TFSA withdrawl and tax

CJB said:

Not sure where you're getting all those numbers from. I believe the contribution for consecutive years is simply a new $5000 (adjusted periodically for inflation) + withdrawals in previous year - over contribution for previous years

Click to expand...

Well let's compare what we said....

a new $5000 (adjusted periodically for inflation) /or/(what ever the new 2010 limit will be) ..... same thing

+ withdrawals in previous year /or/ the amount of your withdrawl ..... same thing


over contribution for previous years / the previous posters had not mentioned over contributions so I left it out but yes these must be subtracted.

the only number I used was the original $5,000 contribution which is either ignored if it is left in or added to the formula if you choose to withdraw your all your funds and then re-invest in the new year.

I was actually trying to convey the fact that by withdrawing funds you can LOCK IN any gains you have made towards your contibution limit the following year.....

using the OP example above:

by taking out his $10,000 gain he will have $5000 ( adj for inflation) + $10,000 = appr. $15,000 contribution room next year.

by leaving it in, stock could tank back to original value, leaving him with $5000 ( adj for inflation) = appr. $5,000 contribution room next year

this was merely a reason for why it may be advantagous to withdraw funds (especially large gains )

wg

I am not very good at transfering my thoughts to paper and thus my posts are probably only making sense to me

I think I am using the term "contribution limit poorly" ( read wrong ) !

the reason you may want to w/d any large gains is to lock them in and then add them to the next years contribtion .

the "yearly contribution limit" will always be $5000 ( adj for inflation )

but when you lock in your gains by w/d funds your "allowable contribution" the following year will include those gains.

If you let the investment ride you could loose the gains.

So the point is you MIGHT want to w/d if you hit a multi bagger stock .... you will not be penalized by w/d the funds as you will be allowed to recontribute this amount plus the normal contribution in the following year.

wg

The concept makes sense, but only if you hold an investment inside a TFSA that has a huge gain (it doubles in value or more).

Think of it this way: the TFSA lets you hold X dollars' worth of investments in an account that is not subject to any taxes, either while in the account or upon withdrawal. Each year, starting in 2009, the value of X increases by $5000 (and eventually larger amounts due to inflation). Thus, the total amount you can contribute to the account will be ($5000*X), where X is the number of years the account has been opened after 2009.

Since withdrawals from the current year are automatically added to the contribution room for the next year, it's possible to "boost" the value of the account beyond the $5000*X limit by withdrawing funds from any large-gaining securities. If, in 2009, you invest $5000 in your TFSA in a stock that jumps in value ten-fold, your TFSA will have a value of $50,000. You could then withdraw the entire $50,000, which would be added to next year's contribution limit. The $50,000 is permanently "locked in" to your contribution limit, and you have secured a tax shelter for life for that amount of money.

Of course, the argument is all in theory anyway, since it's very difficult to reliably find stocks that will jump in value that much in a short timeframe. It's also possible that the government would revise the TFSA rules to limit the withdrawal amounts that can be added to a future year's contribution limit.

George, I think there is a flaw in your logic. You say:

The $50,000 is permanently "locked in" to your contribution limit, and you have secured a tax shelter for life for that amount of money.

Click to expand...

But that's not what really happens because that contribution limit is only increased until you re-contribute that money. So there is no difference at all between a TFSA where you put in $5000 year one, it goes to $50,000 in value, you don't withdraw it, and year two you put the maximum $5,000 in (it's worth $55,000), vs. one where you put in $5,000 year one, you withdraw the $50,000, then the next year you put it back in along with the $5,000, and your TFSA now has $55,000. In short, as soon as you recontribute, you're no better off than if you had never withdrawn.

Now, you could withdraw the $50,000 and leave it out, but unless you're spending the money, you're going backwards because now it's gaining value in taxable ways instead of tax free.

The only benefit is if you take that $50,000 and spend it (say, paying off your mortgage because it's a higher return), then later down the road when your funds are free again, you could put that $50,000 back in... but once again, as soon as you do that, your "extra" contribution room is gone and you're no further off than the person who never withdrew it (aside from different levels of investment gains).

Wouldn't locking in the capital gain involve buying and selling the same security to reset the Adjusted Cost Base and lock in the gains? Since that's totally moot in a TFSA (no capital gains tax, no capital loss tax breaks) you would probably never pay the fees to do it, would you?

As far as locking in contribution room, your contribution room is always:

Current Year's Contribution Room + Unused Contribution Room From Past Years + Amounts Withdrawn And Not Redeposited.

Your TFSA is always Contributions + Returns/Gains Earned - Amounts Withdrawn And Not Redeposited.

So your maximum TFSA each year is your current TFSA + your contribution room, which is:

Contributions + Returns/Gains Earned - Amounts Withdrawn And Not Redeposited + Current Year's Contribution Room + Unused Contribution Room From Past Years + Amounts Withdrawn And Not Redeposited.

Since you have + and - Amounts Withdrawn And Not Redeposited, they cancel each other out and you are left with a maximum TFSA each year of:

Contributions + Returns/Gains Earned + Current Year's Contribution Room + Unused Contribution Room From Past Years.

Which shows that withdrawals are totally moot as far as contribution room goes... either they are in your TFSA or you've withdrawn them and can put them in the TFSA, but they can never result in a higher overall contribution limit.