[CanadianCapitalist]

I know, I know, I'm not exactly early to the TFSA party but other financial commitments (such as RRSP contributions) took precedence this year. Nevertheless, I'm looking to open a TFSA account and I'm looking for a savings account to keep emergency funds. I'm *not* investigating TFSA brokerage accounts.

I have narrowed down my search to two options:

1. Outlook Financial offers cashable GICs at attractive interest rates. The early redemption interest rate is 2% and today a 5-year GIC is offered at 3.85%. The only negative is the absence of CDIC guarantee, which in my opinion is much stronger than the Credit Union Deposit Guarantee Corporation.

2. ING Direct. Offers a savings account with a 3% interest rate until Oct. 1, 2009 that may or may not be extended. They also have attractive GIC rates but early redemption interest rate is 0.5%, so a GIC ladder might be an option.

What have folks here done with their TFSA accounts? I'd be interested to hear your opinions / experiences.

 

[Rickson9]

I think either of your choices will work out fine.

For ourselves, we went into stocks via brokerage account.

However, having said that, having to avoid paying taxes on 1.5% interest on cash wasn't our primary concern since this would only amount to $1,500 taxible interest per $100,000 per year.

 

[Sampson]

Hey CC, I was a little late to the game also.

I transferred some high yielding energy income trusts and REITs for my account in May. Got some for my wife's account just last week!

I had been thinking about going the GIC ladder route, but I don't feel its a good vehicle for the cash component of our investment allocation since minimums within self-directed accounts are $3500, so not much room to build a ladder.

In a few years, when the amounts are higher, I'd like to use it strictly to hold my cash portion of the account, but I think the ladder approach is best to ensure some liquidity if opportunities arise.

For our 'emergency' or short term savings (within 1-2 years) I just leave that in a high interest savings account since as was pointed out, interest income will be minimal, especially at current rates!

 

[bean438]

My TFSA holds 2 stocks, BMO, and PWF bought almost at the low. Far from an investment genius, I was simply blessed by mr. market, who was very bi polar, offering me a price too good to be true.

I would like to say it was easy, but I admit i was sick to the stomach after the purchase.

I was thinking of Mr Buffets advise, be greedy when others are fearfull, but i admit I was fearfull too.

Next year I am simply thinking of regular investments in the TD e series index funds, rebalancing as needed to maintain the % required.

Unless of course the world comes to an end again.

 

[humble_pie]

i do appreciate your concern over lack of CDIC coverage under 1) in your post, and if it were myself i'd probably avoid such an institution.

the standard advice to keep interest-bearing securities in a registered plan and tax-advantaged investments in non-registered accounts doesn't apply all that perfectly to a tfsa, although it does apply to a certain extent. One might say that this rule gets skewed when it comes to tfsas.

to my way of thinking, 100% of withdrawals will be tax-free, so in the end the taxpayer will not lose the tax advantages of dividends and capital gains as he will be replacing these with something even better.

also, for at least a few more years, there is no point treating these accounts as if they held 100,000 because, with a 2009 startup date and limited to a 5,000 contribution per annum, most tfsas won't approach the 100K mark for a number of years.

like mr. bean, my own tfsa has held common stock and stock equivalents. Lady luck has favoured us. For such a tiny account - only 5,000 to start with - i've traded it aggressively, only lately easing into something more sedate by rolling more than half into BA.UN for the high yield, although this has to be watched closely and probably will have to be taken out within a year or less.

an interesting strategy that will work well in a rising market is a diagonal call spread, or its inverse, which would be a put diagonal in a falling market. The tweaked factor for a tfsa is that the long leg of the diagonal gets bought within the tfsa, while the intermittent sales of the short leg get carried out in a margin account. Thus the capital appreciation of the long leg is fully captured in the tfsa, while the hedging cost is borne in the margin and serves to offset other capital gains in the margin. The inevitable catch in all this is that one has to be right about the direction of the market.

