# For me TFSA changes everything



## high octane (Jul 21, 2009)

For the past year I've been reading as much as I can about the Smith Maneuver and tax strategies (and I wish I'd found this site sooner)

I'm 25, have over 20% paid down on my house, and I have about 20k in cash (not all free to move). I'm trying to save about 10k per year, and move every 3 yrs for work

I figure at my age TFSA trumps SM until I run out of TFSA room or want to buy a rental. But in the future, kids my age would have 35k TFSA room already!!! I might be able to keep up with 5k a year for awhile now, but the new kids will always have TFSA room (unless they lower the limit)

Will TFSA kill the SM for the newbies?


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## high octane (Jul 21, 2009)

Whops I guess this should be under the taxation forum

But also assuming a future 25 year old had 35k TFSA room, for most people won't that take non-registered Cdn dividend and capital gain taxation out of consideration?


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## Canadian Finance (Apr 3, 2009)

For most people, The Smith Manoeuvre and the TFSA are quite different. If you have available cash, which it sounds like you will, then yes, you might be better off investing it within a TFSA. Any borrowing for investment in a TFSA would not be a great option since the interest would not be tax deductible.

However, if someone is simply making their regular mortgage payments, then a Smith Manoeuvre would use that available equity to start investing sooner (in a non-registered account) with a tax-deductible home equity line of credit.


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## high octane (Jul 21, 2009)

Ok yea I guess I was thinking TFSA vs mortgage pre payment SM

I made a spreadsheet to play with the variables. Assuming the HELOC rate = mortgage rate the tipping point I found was where expected yeild = double the mortgage/heloc rate. If yeild is less than double the HELOC rate, SM beats TFSA

But I guess the real question is how the HELOC rate compares to the mortgage rate. I'm assuming I can get a better mortgage rate, which I think makes the TFSA better for me


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## high octane (Jul 21, 2009)

Here is the spreadsheet. Not sure if I calculated tax on capitals gains correctly because I've never dealt with them

http://spreadsheets.google.com/ccc?key=tyPm8qBKhP_LYC8xKsEvnTg


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## specialk (Jul 14, 2009)

I still don't understand why people insist on borrowing against, and therefore adding risk to the house where they and their children sleep at night, all in the name of hopefully if everything goes right over a long span of time, will maybe result in a little extra cash....no thanks.


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## high octane (Jul 21, 2009)

Depends on the situation.

I'm not leveraging my house I'm trying to pay as little taxes on money I already planned to invest


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## cannon_fodder (Apr 3, 2009)

High octane,

I'm not sure why, but it looks like you need to have a google docs account to view your spreadsheet (I already do so I don't know if that is normal or not).

Anway, it looks like what your spreadsheet is doing is to compare putting $20k into a TFSA (which can't be down until 2010 if you have a spouse or 2012 if you are single) vs. putting down $20k on your mortgage, then reborrowing it from the HELOC to invest.

If I have that right, then one thing seems to be missing from the SM calculation - the interest saved on the mortgage paydown.

I created a similar calculator that attempts to show whether it is better to invest *borrowed* money in a non-registered account, TFSA or put it into an RRSP and then take the refund and paydown the mortgage. I also created one where paying down the mortgage does not come into play.

Typically the best scenario is a combo of using the RRSP and mortgage paydown IF your marginal tax rate when you withdraw is less than your contribution rate. There are a lot of variables but the bigger the difference between those two numbers the more likely the RRSP-mortgage paydown wins.


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## high octane (Jul 21, 2009)

Thanks Cannon

I'm looking for your calculator can you post a link?

