TFSA: What Asset Allocation?

[pmj]

In addition to issues such as marginal tax rates, recovery of foreign with-holding taxes, etc - dividends (Cdn or other), "other income", and capital gains in non-registered accounts all increase one's net income. Income of any kind within a TFSA does not increase one's net income - and thus it has no effect on clawbacks such as OAS, medical expense thresholds, "steps" in the calculation of Ontario Health Premium, etc. All other things being equal - which they rarely are - avoiding increases to one's net income is usually beneficial tax-wise.

[gsp_]

What am I missing?

Lots.

First, the US withholding is only going to be $7.50(15% of $50). That's your cost on the TFSA side.

On the non reg side, you'll pay $13.24(31.15% of $42.50) for the foreign income(foreign dividends are taxed as income) and $7.79(15.58% of $50) for the cap gains. You should be able to get most/all of the foreign withholding back as a credit on your taxes so your total cost would be $13.24 + $7.79 - $7.50 = $13.53. However as shakes points out the cap gains tax is deferred until you sell and that deferral is worth something.

Why is this even a choice? Does the subject facing this choice have no RRSP whatsoever? If he does he would likely be better off holding those assets in the TFSA and moving the US equities to the RRSP. Moreover is our subject also not maximizing his TFSA? That seems like a rather niche segment

[Shakespeare]

If one has a reasonably large portfolio such that the TFSA is a small amount and there is room for all foreign and US equities elsewhere, the two strategies that make the most sense are filling it with Canadian fixed income or filling it with Canadian equities. The first makes sense if you have limited RRSP room.

[Thorn]

I, like many of your here, have three accounts - unsheltered, RRSP/RRIF and TFSA. Three comments:

1. I think your asset allocation needs to first be worked out for your entire portfolio (cash, fixed income, equities), then decisions made about allocating funds to each account. Certainly tax-inefficient income like interest should be in sheltered accounts as much as possible.

2. It is important for persons working over a long period of time and contributing regularly to their RRSP to consider the possibility that too much money ends up there, and you are forced to take unacceptable payouts during your RRIF schedule, affecting OAS etc clawbacks.

3. Don't forget a fully taxable account - many of us will receive inheritances in coming years which will exceed RRSP and TFSA contribution room.

PS don't wait too long to do some serious pre-retirement income and expense planning, to determine to what extent you will be dependent on investment income for your monthly bills, which hopefully do NOT include long-term debt.

[Archie]

My TFSA is all stocks. If I had any savings accounts or GICs (I don't, I put all my money in stocks except for about 3k in my chequing account) I would keep them in an unregistered account as I consider it a waste of precious TFSA space to put anything in there except aggressive growers. I feel fortunate that I entered the workforce right before the TFSAs were introduced, so I am able to maximize my use of it.

I use my RRSP for American dividend paying stocks, and when I decide to add some FI to my portfolio when I get older, I'll put it in my RRSP.

[Archie]

2. It is important for persons working over a long period of time and contributing regularly to their RRSP to consider the possibility that too much money ends up there, and you are forced to take unacceptable payouts during your RRIF schedule, affecting OAS etc clawbacks.

Isn't it morally wrong for someone with a fat RRSP to worry about OAS clawbacks? OAS is intended for poor people, not well-off people with hundreds of thousands or even millions in their RRSPs.

[BRIAN5000]

Isn't it morally wrong for someone with a fat RRSP to worry about OAS clawbacks?

NO!!

[adrian2]

contributing regularly to their RRSP to consider the possibility that too much money ends up there, and you are forced to take unacceptable payouts

Oh, the horror! Becoming too rich is an unacceptable burden!

[Bylo Selhi]

contributing regularly to their RRSP to consider the possibility that too much money ends up there, and you are forced to take unacceptable payouts

Oh, the horror! Becoming too rich is an unacceptable burden!

[like_to_retire]

Oh, the horror! Becoming too rich is an unacceptable burden!

Well sure, but it's more a matter of "Becoming too taxed". I suppose it's a result of bad planning, but there is a certain level of frustration to see money going into an RRSP at one tax rate and coming out at a significantly higher rate. My future path certainly reveals this situation and I kick myself for putting as much into the RRSP as I did.

ltr

[Taggart]

2. It is important for persons working over a long period of time and contributing regularly to their RRSP to consider the possibility that too much money ends up there, and you are forced to take unacceptable payouts during your RRIF schedule, affecting OAS etc clawbacks.

