# TFSA and RRSP contribution room...Use it or lose it!



## gaspr (Mar 24, 2014)

I wonder how many of those who have not used all their contribution room from years past, and are carrying it forward, realize that they are slowly losing that room due to the pernicious effect of inflation. Not that serious with the CPI rates of the recent few years, but if early 1980's inflation ever returns, look out. The Time Value of Money strikes again. Just as a dollar in the future is worth less than a dollar today, it works in reverse going back in time...

I did a quick calculation of what it would have cost someone who has yet to make any TFSA contributions. I figure that instead of $41000 of room, you really should have $42827 in todays dollars. The CRA must love these tax payers...

The exact same principle applies to unused RRSP contribution room. Use it or slowly erodes away...

Thoughts?


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## mf4361 (Apr 11, 2015)

http://www.inflation.eu/inflation-rates/canada/historic-inflation/cpi-inflation-canada.aspx
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/cntrbtn-eng.html

According to CRA, TFSA limit is supposed to be based on $5000 in 2009 and linked with inflation and rounded to nearest $500. 

TFSA exist in Canada since 2009. Inflation since 2009 through 2014 is 1.32%, 2.35%, 2.30%, 0.83%, 1.24%, 1.47%

Total inflation from 2009 to 2014 is (1.032*1.0235*1.023*1.0083*1.0124*1.0147)-1 = 9.88%

So limit in 2014 is supposed to be 5000*6 years* (1+9.88%) = $32964. We should have got $1964 more limit without the rounding.

If inflation of this year is 2% as target, the total inflation from 2009 to 2015 is 1.0988*1.02 -1 = 12.1%
And supposed TFSA limit is 5000*7*1.121=$39227 if it's still linked to inflation.

So you see they are giving us more room than inflation-linked, which is no surprise in an election year and it's clearly a vote grabbing move.


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## gaspr (Mar 24, 2014)

I guess the point I am trying to make is that those who contribute the max every year end up doing much better than those who simply carry forward their contribution room....hoping to catch up later...


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## sags (May 15, 2010)

Pretty simple answer I think.

People are piling into real estate, often up to their necks in affordability for them, so they don't have the money to put into a RRSP or TFSA.

People also have more confidence in real estate. Most people have not experienced a big housing crash, or even read about one in Canada.

On the other hand, the TSX did crash and it took years to recover, and in their minds it is more dangerous and complicated waters.

Not saying it is wise to put all your financial trust in a home, but as long as people can afford the payment, they don't suffer an immediate loss and have a place to live.

I wonder if the stock market were to crash this September, would people still be as happy they topped up their TFSA or RRSP as soon as possible ?

What are the statistics in Canada....70% own homes and about the same number have no retirement savings, no idea how they will get any, and are living from pay to pay.

In Canada.....the house is king..... Long live the House.


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## gaspr (Mar 24, 2014)

I agree that a lot of folks are choosing real estate over financial assets. I just wonder if they realize what they are giving up...and the level of risk they are taking on...


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## none (Jan 15, 2013)

^ That is the belief it seems. It is odd that people think there is so little risk in house. I lived in the states during the housing crash. If it can happen in La Jolla it can happen anywhere. That place makes any place in canada look like Ron Jeremy's bung hole. Seriously, that place is gorgeous. I knew quite a few people that we hundreds of thousand below the worth of their house. At least for most stock, the worst you can go is zero. Not so with housing, you can EASILY go below zero especially when you put 5-10% down.

Oh well, I hope there isn't a crash. I'm happy renting and I have lots of friends who would be financially devastated if one occurs. Of course, I'm going to position myself quite well to pick something up on the cheap (when cost of ownership is < than renting) in 3-5 years.


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## none (Jan 15, 2013)

gaspr said:


> I guess the point I am trying to make is that those who contribute the max every year end up doing much better than those who simply carry forward their contribution room....hoping to catch up later...


Better to focus on opportunity cost of not using the room. (i.e you lose on average 7% a year every year you don't have it filled)


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## Eclectic12 (Oct 20, 2010)

none said:


> ... I lived in the states during the housing crash. If it can happen in La Jolla it can happen anywhere.


YMMV ... question is what makes La Jolla's experience/environment compareable? Or not? Or somewhat?




none said:


> ... That place makes any place in canada look like Ron Jeremy's bung hole. Seriously, that place is gorgeous.


 ... sounds like it might be a place of choice ... attracting more of the world's rich and driving up demand. 




none said:


> ... I knew quite a few people that we hundreds of thousand below the worth of their house.


I remember seeing a cable TV show where an expert helped out those trying to sell their homes around late 2007. The expert was telling the family that was looking to sell their two homes to pay off the custom house that was just about completed for the two families to move into. The expert was saying "sorry ... but my research of the area says you need to list each house at -$600K from what is currently being asked".




none said:


> ... At least for most stock, the worst you can go is zero. Not so with housing, you can EASILY go below zero especially when you put 5-10% down.


YMMV ... the "only lose 100%" is where one is paying as they go instead of using margin/leverage. 




none said:


> ... Of course, I'm going to position myself quite well to pick something up on the cheap (when cost of ownership is < than renting) in 3-5 years.


