# Withdraw TFSA funds to buy RRSPs?



## wanthusky (Jan 6, 2011)

Hi all,

Thanks in advance for any insight or guidance - I am really new to the savings/investing thing (and equally horrible at understanding it!)

Up till now, I didn't make enough to warrant buying RRSPs, but starting from mid-2010, my income should be on the rise to about the $70K to 90K range. Since 2009, any savings I've had, I stashed (probably foolishly?) into a TFSA savings account with 2-4% interest. 

I was wondering if it's now wise to withdraw the $15,000 I have in the TFSA to buy RRSPs? Is there any downside to this in terms of tax/investment planning? (in any event, I plan to move the TFSAs funds into mutual funds/stocks instead of just savings this year).

As well, I do have government student loan debt of approx $33,000 at about 5% interest (no other debts) - I've been paying it off slowly but could pay it down more....based on my higher income now, would it be beneficial to pay it down faster compared to the tax credit for the interest paid on these loans?

Thanks!!!
-H


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## Eclectic12 (Oct 20, 2010)

wanthusky said:


> Hi all,
> 
> Thanks in advance for any insight or guidance - I am really new to the savings/investing thing (and equally horrible at understanding it!)
> 
> ...


Here are a few thoughts, off the top of my head.

Both the TFSA and the RRSP are tax-advantaged (TFSA is tax-free while the RRSP is tax-deferred). So to use the TFSA to buy RRSP does not have an advantage. Maybe if the TFSA was generating a 30% cash flow and you didn't have the money to buy the RRSP otherwise, it might make sense.

For TFSA withdrawals, some factors to consider are that the money becomes taxable when withdrawn, the withdrawal means the TFSA does not grow and the amount withdrawn can't be put back until Jan 2012.

If you are using the money right away (ex pay-down the loan), the taxable factor probably does not matter. Based on 2-4% interest, you'll have to know your tax situation to get a exact number but as this is tax-free, whatever you do with the money will need something like a 3-8% return to be the same as leaving the money there. As for replacing the money, a withdrawal in Jan 2011 will mean almost 11 months before the money can be put back - this will have to be factored into your calculations. You will be able to contribute the 2011 amount of $5K or so.

As for the student loan, as a general rule, paying it off sooner is better. The variables you'll have to look at are what the money you'd use would make if invested RRSP or not versus the 5% cost, minus the tax credit. 

Once the calculations are done, think about in the "security" factor of having the loan paid off. If it's paid off, that's one less expense to worry about should your investments do poorly or (god forbid) you lose your job. 


I'd setup a spreadsheet and run some comparisons of how each scenario changes your tax, debt and asset situation to see what the impacts are. My gut feel is that using your increased income to buy the RRSP and then using the refund to pay down the loan might be a good way to go.

Also - you don't mention an emergency fund but I'd recommend setting one up before any of the rest of this. Having fewer expenses or the potential for needing cash for emergencies will usually result in better investment decisions.


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## the-royal-mail (Dec 11, 2009)

>So to use the TFSA to buy RRSP does not have an advantage. 

I disagree. If the OP moves money from his TFSA into his RRSP he will get a tax refund cheque from the gov't.

To the OP. If you have debt, pay that off FIRST. Forget about tax and all that other stuff. You owe money and you're paying interest on it. Get rid of that with priority. You can always invest in stuff later, but the cash you are shelling out in interest every day can never be recovered.


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## jamesbe (May 8, 2010)

^ this.

Pay off loans, the. IMO take tfsa put in rssp, tax refund from gov, put that in tfsa or pay off loans if still exist or put that extra again into rrsp.


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## MikeT (Feb 16, 2010)

Don't Mickey mouse around with this. Take the money out and pay the debt. Use 2011 as your year to pay off your debt and be free of it by next new years.

I wouldn't be against making regular rrsp contributions to get in the habit, but focus on your debt first. It's costing you $140 a month in interest.

Trying to invest with debt like that is foolish. You have a GUARANTEED 5% return waiting for you by paying it off. You can't get any investment that can guarantee you that.


