[S.Edge]

I have been reading a lot of questions about people concerned with which account (TFSA or RSP) to invest in.

I am unsure if this will be corrected in the future, but there is currently a loophole which seems exploitable.

Invest your $5000 in a TFSA right away. Collect your capital gains throughout the year. At the end of the year (let's say you did well and have $6500) you withdraw the full amount and invest it into an RSP. If you had initially invested in the RSP you receive 5k tax credit and have 6500. Using your TFSA you are able to now declare $6500 tax deductable and by withdrawing the money in december, the money can be recontributed in less than a month (a couple days later is timed correctly).

I have reviewed all the rules of the new TFSA account and this seems to be the best way to use it. The best part is this works even if you are maxing your RSP account every year.

We've paid taxes on capital gains long enough, using this method, you are receiving tax deductables for capital gains!

 

[OhGreatGuru]

There are too many logical flaws in this scheme to explain.

 

[moneymusing]

My suggestion would be to maximize both your RRSP and the TFSA and never withdraw from either of them. Therefore ensuring you don't get taxed.

If you had initially invested in the RSP you receive 5k tax credit and have 6500. Using your TFSA you are able to now declare $6500 tax deductable

I'm not entirely sure what is meant by the above quote but RRSP room and TFSA room are not transferable. TFSA withdrawals are also not tax deductible.

Perhaps another example might help clarify your use of a TFSA

 

[S.Edge]

My apologies if the explanation was unclear. Hopefully this clears it up.

This is beneficial if you are not maxing out both rsp and tfsa. For the people who choose to invest in an RSP and not use their TFSA they are making a mistake.

If you invest all year in the TFSA and receive capital growth, at the END of the year, withdraw the money and invest it in an RSP. You are NOT taxed for the gains you made in your TFSA and INCREASE the amount contributed to your RSP by the amount of capital gains made throughout the year.

Using my past example.. explained a little more clearly....

John has $5000 he will invest for the year.

Situation A)

John invests 5000 in an RSP. It grows to 6500. John declares an RSP contribution of 5000 for the year and receives 1250 as a tax refund.

Situation B)

John invests 5000 in a TFSA. It grows to 6500. In december, John withdraws the 6500 from his TFSA and invests it in an RSP. John declares an RSP contribution of 6500 and receives a 1625 dollar tax refund.

Since the TFSA resets January first, you can then start recontributing to the TFSA to repeat the process.

Understand?

 

[OhGreatGuru]

1. By earning $6500 on $5000 invested in the TFSA, you have made your capital gains tax free. Whether you then invest it in an RRSP, spend it, or leave it in the TFSA is an entirely separate issue that has nothing to do with improving returns or gaining some mysterious benefit.

2. How consistently do you expect to generate a 30+% return your investments?

3. If you have sufficient cash flow and RRSP room to put $6.5K in your RRSP in December 2009, and $6.5K into your TFSA in January 2010, and possibly add another $5K during the course of the year, why didn't you just put $6.5 K into your RRSP in January 2009? At your mythical 30% return it would be worth $8450 in December 2009. You are hung up on the fact you made $1500 "tax-free", but you couldn't have predicted that in January 2009.

4. Alternatively, with that kind of cash flow you could leave the money in the TFSA and contribute to your RRSP from other earnings. (Which you seem to project that you will have.) This points up the fallacy of thinking it is the TFSA earnings that are being transformed in this "trick".

5. You are playing a high risk of investment loss by withdrawing money unnecessarily from either account.

6. We won't even go into the questions of transaction fees and commissions, or penalties for short-term trading of mutual funds, that your scheme raises.

 

[S.Edge]

This is mostly for people who won't be maxing out their contributions. It is working well for myself.

I was pondering at the start of the year whether to start contributing to my RSP or my TFSA. I trade equities in my TFSA and went with that method.

It's now November, my TFSA has $8000 (starting from March 20th). If I had opened an RSP and invested, I would still have $8000, but would only receive a 5000 tax credit.

Because I chose to invest in my TFSA throughout the year, when I sell my equities in December, and withdraw the $7950 (after trading fees) and invest it in my RSP, I will receive a tax credit of 7950.

