# TFSA maxed then..?



## heyaday (Feb 19, 2014)

Hi everyone,

So I am on track to have my TFSA maxed out in June/July of this year. I am a little conflicted about what to do next. Being 22 years old, I am not sure if I should open an RRSP just yet or invest in a non-registered account to keep my funds liquid.

In November I become eligible for my company's DC pension plan to which I can contribute 4% of my earnings and they will match 1% (seems kind of dismal, if you ask me).

Right now I earn 45,000, which is expected to increase by approximately 10% in September. I am aware of the opportunity to defer a tax refund until I am in a higher tax bracket, however the idea of having my money locked is what is concerning me. I am not too interested in the First Time Home Buyer's plan either. I am not sure how long I will stay with this company but buying a home is not in my immediate future. I plan to retire (or significantly reduce my work hours) before I am 40.

Knowing all of these facts, what would be the best course of action come August?

Your responses are much appreciated. Thanks.


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

I posted in another thread what my thoughts are about this. Although older than you by a bit, I feel similarly and have chosen not to lock away most of my funds in the RRSP but have instead chosen the TFSA and non-reg options. The TFSA and RRSP (I have a small amount in there from an earlier time) hold the aggressive growth investments (such as they are) and the more boring HISA (gaining about 1% so tax burden is not significant) is kept in non-reg for easy access. The way I have set up my emergency funds ensures the tier 1 and 2 money is the most liquid and the tier 3 and 4 funds are kept in TFSA and RRSP, not quite as easily accessible.

You might want to consider setting up tiered savings to help you organize your money a little better.


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## v_tofu (Apr 16, 2009)

You're young. Live a little. Take a little gamble! Bitcoins, Gold, Strippers, and Jack Daniels. Not necessarily in that order.


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## cainvest (May 1, 2013)

So why does having some money in the RRSP concern you? 

Tough to say what your options are without knowing how you plan to retire at 40, as in, what sources of income will you have then and what level of income do you expect to have when you reach that estimated retirement age.


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## Butters (Apr 20, 2012)

You should think more about rrsp and home buyers. You don't need to contribute a lot. Just 1-2k a year now and more as your income goes up. Especially if you hit that higher tax bracket. 
When you are 40+ and working less that money may come in handy, 20+ years for growth in your investments is worth thinking about. Get us exposure in rrsp. 

But yeah. Higher yield in tfsa. Then save up your emergancy cash in non reg, and Canadian dividend stocks perhaps in non reg. 

You're doing great. You don't need to gamble on bitcoins and gold. If you want gold exposure get abx stock. But im sure he was implying you should have fun a little now  enjoy yourself!


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## Spudd (Oct 11, 2011)

You should contribute at least the 4% to get the company match. It may be a dismal match but it's a guaranteed 25% return right off the bat. After that it's up to you, consider what is your tax bracket now vs at retirement and choose based on that.


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## Eclectic12 (Oct 20, 2010)

heyaday said:


> ... So I am on track to have my TFSA maxed out in June/July of this year. I am a little conflicted about what to do next. Being 22 years old, I am not sure if I should open an RRSP just yet or invest in a non-registered account to keep my funds liquid.


 ... I'm not convinced the RRSP is that much less liquid. 

Since you are considering a taxable account, a stock/ETF/MF sale is going to result in a taxable event, either way. The difference is that the taxable account will be capital gains, the RRSP withdrawal will be income, with a withholding tax applied and any refund or extra taxes applied when the tax return is filed.

So the trade off is to balance tax deferred growth of $1 in the RRSP versus the already taxed $0.70 (or whatever your tax rate is) in the TFSA versus where you think retirement income will be versus the chances of needing a withdrawal of where the investment is.

Do you have an emergency fund so that you might not need to draw on this money in an emergency, regardless of where you decide to put it?




heyaday said:


> ... In November I become eligible for my company's DC pension plan to which I can contribute 4% of my earnings and they will match 1% (seems kind of dismal, if you ask me).