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## Eclectic12 (Oct 20, 2010)

the-royal-mail said:


> >So to use the TFSA to buy RRSP does not have an advantage.
> 
> I disagree. If the OP moves money from his TFSA into his RRSP he will get a tax refund cheque from the gov't.
> 
> To the OP. If you have debt, pay that off FIRST. Forget about tax and all that other stuff. You owe money and you're paying interest on it. Get rid of that with priority. You can always invest in stuff later, but the cash you are shelling out in interest every day can never be recovered.


True ... but then again, why pull out sheltered money to put it back into a shelter where there are other options?

If the increased cash flow from income isn't enough to fund the RRSP, the TFSA withdrawal is still available. Then too, it will be better to make the withdrawal in Dec as the refund generated won't be available until the tax return is filed in 2012 anyway.

If the aim is to pay off the loan, then an earlier TFSA withdrawal will cut down on the interest cost.


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## Irontoast (Oct 13, 2010)

Here's what I would do:

Leave the TFSA alone, and use that for your emergency fund. 
Then, start an RRSP with small(ish) monthly contributions to get a start on it, but focus the bulk of your extra money on the debt. When the debt is paid off, increase your RRSP monthly contributions.


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## MoneyGal (Apr 24, 2009)

Let's take a look at this a little more carefully. We don't know enough about the original poster to make definitive statements, but we can still come up with some ways to think through the problem. 

Many posters have suggested that paying off debt should be the highest priority - but have not worked through the numeric arguments for (or against) this. 

When interest is tax-deductible, you need to calculate the after-tax interest rate to get the out-of-pocket cost. 

At an income of $90K, the OP may be in a marginal tax bracket as low as 36% (Alberta) or as high as 46% (Quebec). I'm going to use Ontario because that's where I live and I'm most familiar with the tax rates here. With an income of $90K in Ontario, our OP will face a MTR of about 43%. 

We don't know his payment schedule for his loan, but student loan payments are usually spread over a long period of time. Assuming his total payments are low, we can expect his interest rate tax credit is at or near his marginal tax rate - so we are going to discount his 5% interest payable on the student loan by the MTR of 43.41%. 

5% * 43.41% = 2.15%; thus the effective after-tax rate on his student loan is 2.85%. 

Ok. With that figure, we can immediately see that compared to keeping his cash in a TFSA paying anything less than 2.85% APR, keeping the debt is not the optimal choice. 

But should he keep the debt and invest his funds another way in his TFSA or RRSP? Well, we now know that the "hurdle rate" he has to beat is 2.85% after-tax. 

Keeping the funds in a TFSA or RRSP is only the optimal choice *if* the OP feels he can (consistently OR at the end of the loan period) beat the hurdle rate of 2.85% for the duration of his loan. 

Whether or not he should withdraw from the TFSA to put funds in an RRSP is a separate discussion. I disagree with the suggestion that the tax advantages of the two containers are equivalent given the facts in the OP's case.


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## atrp2biz (Sep 22, 2010)

One thing to note that since the loan is from a government entity (such as OSAP), the interest is tax deductible.

I would still lean towards making a significant payment towards the debt, but it is still a good idea to have some funds available in the TFSA for an emergency. Paying down debt is great, but it will negatively affect liquidity.

I would ignore RRSPs for now as this will allow contribution room to grow that you can use when you are in a higher tax bracket (8-10% higher when income is in the $90s compared to now).


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## Sampson (Apr 3, 2009)

MoneyGal said:


> Let's take a look at this a little more carefully


It's nice to see others suggest debt repayment isn't always the best option. I was going to post to this effect, but sometimes grow tired of trying to convince. 

Debt repayment is undoubtedly the most CERTAIN and controllable action, just may not be the best option. If people need so much certainty, then there should be very little discussion of investing in equity markets on this forum, since we all know how much certainty they present.