Isn't it morally wrong for someone with a fat RRSP to worry about OAS clawbacks? OAS is intended for poor people, not well-off people with hundreds of thousands or even millions in their RRSPs.

I don't have to worry about the OAS clawback but then again, .......I didn't realize I was poor either.

[newguy]

Isn't it morally wrong for someone with a fat RRSP to worry about OAS clawbacks?

It's morally wrong to give the government more money than you absolutely have to in the same way as it's morally wrong to give a crack addict more crack.

newguy

[CROCKD]

My future path certainly reveals this situation and I kick myself for putting as much into the RRSP as I did.

If you are young enough i.e. some years before 72 it is a matter of planning and making yearly withdrawals from your RRSP to level out income.
When you are in the mandatory RRIF withdrawal stage as I am, you take your lumps and be glad that you are fortunate enough to have enough income to be in that position.

[adrian2]

Oh, the horror! Becoming too rich is an unacceptable burden!

Well sure, but it's more a matter of "Becoming too taxed". I suppose it's a result of bad planning, but there is a certain level of frustration to see money going into an RRSP at one tax rate and coming out at a significantly higher rate. My future path certainly reveals this situation and I kick myself for putting as much into the RRSP as I did.

Have you actually done the math comparing the present / future value of two scenarios:
(A) what you have actually done, put $x of your pre-tax income into your RRSP, which has grown tax free for decades, and in the next decades has to come out as taxable income at y% MTR; vs.
(B) not contributing $x, paying tax decades in the past at z% MTR, paying tax annually on non-registered investments.

I would be interested to learn the numbers y vs. z which make scenario A win.

[like_to_retire]

Have you actually done the math comparing the present / future value of two scenarios:

Well, I've done a fair bit of the math, and I've seen a multitude of articles that make it fairly clear that when the effective tax rate at the time of withdrawal is higher than the effective tax rate at the time of contribution, an RRSP isn't a winning situation.

With careful investing, my retirement taxable income is about 10K above my final working salary, and that's great, but at 72 when I have to tack on forced RRIF income, it gets ugly. My own fault, and I'm not complaining, but I don't think the subject should be poo-poo'd when it comes up.

I personally didn't have a lot of time to look closely at these things when I was working. Instead, I religiously socked money away into both unregistered accounts and RRSP's. Everyone, especially the government, promoted it as the smart thing to do.

Once I retired and began to examine the tax implications, I see why the government likes the RRSP programs. In many cases it's a winner for them. They're getting much more in return when RRIF withdrawals begin.

ltr

[adrian2]

Have you actually done the math comparing the present / future value of two scenarios:

Well, I've done a fair bit of the math, and I've seen a multitude of articles that make it fairly clear that when the effective tax rate at the time of withdrawal is higher than the effective tax rate at the time of contribution, an RRSP isn't a winning situation.

You're conveniently neglecting decades of tax free compounding. You're also forgetting that today's tax rates are possibly lower than decades ago, and my often repeated mantra that "official" tax brackets are far from a good approximation for many people, especially in what's supposed to be the lowest tax bracket.

I've seen a multitude of studies, including from our fellow member Steve, showing that an RRSP wins even if the tax rate when withdrawing is ~10% higher than the one when contributing. You cannot just compare MTR-in and MTR-out and pick a winning scenario based on this comparison alone.

OTOH, FWIW, our RRSP's are about 12% of our portfolios, so it's unlikely we'll face unacceptable forced payouts from them.

[Bylo Selhi]

I suppose it's a result of bad planning, but there is a certain level of frustration to see money going into an RRSP at one tax rate and coming out at a significantly higher rate. My future path certainly reveals this situation and I kick myself for putting as much into the RRSP as I did.

How is it "bad planning" that you have to withdraw more per year in retirement than you earned per year during your working life? ISTM that's a sign of "good planning." Now perhaps if you can fine tune things so that you get to withdraw as much or more but pay tax at the same or lower rates then that would be "better planning." But considering that we can't know in advance how much we'll earn or what the prevailing marginal tax rates will be decades into the future then perhaps all we can hope for is "good-enough planning."

Once I retired and began to examine the tax implications, I see why the government likes the RRSP programs. In many cases it's a winner for them.

Many cases perhaps, but I doubt that's true in most cases. Most people don't save enough in their RRSPs to have the sort of "problems" with large mandatory RRIF withdrawals and OAS clawbacks that we're discussing here. The sorts of "problems" that we face are trivial in comparison to the real problems faced by retirees who have to depend on government largesse via OAS/GIS.