How much of a drop in your area makes owing cheap?


Cheers


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## andrewf (Mar 1, 2010)

I think the point is that in every bubble, there are bulls arguing that 'this time is different'. They are always shown to be wrong, eventually. What argument can you make for sky-high Vancouver real estate that couldn't have been applied to Japan, or San Diego, prior to their real estate corrections?


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## none (Jan 15, 2013)

Eclectic12 said:


> How much of a drop in your area makes owing cheap?
> 
> 
> Cheers


I doubt I would buy a house for more than 400K (victoria) - that would require a 30% correction. 

http://househuntvictoria.blogspot.ca/

If that's reasonable or not I'm not sure. Much like the timing of when a bubble pops it is equally difficult to predict the magnitude of correction (or over-correction). Doesn't really matter though as i said, I'm happy renting and can max out my TFSA; RRSP & Pension as a result. I figure I'll be in one of 2 place in the next two years (perhaps both if I re-marry):
1) Well positioned to buy a house that is a good 'investment' based on price-to-rent ration;
2) Pretty close to done my retirement savings and I can just live pay-check to paycheck for the rest of my life.

I think being in either of those would be a pretty good spot to be.


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## cainvest (May 1, 2013)

gaspr said:


> The exact same principle applies to unused RRSP contribution room. Use it or slowly erodes away...
> 
> Thoughts?


Since I'm already saving at my maximum comfort level I'm not concerned about the extra RRSP room I have not used from many years ago. Plus now that the TFSA is 10k/year its even less a concern as my non-RRSP investments will fill that up over time.


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## sags (May 15, 2010)

I would wait until home prices stop declining for awhile and start to go back up again.

I wouldn't want to buy and then watch the price keep falling, and I doubt there would be a sudden upturn. More of a gradual change in sentiment and prices.

I think most people would do the same, and the housing market would over correct as a consequence.

Lots of people from banks to bloggers, have been predicting a house price correction and thus far they have been mostly wrong.

Either home prices flatten and everything will be fine.............or if the correction comes housing is in for a big price adjustment.

How much have prices gone up...........since they strayed from long term trends ?


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## mf4361 (Apr 11, 2015)

gaspr said:


> I guess the point I am trying to make is that those who contribute the max every year end up doing much better than those who simply carry forward their contribution room....hoping to catch up later...


I guess that's true too. I think the bigger problem is not people not contributing, it's people are less educated about TFSA than it should have been.


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## Eclectic12 (Oct 20, 2010)

andrewf said:


> ... What argument can you make for sky-high Vancouver real estate that couldn't have been applied to Japan, or San Diego, prior to their real estate corrections?


The idea seems to be "I lived through it in the US ... it is likely can happen anywhere" ... my parent's foray into US RE was that the year after they bought, the area RE dropped 60%+ and stayed there for over a decade.

I think I know some of the critical factors ... but I am interested in what someone who has lived under both markets has seen.


As for being bullish, particular for Vancouver RE - I've been waiting for it's insane prices to adjust for decades so I have no idea what is driving it ... let alone any arguments.


Cheers


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## Eclectic12 (Oct 20, 2010)

none said:


> I doubt I would buy a house for more than 400K (victoria) - that would require a 30% correction...
> I think being in either of those would be a pretty good spot to be.


Interesting ... you will win either way.


Cheers


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## Eclectic12 (Oct 20, 2010)

mf4361 said:


> ... I think the bigger problem is not people not contributing, it's people are less educated about TFSA than it should have been.


In practice ... I can agree but the puzzle for me is why such simple rules are misunderstood by those that took the time supposedly to read them. The only trouble I had was confirming the rules were that simple and that I had not missed something.


Cheers


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## none (Jan 15, 2013)

Eclectic12 said:


> In practice ... I can agree but the puzzle for me is why such simple rules are misunderstood by those that took the time supposedly to read them. The only trouble I had was confirming the rules were that simple and that I had not missed something.
> 
> 
> Cheers


Because people are very bad at evaluating risk correctly and they frequently confuse good intuition with wishful thinking.


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## CalgaryPotato (Mar 7, 2015)

It's a good point, especially as the years go by. But reality is that most people will never fill up every last cent of their RRSP & TFSA room and by far the vast majority of those poor helpless people who are unable to do so will be... just fine financially.

There have been a few doomsayers on here decrying how society is going to be in big trouble because few are maximizing the TFSA when this is an option that didn't even exist a few short years ago.

Time in the market is a huge asset, take advantage of it where you can. But something is better than nothing, and very few people under 30 or even 40 are going to fill all their contribution room.


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## gaspr (Mar 24, 2014)

Another observation...we just might be in a housing bubble when every other thread ends up talking about real eatateeach:


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## Eclectic12 (Oct 20, 2010)

none said:


> Eclectic12 said:
> 
> 
> > mf4361 said:
> ...


This looks like a response to a different cost as making mistakes for something they supposedly had followed up on has no connection to risk evaluation that I can think of.


Cheers


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