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## MoneyGal (Apr 24, 2009)

What can I say; I like math.  I know all the behavioural stuff is important and yadda yadda yadda, but if we are talking about *optimal* solutions in a world of numbers, the answer is always MOAR MATH.


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## steve41 (Apr 18, 2009)

As MG said.... it is a math problem. Not 'math' as in playing with a spreadsheet and marginal tax rates... 'math' as in the effect of the T1 with its progressive tax algorithm, age/interest deductions, clawbacks, and especially the effect of tax over time. That RRSP decision you make now will effect the tax you pay out in the future. This isn't just math, it is a huge recursive clusterf**k.

This is complicated by whether or not you are simply worried about your own retirement lifestyle, or whether you care about your estate. One option might be beneficial to your estate if you died prematurely, but would be detrimental if you made it out to a ripe old age. And vice versa.

If we knew exactly when we are going to die, this would be easier, but of course, we don't.

It is no surprise that my biggest user group are the life insurance types.


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## MoneyGal (Apr 24, 2009)

steve41 said:


> If we knew exactly when we are going to die, this would be easier, but of course, we don't.


Yes, but we know the average life expectancy, and the variation around that average. We don't know stock market returns with certainty either, but that doesn't stop us from planning around average and expected returns.


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## wanthusky (Jan 6, 2011)

*Strategies?*

OP here. Thanks for all the posts...the "Math" is definitely my problem. I get in theory how this works but the calculations are horrific!

(Note: I do have an emergency fund, so I am trying to use the other funds I have available to plan financially instead of just hoarding in a savings account...)

So, based on all the differing views, I'm interested to see your thoughts on the best use of:

$15,000 TFSA money, and about $8000 cash.

I am in Alberta and the student loans are government, so interest is deductible. My income for 2010 was approx. $55K, but for 2011 will be around $80K. I have about $25K RRSP contribution room - and starting June 2011, my employer is matching my contributions up to $2250


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## atrp2biz (Sep 22, 2010)

wanthusky said:


> ...and starting June 2011, my employer is matching my contributions up to $2250


This is KEY. I would absolutely contribute $2250. But at this point, no more than whatever the employer is willing to match.


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## MoneyGal (Apr 24, 2009)

These details make the argument in favour of paying down the student loan more compelling. 

Your marginal tax rate on $80K of income in Alberta is 32%. The after-tax interest rate you are paying on your student loans is thus 3.4%. 

Contribute $2500 to your RRSP for the 100% return you will get via employer matching. 

Take the rest of your cash and TFSA and pay off your student loan. 

Direct future spare cash first to employer-matched RRSP contributions, and then secondly to the student loan until it is totally repaid. 

Use the time during which you are paying off your student loan to learn more about investing and personal finance such that you are reading to begin investing your spare cash once you have your student loan paid off.


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## Jungle (Feb 17, 2010)

Just saying another point to consider. Also when you remove debt you remove risk. You're at more risk with debt if you're laid off or injured. 
But since this is a gov loan, they might have relief if you can prove distress.


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## atrp2biz (Sep 22, 2010)

Jungle said:


> Just saying another point to consider. Also when you remove debt you remove risk. You're at more risk with debt if you're laid off or injured.


I disagree with this statement. The OP has a fair amount of liquidity at the moment with $15,000 in a TFSA and $8,000 in cash. If the funds are used to pay down the debt, this would actually increase exposure to event risk such as a job loss since no liquid assets would be available.


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## HaroldCrump (Jun 10, 2009)

Both of you are correct.
Emergency cash savings as well as low debt are both important goals.
Normally it's better to exclusively build emergency savings first, then start paying down debt in parallel to building other savings such as large expense fund (car, home maintenance, etc.), a home down payment fund and so on.


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## wanthusky (Jan 6, 2011)

*Thanks!*



MoneyGal said:


> These details make the argument in favour of paying down the student loan more compelling.
> 
> Your marginal tax rate on $80K of income in Alberta is 32%. The after-tax interest rate you are paying on your student loans is thus 3.4%.
> 
> ...