I didn't really know where else to host the spreadsheet. I do realise it is borrowed money (because I have a mortgage) I tried to take that into acount by charging interest to the TFSA at mortgage rate

Which is why I think that if the mortgage rate is lower than the HELOC rate, TFSA is a better choice than SM. Unless I'm missing something else

Before TFSA, I was convinced the best stratedgy was to pay down my mortgage ASAP and convert it to tax deductible investment as per SM

Now I'm wondering if future kids, with more TFSA room then they'd ever need, will still consider the SM


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## Jon Chevreau (Apr 4, 2009)

My Saturday column features actuary Malcolm Hamilton, who suggests Ottawa should let those who suffered massive RRSP losses get retroactive TFSA room going back to 18 in order to get parity with those with Defined Benefit pensions (where the plan sponsors get to replenish losses tax effectively.)

Here's the column: 

http://www.financialpost.com/story.html?id=1826891

Later this morning, I'll start publishing on my blog a few dozen emails I received from readers who agree with this suggestion. Glad to hear from members of this forum too.

Watch for update at http://www.wealthyboomer.ca


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## high octane (Jul 21, 2009)

There should be a better formula for the limit

$5000 for everyone per year regardless of age/salary is too restrictive to start

Then before long the limit will mean nothing to most


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## cannon_fodder (Apr 3, 2009)

high octane said:


> Thanks Cannon
> 
> I'm looking for your calculator can you post a link?
> 
> ...


High octane,

I've forwarded my collection of spreadsheets to the owners of this forum so that they may host them all.

It is not uncommon for the HELOC rate to be higher than the mortgage rate. However, perhaps you meant to say if the mortgage rate is lower than the _effective_ HELOC rate (i.e after tax deductibility is factored).

You would also have to factor in not only your marginal tax rate now but when you expect to withdraw funds. If your MTR is very low when you withdraw them from a non-registered portfolio, one would think the advantage of the TFSA would be reduced, if not overwhelmed.


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## cannon_fodder (Apr 3, 2009)

high octane said:


> There should be a better formula for the limit
> 
> $5000 for everyone per year regardless of age/salary is too restrictive to start
> 
> Then before long the limit will mean nothing to most


I believe that it will be just a few years before the government will amend this to start addressing inflation. Think of the RESP - there was a lifetime contribution limit of $42,000 IIRC - now it's $50,000.


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## Maltese (Apr 22, 2009)

The Federal government already plans to raise TFSA limits as inflation rises. Here's a quote from their website.

"The TFSA dollar limit is $5,000 in 2009, and will be indexed to inflation and rounded to the nearest $500 in later years. " 

From what I understand the increase won't be yearly but will be once accumulated inflation results in a $500 increase to the limit.


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## high octane (Jul 21, 2009)

> You would also have to factor in not only your marginal tax rate now but when you expect to withdraw funds. If your MTR is very low when you withdraw them from a non-registered portfolio, one would think the advantage of the TFSA would be reduced, if not overwhelmed.


Good point, I added that to my spreadsheet. But in my case at 25 I plan to semi-actively trade in the TFSA and don't expect my MTR to go down for a long time

I did take into account that the SM gets a tax return on the HELOC interest (I labelled my spreadsheet better). From my trials, the HELOC rate being higher than the mortgage rate at all makes it hard to beat the TFSA, and only beats the TFSA if yeild is low or MTR goes way down

I've been planning to do SM, I just found it surprising when I crunched these numbers and for me I think TFSA has the upper hand, and its a lot easier to do


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## johnsazzr (Apr 20, 2009)

specialk said:


> I still don't understand why people insist on borrowing against, and therefore adding risk to the house where they and their children sleep at night, all in the name of hopefully if everything goes right over a long span of time, will maybe result in a little extra cash....no thanks.


I agree, personally..it is really a question of risk tolerance, and my personal risk tolerance (and that of my family) do not support the logic of borrowing against your princ residence to invest in anything with risk...if it is rental properties or you have the "cash" laying around to offsett that risk then "giver"


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## steve41 (Apr 18, 2009)

Yabbut. What about all those advisers? Leveraging your home means they get to manage more of your money and enjoy more fees. These guys have families with mouths to feed, after all!


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