If the investment stays flat, you have contributed $4 to have $5 (your $4 + the company's $1) versus having $4 x 0.7 = $2.80 (likely higher taxes but I'm keeping it simple to illustrate) in the taxable account. 

What's not to like?

Plus unless your budget is really strapped - you probably can invest in a taxable account in addition to the DC pension.




heyaday said:


> ... , however the idea of having my money locked is what is concerning me.


I believe in a DC pension, only the employer's contributions are locked-in. Check the plan rules as well as ask what the options are if you leave from the HR dept/pension admin to confirm this.




heyaday said:


> ... I plan to retire (or significantly reduce my work hours) before I am 40.
> Knowing all of these facts, what would be the best course of action come August?


It is impossible to have confidence in the comments as there is no indication of how long it will be before age 40 or what assumption you are making for what your income will be both just prior to 40 and after.

For example - if you've put money into your RRSP and you have reduced or no income after retiring at age 40 - you know that you can withdraw from your RRSP at an income rate *you control* as you likely won't have any pension income (company or gov't) being paid at that point. As well, there will be no minimum RRSP withdrawals required so if you have an exceptional high income year, you can delay the RRSP withdrawal to the next year when income has returned to normal.


Is sounds to me that if you follow through on this plan, you are in a good situation to ensure a low income level when the RRSP withdrawals are being made.


Again - it is hard to provide input as there is no indication of whether you expect to have any investment income at age 41 or how much. Or if you are working some days, how much that income would be.


You need to be clear on how RRSPs and DC pensions work, make some assumptions and setup some comparison scenarios.

With the control of income through flexible RRSP withdrawals and possibly the ability to shelter RRSP withdrawals by contributing to your TFSA - it sounds to me like you are in a good situation to make effective use of the RRSP.


Cheers


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## Cal (Jun 17, 2009)

You will do no harm by simply opening your RRSP anyways....


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## Jon_Snow (May 20, 2009)

Is it me or are there a lot of young new CMF members who want to retire at 40? To the OP, are you going to build up a seven figure nest egg in the next 18 years? Would love to know how you plan to tackle this - I saw on one of your earlier posts that you live with your parents, so you are able to save at a good clip despite a modest income. Once you move out (I assume one day you will) you will have to pay rent or have a mortgage if you decide to buy and your saving ability will be lessened.

Sorry my post isn't related to the TFSA/RRSP question you asked, but I'm fascinated by your goal of retirement by 40. Good luck to you.


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## Jacq (Feb 8, 2014)

I have my 25 yo son's investments in value stocks. He contributed to an RRSP for the first time last year with a gross income of about $50k - only because he's going to use the first time home buyer's plan next year with a 20% downpayment and being "home-less" and very job secure, needs neither liquidity or much of an emergency fund for that matter. 
So far, he's had a takeover with Petrominerales (50% gain on that one), and the gold mining stocks that I bought for him in his RRSP are running about a 40% gain. That will be that much less he will have to save or contribute.

Ordinarily, people want short-term liquidity to buy something in the short term (eg. I keep cash on hand to buy stocks at depressed prices and hold on to it in a HISA if I can't find anything), yet you're not purchasing a house, so the first question would be what you need liquidity for? I would suggest that maybe your paycheque itself is liquid enough. 

Another question - I was hiring university students just out of business school at ~$55k/year (base - not counting bonus of ~10% and DC plan contributions with no employee portion of 10%) over 7 years ago. Is your salary where it should be? Just seems incredibly low to me but it might be the industry norm. If your goal is FI or ER in a relatively short period of time, I'd be inclined to go where the money is.

At this stage, you almost just have to avoid doing anything stupid rather than optimize the perfect tax planning scenario.


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## Sherlock (Apr 18, 2010)

If he has $31,000 now at 22, and he wants to have $1 million by age 40, assuming a 7% annual return he needs to contribute about $2070 monthly. Which is possible now while he lives with his parents, but if he moves out and has to pay rent or mortgage he will need a significant pay raise to be able to maintain that $2070/monthly contribution. And this is assuming he does not use any of his savings for a house downpayment.