Hi again, OP here. Thanks for the guidance everyone!!!


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## atrp2biz (Sep 22, 2010)

From MG:

Contribute $2500 to your RRSP for the 100% return you will get via employer matching. *[HIGHLY AGREE.]*

Take the rest of your cash and TFSA and pay off your student loan. *[THIS IS SOMEWHAT AGGRESSIVE. I WOULD TAKE THE CASH AND HALF OF THE TFSA TO PAY DOWN STUDENT LOAN. THIS WOULD LEAVE FUNDS AVAILABLE FOR AN EMERGENCY.]*

Direct future spare cash first to employer-matched RRSP contributions, and then secondly to the student loan until it is totally repaid. *[AGREE.]*

Use the time during which you are paying off your student loan to learn more about investing and personal finance such that you are reading to begin investing your spare cash once you have your student loan paid off. *[ONE CAN NEVER HAVE TOO MUCH KNOWLEDGE.]*

OP: What is your emergency fund? Is it the $8000 cash? How much in terms of living requirements?


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## MoneyGal (Apr 24, 2009)

atrp2biz said:


> Take the rest of your cash and TFSA and pay off your student loan. *[THIS IS SOMEWHAT AGGRESSIVE. I WOULD TAKE THE CASH AND HALF OF THE TFSA TO PAY DOWN STUDENT LOAN. THIS WOULD LEAVE FUNDS AVAILABLE FOR AN EMERGENCY.]*


I didn't comment on emergency funds etc. because the OP didn't raise that as an issue. I have no idea how old he or she is, own or rent accommodation, how old their car is, whether they need a car to get to work, how stable their job is, etc. 

What was presented was the question, "what is the optimal course of action between [3 proposed courses of action]?" and that's what I responded to. 

(I'm not intending to disagree with you...just pointing out why I answered the way that I did. I am a huge personal advocate of emergency funds and probably have *excess* emergency funds available to me, honestly; because I am personally quite risk-averse. But that's a behavioural thing, not a math thing.)


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## wanthusky (Jan 6, 2011)

Oh...OP here again. Emergency funds are around $6000 - this is aside from the $8000 cash I've saved. Living arrangements are very minimal (thank goodness) at around $700 per month. No issues there as I am basically living (mooching) off my parents' rental property; I also have monthly car payments of $500 - which are 100% interest free. Other living expenses are very minimal - I don't really spend money except to eat, which isn't very much anyhow.

I'm trying to learn how to calculate the after tax interest rate (I think that's the term Moneygal used?) of my student loans interest and the percentage that I can deduct...can someone do a quick example?

Oh - and I'm 30, single, no children. Spent wayyyy too much time in post secondary getting a professional degree, then 2 years regretting said degree and floundering around in a career I hated, and finally found a decent job this year where I feel I can make some commitments. I'm not looking to buy a house yet...maybe 2/3 years down the road.


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## atrp2biz (Sep 22, 2010)

I agree with MG's approach.


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## MoneyGal (Apr 24, 2009)

wanthusky said:


> I'm trying to learn how to calculate the after tax interest rate (I think that's the term Moneygal used?) of my student loans interest and the percentage that I can deduct...can someone do a quick example?


Crumb - I just realized that what I wrote is incorrect. Student loan interest gives rise to a tax credit. It is not a tax deduction. 

To determine the total amount of the available credit, multiply the total interest paid in a year by 15%. If you paid $1000 in interest over the course of a year, the total tax credit available is $1000 * 0.15 = $150. 

So, the after-tax interest rate (specifically, the after-tax-credit interest rate) you are paying on your student loans is 5% - (5*.15) = 4.25%. 

That is, you multiply the before-tax interest rate (5%) by the rate of the tax credit (15%) to get the after-tax rate (4.25%). Algebraic!


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## the-royal-mail (Dec 11, 2009)

want,

I never realized you were paying $500/month car payments also. Shouldn't you pay off that car? That it's a 0% loan is irrelevant. You owe that money and it's coming out of your account every single month. Pay off the car with the money you have saved so you can save more in the future! 