 

[Robillard]

I put in the paperwork to open my TDW TSFA prior to the end of 2008. Then when the new year started, I contributed some bonds and bond fund units that I had previously purchased and held in a non-registered account. It also holds a small number of equity fund units as well. Thus far I haven't used it to house my emergency funds. The cash I have contributed thus far is mostly set aside for future big ticket purchases, such as a car or downpayment on a house/condo. The market has treated my TSFA fairly well since March.

I think next year I will open a separate TSFA to house emergency funds.

 

[MoneyEnergy]

I was quick to jump on the TFSA account, but have since realized that I'm not sure what strategy I will use for it. I've got a "brokerage TFSA" in TD Waterhouse. It generates cashflow, which I plan to reinvest back in the TFSA. But I wonder if I withdraw dividends, if that counts towards the "amount withdrawn" each year? I suppose it would have to. And likewise, do dividends earned count towards "money deposited" for the year? What if they just sit in your account but are not yet "reinvested"?

 

[Kathryn]

The plan is ING TFSA at 3% for the first $10,000 each (2009 & 2010 maxed out for both of us) as our emergency fund. We'll invest the rest after that.

 

[humble_pie]

oh my goodness. People are thinking of a tfsa as an emergency cash account, something to pay into & withdraw from like an ordinary bank account except that it has no fees.

i know there's a lot of big-name fancy financial planners on this board whereas i'm just a very ordinary kind of pie, but the fact is the government fell asleep over tfsas and gave canadians their biggest tax break since before capital gains ... a tfsa is a stunning opportunity, a far better deal than a rrsp, and my only concern is that the govt won't let them last.

the goal should be to drive this plan towards the greatest possible accumulation of funds inside the plan in the shortest possible period of time. Ideally there should be no withdrawals whatsoever until retirement, or until an exceptional life need arises. Every dollar inside a tfsa is literally a goose that will lay nothing but golden eggs.

the annual contribution ceiling is $5,000, making these early plans so tiny they're like a bonsai tree or petit-point embroidery. It's worth learning how to use leverage through double and triple ETFs and through the selling of options just to cultivate these little treasures.

 

[Brad911]

CC - FWIW I opened a TFSA at TDW (TD is my main bank) and currently am using the TFSA as a fixed income vehicle for my CDN FI allocation.

Now that's only $5,000 right now, but in the future I hope to hold all my CDN FI within the TFSA and all US/Int equities and FI within my RSP. Making that switch will take a few years as contribution room rises of course.

My view on using it as an emergency fund, in this low interest rate environment, didn't give me a huge incentive from an after-tax perspective. I've basically just plugged the cash into two bond ETF's for now with the intention of building a bond ladder and corporate bond portfolio within it in the future.

 

[steve41]

but the fact is the government fell asleep over tfsas and gave canadians their biggest tax break since before capital gains ... a tfsa is a stunning opportunity, a far better deal than a rrsp, and my only concern is that the govt won't let them last.

Sorry, your understanding is way off. The fact is, the RRSP and the TFSA are very similar outcome-wise when projected as normal saving-for-retirement vehicles. For lump sum cash requirements, the TFSA is useful, but the normal saving/drawing down on a constant level trajectory, the RRSP and TFSA are very close. If estate issues are important, the TFSA can make sense, but I wouldn't get overly excited... the rules really haven't changed by much.

 

[leslie]

I agree with HumblePie's worry that "People are thinking of a tfsa as an emergency cash account", but for another reason.

Since emergency cash has to be kept liquid, it will never earn high (or even moderate) rates of return. So the tax shelter of TFSA is wasted for this capital.

Yes, use the TFSA for income-earning savings, especially if you are savings for a specific requirement. It has two benefits over RRSPs. 1)You can withdraw (say for RE downpayment) and recontribute without penalty. 2) If you are contributing from the bottom tax brackets you don't run the risk of being taxed at a higher rate on withdrawal from an RRSP.

 

[humble_pie]

i don't follow your argument at all, senior member steve. An rrsp is delayed taxation. Its holdings will eventually get taxed as mandatory rrif withdrawals, whereas neither the base capital nor any accrued income in a tfsa will ever be taxed in any form whatsoever.

suppose you're 77, the proud owner of both a 40-year rrsp and a 40-year tfsa, each containing approximately the same dollar amounts. And like so many middle-class taxpayers you have other income. From which plan will it be more beneficial for you to withdraw, tax-wise ...