They're getting much more in return when RRIF withdrawals begin.

Not necessarily. Remember that the government allowed you compound all income earned inside the RRSP tax-free until age 71. Had they taxed it as you earned it, as they do on open accounts, I suspect they'd also have made out like bandits—and sooner too.

[adrian2]

Once I retired and began to examine the tax implications, I see why the government likes the RRSP programs. In many cases it's a winner for them. They're getting much more in return when RRIF withdrawals begin.

The possibility (you've admitted you haven't done the math) of the government getting more tax dollars from you is not necessarily a bad thing: in order to pay tax, you have to have taxable income, so you may end up with more money, too. It's not a zero sum game: remember, your money compounds and makes more money for you and the government, compared to paying taxes decades ago which would not have compounded for anyone.

[StuBee]

First of all, we all must pay what we owe to the governments according to whatever laws affect us. In addition, it is our obligation to be aware of all these laws so that we pay exactly what we should... no less and also no more. Am I allowed to break the law by not paying my taxes? Absolutely not! All of these so called tax-breaks are simply a part of this legislation and it is my obligation to apply them also! If I want to give the government a gift, there are other better ways of doing so apart from "accidental giving" as a result of "mismanagement" of my own affairs.

My wife is in the lowest tax-bracket (she actually pays no tax at all and transfers excess tax credits to me...). I would be crazy not to contribute to a Spousal RRSP! Income splitting (and even better: Asset splitting) with the resulting diminished tax burden (as well as increased eligibility for certain benefits) should be actively sought!!

In as much as I can never imagine the government renouncing on whatever tax I may owe I also presume that the government expects me to take advantage of whatever favors the tax-breaks and/or benefits the system has to offer me and to plan accordingly!

Now, concerning the continuing RRSP vs Non-Registered debate... Quite simply, If MTR-in is greater or equal to MTR-out, the RRSP wins every time. If MTR-in is less than MTR-out then the end result is directly dependent on the amount of time that any given contribution remains within the plan. Any significant difference, disappears rather quickly the further away the contribution is from retirement. MTR-out has to take into consideration OAS clawback... Far easier said than done. OTOH, OAS clawback kicks in at close to 70K$ of taxable income. Personally, if I am subject to OAS clawback, my quality of life shouldn't suffer...

Finally, this thread is not about RRSP's or Non-Registered accounts but TFSA's!! Imagine a couple both currently 22 and just beginning to work. At age (for the sake of the argument) 28, they are able to start setting money aside. Combined, they will have 100K$ of TFSA contribution room at that time. Unless they are absolutely certain that there MTR-in will be greater than their MTR-out then clearly the TFSA is the only way to go. I am convinced that on average, most individuals will find that the favorable difference between their MTR-in and MTR-out (in favor of the RRSP route) is far less than the financial industry would have them believe and , on average, probably non-existent.

My advice to the average younger income earner would be income/asset split as much as you can and start off with the TFSA.

[freedom_2008]

With careful investing, my retirement taxable income is about 10K above my final working salary, and that's great, but at 72 when I have to tack on forced RRIF income, it gets ugly. My own fault, and I'm not complaining, but I don't think the subject should be poo-poo'd when it comes up.
... ...
ltr

With higher taxable income, of course one will pay higher income tax. Nothing wrong with saving in tax free or tax deferred accounts when one is working, but one could choose to retire earlier so that ones retirement taxable income wouldn't be higher than final working salary?

[CROCKD]

Question on contribution room.

I am thinking of funding a TFSA for my daughter.

For someone who does not yet have a TFSA and opens one this year, what is the allowable contribution $5k or $20k.

[Lazy Ninja]

You can contribute 20K.

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs ... n-eng.html

You will accumulate TFSA contribution room for each year even if you do not file an income tax and benefit return or open a TFSA.

[StuBee]

To be a bit more precise...

{(Age of your daughter as of Dec. 31 2012) minus 17} multiplied by 5000$. This result can be no greater than 20000$.

[CROCKD]

Thank you for your responses. She obviously qualifies for a $20k contribution.
The institution I enquired about a TFSA for her (PT) stressed that she must open the account and deposit the money not to run afoul of CRA. Therefore I will get her to open the TFSA , deposit it in her credit union chequing account , give me a signed cheque, which I will fill in the amount and mail it in.

[Lazy Ninja]

To be a bit more precise...

Thanks for clarifying. I neglected to take CROCKD's daughter's age into account....