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## heyaday (Feb 19, 2014)

Thank you for the replies.

In response to some of the questions:

Jon_Snow - Although I am a new CMF member, I have been an avid reader for a long time. How do I plan on saving enough for retirement (or more accurately, financial independence)? By sticking to the basics of course. Saving a significant portion of my income (at least half) even when I do move out and by practicing smart spending. I don't plan on having children, I don't want an extravagant wedding and my main interests in life are mostly free (outdoor recreation, reading, spending time with friends and family). Having a partner who is on the same page with a similar income trajectory is very helpful as well. Also, 40 is the age that I hope to never have to rely on a paycheque, not necessarily never earn one.

Jacq - I would love to work for you! Of my graduating class I'm not sure if I know anyone who got that high of a starting salary. Most couldn't (and still haven't) been able to find jobs or are underemployed. I feel that I am paid fairly in addition to the myriad of other monetary and non-monetary benefits that my company offers. Plus I am anticipating a 10% salary increase come October. Thanks for your advice.


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## Jon_Snow (May 20, 2009)

Heyaday, you sound a lot like myself... and I'm poised to ER in my early 40's. I think you can do it, especially if you do find a like minded partner - that will speed things up immensely.


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## Taraz (Nov 24, 2013)

Why not invest in an non-registered account? Take advantage of the lower tax rates for dividends and capital gains.


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## donald (Apr 18, 2011)

I would personally keep it liquid(or at the very least 60-70 %)
@ 22 it aint so bad living at home but give it another couple yrs or 2 and it will likely intensify to move out(coming from a guy that waited till 28 lol,i stretched it about as long as possible)
Soon or later your going to want to spend time alone with your girlfriend and not hang out in your mom and dads basement right?
Your first time living alone there is more than just rent,your likely going to at a minimum buy a few starter pieces likely right?Tv,furniture,bed,maybe appliances ect.
You have a nice start on the tfsa,you got a pretty good starting salary(lots of human capital ect)
Only reason i say this is because even if it is non reg you still got investment risk happening and i wonder if the extra 7/8% per yr you might be hoping for is worth it mentally or emotionally,we have not had any nasty downturns lately and feels like we could be due(i don't know how you are emotionally in corrections but having nearly all your liquid savings in the capital markets is not the way to go(m.o)
Makes it easier to stay fresh and be focused on your career,day job
I think your putting the cart a little ahead of the horse......there is value in cold hard cash
I took abit off the table in my non reg not so long ago and i am happy i did(not worth it to be fully invested in all your capital,yeah ypu have a steady paychek but still)my 2 cents


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## donald (Apr 18, 2011)

Just to add,you are so fresh in the ''real world" that the R word should not even be in your thoughts right now.
You have barley had a shift on the ice!Slow down and stop thinking about 25 yrs from now,don't get to wrapped up in the ER yet.
I think it is a bit cray u thinkin about it already actually


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## Eclectic12 (Oct 20, 2010)

heyaday said:


> .... So I am on track to have my TFSA maxed out in June/July of this year ... , however the idea of having my money locked is what is concerning me ... I plan to retire (or significantly reduce my work hours) before I am 40 ..


With more time to think about it, a question comes to mind ... with $31.5K in your TFSA, what sort of expenses (ex. emergency) can you see happening in your life that the TFSA won't cover the days to withdraw from the RRSP?

If you split the money between a taxable account and RRSP, you could choose what makes the most sense between the TFSA & taxable account, in addition to potentially buying the time for the RRSP withdrawal (if needed).


It seems to me that having so much in a TFSA, when compared with the likely situations you might face - is one way to make any sort of delay irrelevant.


Cheers

*PS*

I personally would do both (i.e. RRSP and taxable investments), monitor how I was doing versus plan, think through the options for drawing on the RRSP and adjust accordingly.


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