# RRSP and TFSA together?



## neverxotic (Feb 28, 2011)

I've recently been reading the debate (banter?) that has been going on in this thread and was wondering does it not make sense to have both an RRSP for long term holds and a TFSA that can be used to realize short term goals? Granted many people cannot meet there full contribution room each year (for many reasons) I don't see the harm in being able to attack investing from 2 different directions even if that was the case. The TFSA could be used to focus on individual stocks where trading would occur more frequently. The gains made from the TFSA could be put into the RRSP. Does anyone use this strategy?

Unfortunately my forum searching skills didn't seem to find any answers to this question.


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## OhGreatGuru (May 24, 2009)

neverxotic said:


> I've recently been reading the debate (banter?) that has been going on in this thread and was wondering does it not make sense to have both an RRSP for long term holds and a TFSA that can be used to realize short term goals? Granted many people cannot meet there full contribution room each year (for many reasons) I don't see the harm in being able to attack investing from 2 different directions even if that was the case. The TFSA could be used to focus on individual stocks where trading would occur more frequently. The gains made from the TFSA could be put into the RRSP. Does anyone use this strategy?
> 
> Unfortunately my forum searching skills didn't seem to find any answers to this question.


You seem to be confusing "short term goals" with "Short term holds". IMHO short term trading shouldn't be done in any registered account because yuu cannot claim any capital losses.

If you have "short-term goals", you want fixed income and relatively conservative, non-volatile equity.


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## warp (Sep 4, 2010)

As well, just a quick bit of advice...

You should be looking at the RRSP/TFSA debate with the tax implications in mind.

If you have to choose between the two, generally if your income is below about $ 40K a year, the TFSA is better.
You should use the RRSP contribution to lower your TAXABLE INCOME to as close as you can get it to the lowest tax bracket.

Otherwise, pay the taxes now, and put your funds into the TFSA for tax free growth.

Of course, if you can,,,its best to use both.

Losses will NOT be able to be used against gains in either account.

good luck.


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## neverxotic (Feb 28, 2011)

> You seem to be confusing "short term goals" with "Short term holds". IMHO short term trading shouldn't be done in any registered account because you cannot claim any capital losses.





> Losses will NOT be able to be used against gains in either account.


Those are very good points. Thanks! It just reaffirms the fact that I have so much to learn because I didn't even think about using losses against gains. Are there typically restrictions on where money can be allocated within a non-registered account?


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## neverxotic (Feb 28, 2011)

So I've been thinking about this a bit more and it seems that the ability to claim losses is a kind of safety net so to speak. But if you were to ignore losses wouldn't you come out further ahead using a TFSA than a non-registered account? 

The $5000 cap is a limiting factor of course but if you only had $5000 for example and you put that both in a TFSA and a non-registered account and say the return is 15% for both, since the allocations were similar, then with the TFSA you would have $5750 but with the non-registered account you would have less due to the capital gains. I am novice so am I over simplifying this somehow?


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## Cal (Jun 17, 2009)

No. You are getting it.

TFSA will always come out ahead, with a comparable investment, as you have no capital gains, and have no payable tax upon withdrawl.

The only exeption being holding a foreign dividend paying equity in your TFSA. As it is best to hold that within your RRSP to avoid witholding taxes.

Confused yet? 

Just hang around here more and soak up as much as you can.


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## Larry6417 (Jan 27, 2010)

The TFSA and RRSP are mirror images of each other. Equivalent amounts invested in either will yield the same after-tax income assuming equal rates of return and the same marginal tax rate (MTR) upon contribution and withdrawal. For example, imagine someone at a 40% MTR. That person can invest $1000 (pre-tax amount) in a RRSP or $600 in a TFSA (the equivalent after-tax amount). Let's imagine that the investment doubles over 8 years. The TFSA now holds $1200 while the RRSP holds $2000. So the RRSP wins hands down...*not*. Assuming a MTR of 40% upon withdrawal, $2000 withdrawn from the RRSP will be incur tax of $800, so the after-tax amount from the RRSP is $1200 – exactly the same as the TFSA.

Please note that there are a lot of assumptions in the above. If these assumptions don't apply to you, then the conclusion may not apply either. 

*Assumption # 1*: the full pre-tax amount is invested in the RRSP. To get the full pre-tax investment in the above example, one must take the $600 in after-tax savings and borrow $400 to get a contribution of $1000, which then yields a tax refund of $400 (which can then be used to repay the $400 loan). Almost no one does this. Most people who take out RRSP loans do so to catch up on prior missed contributions. Many people will contribute the refund from the after-tax contribution, $240 ($600 X 0.4), for a total of $840 in the RRSP – well below the full pre-tax amount. Many will also use the refund to pay down a mortgage or other debt. I'm not saying that's a bad use of the refund; I'm saying that the rate of return from the RRSP will fall short of the TFSA if one does so.

