plan 2 should allow the individual to enjoy exactly the same level of beer and grocery consumption. At the end of the year, who cares what taxes or contributions to your RRSP/TFSA you made.... what counts is the amount you get to spend on living.

After tax/after inflation income (lifestyle) must be the same in both plans. This means, that because the RRSP contributor gets a rebate on his RRSP contribution, he will have the extra cash available to add to his RRSP. The TFSA guy doesn't get that extra refund, and so his tfsa nest egg doesn't grow to the same extent.

Again... the only metric after all is said and done is the lifestyle one gets to enjoy. Tax and after tax income have to be included in the calculation, it is not simply a compound interest problem.


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## Sampson (Apr 3, 2009)

Very good point steve41. But I think you also have to consider the lifestyle during the contribution years.

One could also invest the same $100 post-tax dollars into either account, and the RRSP contributor could spend the refund so as to have a better lifestyle during the years of saving.

I'm not sure why comparisons always have to be one or the other, in reality, I'm sure the people who use these vehicles (minority of Canadians right?!?) use both, and I'm will to wager that for most Canadians, it is better to have a combination of both as opposed to 100% one-way vs. the other.


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## steve41 (Apr 18, 2009)

> But I think you also have to consider the lifestyle during the contribution years.


Bingo! that is exactly the point. In fact when you look at my model, there is absolutely no difference in the math/logic pre or post retirement. In fact, there is no element in the program called 'retirement age' The plan is one continuum. After all, what if you were working and decided to take a 2 year sabbatical in three years for education or travel and decided to come back into the workforce before finally retiring at 60. Or.... what if your plan was to continue working at a reduced level forever.

How does one define a retirement age in either of those cases?

There is no such thing as retirement... there are simply periods of time when you have excess cash coming in the door, and periods when you don't. money simply shuffles in or out of savings in order to maintain a level lifestyle through those choppy waters.


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## sprocket1200 (Aug 21, 2009)

no one has mentioned the fact that TFSA is not used for the clawback calculation on gov't programs when we retire.

any thoughts?


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