You have debt and car payments and are asking about RRSPs while living at home. That seems wrong to me. Pay off your debts and loans ASAP while focusing on an emergency fund as suggested above to carry you through the next crisis or major expense. Someone in your situation should be far more concerned with these things rather than taxes and RRSPs.


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## MikeT (Feb 16, 2010)

I disagree with paying back a 0% car loan early. Might make psychological sense, but not financial sense. I'd rather he keep the cash as emergency funds or whatever than give back the free money early. That money over the time period has value.

However I agree with everything else. I obviously forgot about the tax credit for the student loan interest, but doesn't make much difference. Student loan is the priority. And getting the rrsp match.


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## wanthusky (Jan 6, 2011)

the-royal-mail said:


> want,
> 
> I never realized you were paying $500/month car payments also. Shouldn't you pay off that car? That it's a 0% loan is irrelevant. You owe that money and it's coming out of your account every single month. Pay off the car with the money you have saved so you can save more in the future!
> 
> You have debt and car payments and are asking about RRSPs while living at home. That seems wrong to me. Pay off your debts and loans ASAP while focusing on an emergency fund as suggested above to carry you through the next crisis or major expense. Someone in your situation should be far more concerned with these things rather than taxes and RRSPs.



Hm...I'm kind of confused. My whole mindset prior to getting this job was just hoarding money in savings in case of emergency and job loss etc. That's how I got to the $6000 emergency fund, $8000 cash, and $15,000 in TFSA. But because the student loans have interest relief in case of crisis no payments are required, and the car loan is at 0%, I thought I could put these things off longer because they are considered lower risk debt....am I totally wrong?


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## MikeT (Feb 16, 2010)

With the car loan sure, 0%, no harm.

But with the student loan, you have to overcome the drag of the 4.25% interest working against you to make any money.

If you had no money and no debt, would you borrow 33 grand at 4.25% to try to invest? I wouldn't.

You're in debt denial. Pretending you don't have a huge debt will not make it go away.


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## wanthusky (Jan 6, 2011)

MikeT said:


> With the car loan sure, 0%, no harm.
> 
> But with the student loan, you have to overcome the drag of the 4.25% interest working against you to make any money.
> 
> ...


Hm...I never thought about it that way - but you are right...For a few years I was paying down the student loan really aggressively (from about $65K to 33K now) and all I felt was depressed with no savings. Good thing I am now doing research on how best to utilize the money.


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## the-royal-mail (Dec 11, 2009)

I absolutely admire that you have saved all that cash and would encourage you to continue. Is there anything you want? You have enough cash that you could probably start saving for it without compromising your safety.

Debt is a bad, period. To hang onto it so you can write off part of the interest for taxes is not prudent. Even if you get a tax credit you are still shelling out the money in interest (ie. flushing it down the toilet) in the first place. If you lose your job and wreck your car tomorrow, you will still have to make monthly car and loan pmts, regardless of the interest rate or tax status. Why shell out all that money every month when you have the money to eliminate those debts now?

I bought a car this July. $10K down pmt and the rest paid off in a few months in $5K chunks. Now, my income is maximized because it's not going out in numerous debits. 

Reduce/eliminate recurring expenses. They are a perpetual drain on your wallet.


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## wanthusky (Jan 6, 2011)

the-royal-mail said:


> I absolutely admire that you have saved all that cash and would encourage you to continue. Is there anything you want? You have enough cash that you could probably start saving for it without compromising your safety.
> 
> Debt is a bad, period. To hang onto it so you can write off part of the interest for taxes is not prudent. Even if you get a tax credit you are still shelling out the money in interest (ie. flushing it down the toilet) in the first place. If you lose your job and wreck your car tomorrow, you will still have to make monthly car and loan pmts, regardless of the interest rate or tax status. Why shell out all that money every month when you have the money to eliminate those debts now?
> 
> ...


Thanks - I agree with the debt paydown and I will refocus my efforts thataway first....


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