*Assumption #2*: The MTR is the same at contribution and withdrawal. If your future MTR is higher, then the RRSP loses. Let's use the example from above. Prior to withdrawal one has $1200 in a TFSA or $2000 in a RRSP. If the MTR is 50%, the after-tax amount from the RRSP is only $1000, less than the $1200 from the TFSA. The opposite is true if your future MTR is lower. Imagine that the MTR upon withdrawal is only 30%. The amount from the TFSA is still $1200. The RRSP still has $2000, but instead of paying $800 ($2000 X 40%) the tax is $600 ($2000 X 30%). The after-tax income from the RRSP, in case the MTR falls to 30%, is $1400 – more than the TFSA. Please note that these calculations don't account for claw back of social benefits like GIS or OAS. The CD Howe institute took this into account and concluded that the METR (marginal effective tax rate, or tax rate including reduction in social benefits) is substantially higher than Canadians think, which lowers the attractiveness of RRSPs compared to TFSAs for Canadians expecting to rely on OAS or GIS.

*My 2 cents*: Decide what your short and long-term goals are and invest accordingly. If there's a possibility that you need access to the money in the short or intermediate term, then the TFSA makes more sense. Money withdrawn from a TFSA can be re-contributed the next year. Money withdrawn from a RRSP cannot (the exceptions are the HBP and LLP). 

Good luck!


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## slacker (Mar 8, 2010)

Cal said:


> No. You are getting it.
> 
> TFSA will always come out ahead, with a comparable investment, as you have no capital gains, and have no payable tax upon withdrawl.


False.

One invests before-tax money in RRSP, and after-tax money in TFSA. There are situations where the compounding effect with the larger initial principal in RRSP will overwhelm the tax-free nature of TFSA.

In the end, both have advantages and disadvantages, and a blanket statement like "FOO is always better" is usually wrong. I just max out both of them, and forget about the "TFSA vs RRSP" debate.


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## steve41 (Apr 18, 2009)

Broken record time. Look, I have seen a lot of financial plans, and I can say without a doubt it is virtually impossible to fabricate a plan in which the tax rate in retirement is the same as, or higher than, pre retirement, for a 'saving for retirement' financial plan. If you have gazillions of dollars and are obsessed about passing on a huge estate, then this rule doesn't apply, otherwise, your tax rate in retirement will almost always be lower.


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## neverxotic (Feb 28, 2011)

Yes the confusion is setting in! 



slacker said:


> False.
> One invests before-tax money in RRSP, and after-tax money in TFSA. There are situations where the compounding effect with the larger initial principal in RRSP will overwhelm the tax-free nature of TFSA.


I believe you are right in the TFSA/RRSP comparison but I was using the comparison of a TFSA to a non-registered account.



> Please note that these calculations don't account for claw back of social benefits like GIS or OAS.


I'm beginning to see that there a lot of "hidden" taxes that people don't think of that could in fact result in being taxed higher in retirement than what you would be taxed when working. But if what Steve41 says is true then maybe this isn't a factor and can be ignored. This just adds to the confusion of course.  

I definitely need to do more research... this forum is great!!


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## Eclectic12 (Oct 20, 2010)

neverxotic said:


> So I've been thinking about this a bit more and it seems that the ability to claim losses is a kind of safety net so to speak. But if you were to ignore losses wouldn't you come out further ahead using a TFSA than a non-registered account?
> 
> The $5000 cap is a limiting factor of course but if you only had $5000 for example and you put that both in a TFSA and a non-registered account and say the return is 15% for both, since the allocations were similar, then with the TFSA you would have $5750 but with the non-registered account you would have less due to the capital gains. I am novice so am I over simplifying this somehow?


Huh? Not being able to claim losses is a safety net? 

I suppose if you pay attention so that investments are conservative, then maybe. I don't get the impression that most people do - until they have been burned by it. Those who pay attention to these posts benefit!
*grin* 

At the end of the day, a loss in a registered account (TFSA or RRSP) has two bad parts to it. 

The first is that the loss can't be used to reduce the taxes owed on other gains, like they can in a non-registered account (this part seems to be easily understood). 

The second is that there are only two ways to provide more funds for future investments - contributing more funds or growth from existing investments. If one has maxed out the contributions and does not have any growth - it is much tougher to buy any bargains, no matter how attractive. (This one seems to be tougher for people to understand - until they are affected by it.)

Bottom line in my opinion, is that registered accounts should be used for conservative investments until one has determined/tested the investment strategy and is fully comfortable with the investments/risk/how they will be bought-sold.

By the way, another factor for the TFSA to think about is one's age - for an eighteen year old who has many years of $5K TFSA room, there is time to make up for losses. Those who are older and don't know if they will be around next year - probably should be more conservative. 