 

[CanadianCapitalist]

suppose you're 77, the proud owner of both a 40-year rrsp and a 40-year tfsa, each containing approximately the same dollar amounts. And like so many middle-class taxpayers you have other income. From which plan will it be more beneficial for you to withdraw, tax-wise ...

You may have the same dollar amount in a RRSP and TFSA but you did not contribute the same dollar amount into the two accounts. The RRSP was funded with pre-tax dollars; TFSA with after-tax.

The point Steve is making is that, for most people, RRSPs will win out because the tax rate on contributions would be much greater than tax rate on withdrawals -- assuming the withdrawal is made in retirement or low-income years.

That's not to say the TFSA doesn't have its uses. In the situation you describe, I would withdraw from a TFSA but if I had no income that year, I would consider withdrawing from the RRSP. Each account has its place and I'm glad to have both options available.

 

[high octane]

Its holdings will eventually get taxed as mandatory rrif withdrawals, whereas neither the base capital nor any accrued income in a tfsa will ever be taxed in any form whatsoever.

TFSA yeild is 100% tax free, but the base principal was already fully taxed at MTR

RRSP base principal is tax deferred, the key is compound interest tax free for years until withdrawal, when it is all fully taxed at MTR

I think of the TFSA as being just as powerful as RRSP, depending on MTR and yeild of course. If the limit continues at 5k per year it will be a big deal

How many people would ever invest non-registered if they had 5k TFSA since 18 yrs old?

 

[steve41]

I have seen a lot of plans, and I don't recall seeing any plan in which the later (withdrawal/retirement) phase had an MTR greater than that during which the subject was salaried. Maybe close to, but in most cases the MTR in retirement was less than the MTR in the earlier (contribution/salaried) part of the plan.

 

[dotnet_nerd]

I think the TFSA is far better than an RRSP if you have any kind of growth.

Here's a simple example:

Invest $5000 into both accounts today. Assume a 12% growth rate for 30 years until retirement. Using the Rule of 72, your money will double 5 times giving you a portfolio of 2^5*5000 = 32*5000 = $160,000

TFSA: you have $160,000 with the freedom to withdraw as much as you like for whatever purpose you like absolutely tax free .

RRSP: you're limited on how you access your funds, taxed at your marginal rate for withdrawals, have estate issues to hassle with etc. I dare you to withdraw the full $160,000 at once. You'd have CCRA drooling. The tax break on the $5000 contribution is negligible in this example.

The TFSA wins hands-down.

 

[steve41]

The tax break at the outset does indeed make all the difference. When making the math work, you have to have a base line of comparison. The standard comparison is to make the net after tax income identical in both cases. This allows the rrsp to grow larger than the tfsa.

I did a simple run, and the tfsa will be only 77% as large as the rrsp at retirement. This is the major source of the discrepency. Also, the tax you pay on the rrsp once you begin drawing it down has to be looked at in future dollars

I wrote this a while ago, but the numbers still pertain. Indexed Brackets and the RRSP (note... at the time, the proposed tax free account was to be called the TPSP)

 

[leslie]

The TFSA wins hands-down.

The mistake in your model is assuming both plans end up with the same total value (B4 withdrawal) because the same amount was contributed. Work your way through this model of how the RRSP works and you will see why that is wrong.

 

[steve41]

The definitive description of an optimum financial plan is one in which the present value of all future taxes is minimized (where 'tax' is defined as the actual T1 algorithm and not a simplistic average or marginal tax rate)

To make the statement "the RRSP is tax neutral", you have to qualify that with the following caveat... "when you are not concerned about estate implications"
If you have children, and are concerned about maximizing your estate should you die prematurely, the TFSA makes sense. If you expect a major cash call at some future time, rather than a smooth constant retirement cash flow, the TFSA makes sense also. Otherwise, if you are concerned purely about your own lifestyle/ATI ... the RRSP is pretty much tax neutral.