Taxpayers hit with penalties on tax-free savings accounts


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ashedfc   
Member since: Jun 10
Posts: 2153
Location: GTA

Post ID: #PID Posted on: 14-06-10 10:26:45

Quote:
Originally posted by newton


Lets take an example say if I contribute $5000 to a RRSP and a TSA.

Here is what will happen


RRSP - Tax deduction at 20% tax bracket - $1000 refund.

I invest $5000 in Apple stock which quadruples to $20000 in 30 years. When I withdraw the $20,000 I get taxed at the lowest tax rate (say 20% at that time) which is $4000.00

Lets say the $1000 refund earns me a compounded 5% over 20 years. So I have $2653.00 from that.

My total gain on $5000 contribution is $2653+$16,000 = $18,653

TSFA

I contribute $5000.00 I get no tax deduction
I invest $5000 in Apple stock which qudruples to $20000 in 30 years. I sell the stock and withdraw $20,000 with no tax liability.

SO RRSP gain = $18653
TSFA gain = $20,000

SO it seems like the TSFA is a good deal. Please correct me if I am wrong.



You are absolutely correct. And while you are holding AAPL stock for 30 yrs, you can also sell covered call on AAPL & make more money. Since this activity is in a TFSA - all the gains are Tax Free.



imwhoever   
Member since: Aug 09
Posts: 277
Location: My laptop

Post ID: #PID Posted on: 14-06-10 11:31:33

Thank you everyone, now much clear. I am gearing up before going to bank/finance advisor. (and its always good to be dumb here than dumb to bank person. :p )



rajcanada   
Member since: Jul 03
Posts: 2713
Location: Kitchener, ON

Post ID: #PID Posted on: 14-06-10 11:36:02

As per the rules, whatever amount is withdrawn from TFSA can be put back into TFSA only next year.

Why are TFSA transfers from one institution to another being penalized and counted as new contributions? What is the use having a facility such as transfer of TFSA if in fact you are going to be penalized if you use it. On top of that many banks are also charging fees for transfer.


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ashedfc   
Member since: Jun 10
Posts: 2153
Location: GTA

Post ID: #PID Posted on: 14-06-10 11:38:26

Quote:
Originally posted by imwhoever

Thank you everyone, now much clear. I am gearing up before going to bank/finance advisor. (and its always good to be dumb here than dumb to bank person. :p )



Because the gains in a TFSA is tax free, I would recommend you go for investment choice with more growth potential, than a GIC's (as its being done by majority of TFSA account holders). Or may be if you a high risk tolerance, than buy Gold or Precious metal in your TFSA account.

This fund can be purchased in a TFSA account (for as less as $25 per month), http://www.theglobeandmail.com/globe-investor/funds-and-etfs/funds/summary/?id=68809

Visit me at http://www.edfc.ca" rel="nofollow">LINK



ashedfc   
Member since: Jun 10
Posts: 2153
Location: GTA

Post ID: #PID Posted on: 14-06-10 11:41:37

Reasons to Own Gold. If held in a TFSA all the gains are tax free.
Read this link http://www.sprott.com/docs/Reports/reasons_to_own_gold.pdf

For more info visit http://www.edfc.ca" rel="nofollow">LINK



pratickm   
Member since: Feb 04
Posts: 2831
Location: Toronto

Post ID: #PID Posted on: 14-06-10 11:46:26

Quote:
Originally posted by newton
RRSP - Tax deduction at 20% tax bracket - $1000 refund.

I invest $5000 in Apple stock which quadruples to $20000 in 30 years. When I withdraw the $20,000 I get taxed at the lowest tax rate (say 20% at that time) which is $4000.00

Lets say the $1000 refund earns me a compounded 5% over 20 years. So I have $2653.00 from that.

My total gain on $5000 contribution is $2653+$16,000 = $18,653

For simplicity, you should assume the $1,000 refund is plowed back into the RRSP as well.
If you don't make that assumption, then you have to account for the capital gains (and dividend) taxes on your non-registered investment.
Once you account for the taxes on the $1,000 "refund", the benefit of the RRSP reduces further.
Of course, there is a big assumption that your MTR in retirement will be so much lower than current (20% vs. 40%).
That may not be the case.
The higher you assume the retirement MTR to be, the less is the benefit of RRSP contribution.

Quote:
TSFA
I contribute $5000.00 I get no tax deduction
I invest $5000 in Apple stock which qudruples to $20000 in 30 years. I sell the stock and withdraw $20,000 with no tax liability.

SO RRSP gain = $18653
TSFA gain = $20,000

SO it seems like the TSFA is a good deal. Please correct me if I am wrong.

To be fair, you should discount both values down to present value since you are talking about a future value.
The $1,000 tax "refund" you receive today should be valued higher than the $1,000 you will receive after 30 years from either the RRSP or the TFSA.
Which is why it's important to assume that the $1,000 is rolled into the RRSP and not kept outside it.

Your conclusion is valid, though.
I think in this case the TFSA will beat the RRSP.


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ashedfc   
Member since: Jun 10
Posts: 2153
Location: GTA

Post ID: #PID Posted on: 14-06-10 11:50:54

Quote:
Originally posted by pratickm

Quote:
Originally posted by newton
RRSP - Tax deduction at 20% tax bracket - $1000 refund.

I invest $5000 in Apple stock which quadruples to $20000 in 30 years. When I withdraw the $20,000 I get taxed at the lowest tax rate (say 20% at that time) which is $4000.00

Lets say the $1000 refund earns me a compounded 5% over 20 years. So I have $2653.00 from that.

My total gain on $5000 contribution is $2653+$16,000 = $18,653

For simplicity, you should assume the $1,000 refund is plowed back into the RRSP as well.
If you don't make that assumption, then you have to account for the capital gains (and dividend) taxes on your non-registered investment.
Once you account for the taxes on the $1,000 "refund", the benefit of the RRSP reduces further.
Of course, there is a big assumption that your MTR in retirement will be so much lower than current (20% vs. 40%).
That may not be the case.
The higher you assume the retirement MTR to be, the less is the benefit of RRSP contribution.

Quote:
TSFA
I contribute $5000.00 I get no tax deduction
I invest $5000 in Apple stock which qudruples to $20000 in 30 years. I sell the stock and withdraw $20,000 with no tax liability.

SO RRSP gain = $18653
TSFA gain = $20,000

SO it seems like the TSFA is a good deal. Please correct me if I am wrong.

To be fair, you should discount both values down to present value since you are talking about a future value.
The $1,000 tax "refund" you receive today should be valued higher than the $1,000 you will receive after 30 years from either the RRSP or the TFSA.
Which is why it's important to assume that the $1,000 is rolled into the RRSP and not kept outside it.

Your conclusion is valid, though.
I think in this case the TFSA will beat the RRSP.



Love your calculation. That is exactly what I recommend to my clients, when they ask for TFSA or RRSP. The best option is Why not both.
Do an RRSP, then get the tax refund, & use the refund to put in an TFSA. In whichever year, you have less income, withdraw from RRSP (so tax implications are less) & put it in a TFSA.





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