As for TFSA versus non-registered for similar allocations/amounts, yes the TFSA will win. 


Cheers


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## solrpr (Mar 23, 2011)

*Buying a home - is TFSA the right way to go?/ Financial advise needed*

Apologies in advance if this appears wrong, first time posting and i was unable to find an answer to what i am looking for. cant seem to figure out how to start a new thread

*here is my financial situation*
(living in toronto)

recently separated, on mat leave, earning only EI benefits - 1600/mo
rent 900
phone/internet etc 100/mo
have a 6 mo old baby
car payments 400 a month
insurance 215
contribution to RRSP 100/mo

going back to work in Oct of this year and i guess that iswhen i can start saving really. anything over the income for now is coming from my savings (about 5000 left now)
no other credit card debts

definitely want to buy a small small house in the next couple years, but cant figure out where and how to start. *dont qualify for HBP* so its savings for downpayment.
total noob at all of this, no idea about how the housing market is/will be in the next couple years.

but any advice on how to save, and where to save would be so much appreciated!
Thanks All


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## bmckay (Mar 10, 2011)

solrpr,

You live in Toronto. Get rid of your damn car. Take transit. That will free up 600 a month. More if you include gas!


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## Brian Weatherdon CFP (Jan 18, 2011)

....and while you save with public transit, also pat yourself on the back for reaching where you're at without any debt. That's awesome, and you'll accelerate your progress when you're back working.


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## slacker (Mar 8, 2010)

@solrpr: You appear to have started your question in someone else's thread?

Anyway $215 per month for car insurance sounds high. I pay about $125 a month, and I drive 70km a day to/from work in GTA. Try to shop around with websites like kanetix.ca or insurancehotline.com . Also try Meloche Monnex if you're affiliated with a University or other professional group.

Definitely try to get rid of the car altogether if you don't absolutely need it. 

Also consider a pause on contributing to your RRSP for now. That money would serve better currently as a rainy day fund, and with your current unemployment, the tax savings from RRSP will be small anyway.

I think you need to increase your income. Have you investigated all channels? Child support? Other social assistance? Support from family and friends?


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## solrpr (Mar 23, 2011)

*financial advise*



slacker said:


> @solrpr: You appear to have started your question in someone else's thread?
> 
> Anyway $215 per month for car insurance sounds high. I pay about $125 a month, and I drive 70km a day to/from work in GTA. Try to shop around with websites like kanetix.ca or insurancehotline.com . Also try Meloche Monnex if you're affiliated with a University or other professional group.
> 
> ...


@Slacker: for some reason i am unable to start a new thread..apologies.
i have tried getting rid of the car, but it was a joint loan, and now i am stuck with it. recently separated after a pretty bad domestic assault situation and now i have to rethink/replan everything. the loan on the car is basically higher than the market value of the car at this time. i dont know what i can do to get rid of it. any suggestions?

shopped around a lot for car insurance, 215 is the cheapest i got. havent been a G driver for long, perhaps thats why.

never drive to work anyways, hence the car is just there for baby emergencies. (6 month old baby)
want to start planning ahead and thats where i cant seem to put my head together.. everything just seems dwindling at the moment.
no child support yet..lawyers working on it..
no share in any matrimonial property yet... so not counting on it.

if i stop the RRSP contribution, is there a penalty?
i dont know if i should move the money in the savings to a TFSA?

i guess the only thing i can count on is to wait to go back to work in oct and hopefully by then i can at least get daycare subsidy or something..

any suggestions appreciated
many thanks for all replies


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## humble_pie (Jun 7, 2009)

hello soir,

it does look like you should get rid of the car asap. Taxis are fine for baby emergencies. Let us hope you will not ever have any such emergencies. For general transport, it's possible to take babies onto transit systems. It is a bit awkward, but thousands of young mothers manage to do this.

personally i think you should also stop your rrsp contributions since it does not sound as if you will be paying any income tax. There will be plenty of time to build up an rrsp later.

with respect to a tfsa, this would be almost identical to your present savings account. If i were in your place, i would look after other priorities & i would not take the time to set up a tiny tfsa. The tax-free aspect of the dollars it might earn on 5k become almost meaningless in your situation.

is there any way you can manage, right now, to earn a bit of extra money in your neighbourhood. For example, when you take the infant out for his or her daily outing, could you walk a neighbour's dog as well.

the last thing i am is a lawyer but surely it should be possible to get an emergency interim order for temporary child support passed asap. Surely this would only mean a delay of a few weeks. Doesn't the system always seek to protect the children esp a newborn baby ... later on you can divide up matrimonial assets, etc.

hoping that the brightening spring days will bring you better fortune soon.


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## slacker (Mar 8, 2010)

solrpr said:


> @Slacker: for some reason i am unable to start a new thread..apologies.
> i have tried getting rid of the car, but it was a joint loan, and now i am stuck with it. recently separated after a pretty bad domestic assault situation and now i have to rethink/replan everything. the loan on the car is basically higher than the market value of the car at this time. i dont know what i can do to get rid of it. any suggestions?
> 
> shopped around a lot for car insurance, 215 is the cheapest i got. havent been a G driver for long, perhaps thats why.
> ...


@solrpr: I'm primarily concerned about your ability to handle life's essentials right now. Food, shelter, etc. If you're not using the car, you should consider cutting auto insurance, and save $215 a month. 

On RRSP and TFSA, you're not really getting any tax benefits from those right now. There should be no penalty on stopping RRSP contributions. You should use that money to build up a rainy day fund instead. 

You should also explore any and all government assistance programs:

http://www.servicecanada.gc.ca/eng/audiences/families/benefits.shtml
http://www.servicecanada.gc.ca/eng/lifeevents/family/index.shtml
http://www.servicecanada.gc.ca/eng/lifeevents/baby.shtml

Don't forget to file your taxes, so that you can get your tax refund !!


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## solrpr (Mar 23, 2011)

many thanks for your suggestions and well wishes, Humble pie and Slacker.
unfortunately, i have no family in canada, makes things a little harder. i am relatively new here so dont know much about a lot of things. i appreicate all the links you have posted @slacker. thank you.

i did file my taxes as well, expecting about a 1000$..not much, but helps.
it is sad that some people will value money more than their chikdren. mr. ex is claiming undue hardship and hence the delay in child support. although he makes 65K! 
anyhow, i am going to call the bank on monday to drop the rrsp contributions for a while.

would cutting the auto insurance reflect negatively later when shopping around for insurance?

also, am not familiar with GTA, does anyone know decent (bed bug free) areas perhaps closer to ttc, where one can rent a place? seems like wherever i look, there are termites, bugs!!!
i will be resuming work downtown toronto and at that time we are looking to add daycare costs! 

nonetheless, hoping times will get better and again thank you for your wishes and advise.
many many thanks


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## financialnoob (Feb 26, 2011)

solrpr said:


> many thanks for your suggestions and well wishes, Humble pie and Slacker.
> unfortunately, i have no family in canada, makes things a little harder. i am relatively new here so dont know much about a lot of things. i appreicate all the links you have posted @slacker. thank you.
> 
> i did file my taxes as well, expecting about a 1000$..not much, but helps.
> ...


By relatively new, do you mean in Ontario or living in Canada? If so, approximately, how long have you been here? And when did you purchase the car in relation to living in Canada?

The reason I ask is that if it wasn't long before you got the car, the loan may have been based on a significantly higher APR due to lack of a credit history. You may be able to re-finance this at a much lower APR if you've been here a bit longer.

With regards to insurance, it might have a slight impact in the future. But I would speak with an insurance broker first. There may be a way to get rid of certain coverages. Most people have $1M liability coverage, but if you're not driving, this could be reduced to the minimum ($200K according to FSCO). You may also be able to drop collision. You may still want to keep insurance in some form though, in case the car is stolen. 

Also, how long have you driven/been insured, and when was the last time you shopped around? That can also impact the insurance costs.

As others pointed out, the RRSP contributions won't help your tax situation so should be stopped immediately.

With regards to HBP, you said you don't qualify, but is that because you already participated? If you haven't owned in 5 years, you can re-qualify and participate again. So it's something to consider in the future.


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## solrpr (Mar 23, 2011)

financialnoob said:


> By relatively new, do you mean in Ontario or living in Canada? If so, approximately, how long have you been here? And when did you purchase the car in relation to living in Canada?
> 
> The reason I ask is that if it wasn't long before you got the car, the loan may have been based on a significantly higher APR due to lack of a credit history. You may be able to re-finance this at a much lower APR if you've been here a bit longer.
> 
> ...


 
Hello:
came to canada in 2007 and that is when purchased the car. it is an upside down loan since at the time my ex and me had a different car, but both our names on it. now that he is gone, i already went and refinanced and that is how the payments have come down. however, the old loan carried forward(my ex had another car in between) hence the total value owing is more than the car is worth. no point selling.

i could follow your insurance suggestiosn for sure. i will check and find out. i have been driving since i arrived in canada, but only got my G in 2009, which is the reason they say for higher rates. i was with bel air before and have shopped around a fair bit in the last month before settling with my current one, which is offering me the lowest of 215$/mo.

with regards to HBP, CRA indicated that even though my name is not on the title (ex's name on house) but since i lived there, it was my principal residence so i would need to wait.

Thanks again for your input


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