By doing this, I will receive an extra (roughly) $900 in tax savings.

Not everyone can max out both every year. I'm merely stating if you trade equities in a TFSA, it is the best bet to max out first, and if you have RSP room at the end of the year, withdrawl and move it over for the tax benefits.

 

[Cal]

Not bad in a market that has basically risen 60% over the time period stated.

Unfortunately your theory doesn't work well in a declining market.

 

[S.Edge]

That is correct, it is presuming gains are made to receive tax benefits... If you lose money, the opposite occurs.. For those with GIC's, and savings accounts it is a guarantee.

 

[DavidJD]

The simple plan is if you withdraw your tax free gains from your TFSA and plunk into an RSP. Not only do you aviod the taxes on the gain, you reduce your taxes incurred from other revenues/income.

 

[moneymusing]

I don't think the idea should be instantly dismissed. It certainly does have merit to those not maxing out both account. But it certainly wouldn't make sense if you've lost money in your TFSA.

If you're maintaining a balanced portfolio inside your RRSP you could use the money coming over from your TFSA to rebalance which you should be doing annually. Depending on the securities used, there is a cost of rebalancing anyway so at least with this method you get a little tax bonus while keeping the desired asset mix.

That being said, investment decisions should never be made with tax savings as their primary motivator.

You'll also need to consider whether even having money in an RRSP vs TFSA is better for your personal situation. So although the idea has merit it only seems to apply under very specific circumstances.

 

[HaroldCrump]

It's now November, my TFSA has $8000 (starting from March 20th).

So if you have a repeatable formula for generating more than 60% returns every year, why limit yourself with $5,000 in TFSA?
Why wouldn't you instead invest the rest of your savings un-registered and live off the income?
Sounds like a pretty good plan to me....
I'm not mocking you at all - if what you claim here is true, you are definetely an above average investor and are well on your way to early retirement.
I guess all I am questioning is how repeatable this sucess is year after year

 

[leslie]

Yet another instance where the prevalent misunderstanding of how the RRSP works leads to wrong conclusions. Learn how the RRSP system works. Watch at least the 2nd viideo of this series. https://www.youtube.com/channel/UCYf70uCj5q4GRWYC0wVtdxg

Again, this strategy presumes that the RSP tax credit on contributions is a 'value/benefit'. It is not. It, plus all it earns is taken back by the gov't when the plan is eventually collapsed. Whether the refund is considered to bump up the RRSP contribution or gets put into an TFSA makes no difference.

 

[ChrisR]

I'm having a tough time wrapping my head around the numbers in this one, but the plan sure looks like it will result in one year of tax free growth for every dollar initially deposited.

Here is a modification of the plan that I think is a little bit easier to work numbers for (but its late at night, so feel free to poke holes in it!)

Lets say you have a total of $5000 to save, and this money is available to you near the beginning of the year.

Scenerio 1: The $5K is invested in the RSP and grows to 6500. The tax deduction will be 5K, and the entire $6500 + further gains will be taxed during retirement.

Scenerio 2: The $5K is invested in the TFSA and grows to 6500. $5K is then withdrawn and added to the RSP in December. The remaining 1500 is left in the TFSA. The tax deduction for the year will still be $5000. The $5000 in the RSP + any further gains will be taxed during retirement. The $1500 left in the TFSA + further gains will never be taxed.

 

[leslie]

That also won't accomplish anything, for the same reasons given above. It presumes "entire $xxx + further gains will be taxed during retirement" when really it is the original tax credit plus the credits's gains that are taxed back on withdrawal.

Again the presumption is that the tax credit on RRSP's is a value to you. It isn't. The OP's scenario would look like.. The $$ at the end is the same. The only difference is the contribution room in each product used up/available.

..................Outside............TFSA..................RRSP
start............$5000
tsf.............<5,000>...........5,000
earn 30%.........................1,500
tsf RRSP.........................<6,500>.................6,500
20%txCrRec'd..............................................1,625
End.................0.................0.......................8,125

Contribution room available.....6,500.................<8,125>...... net <1,625>




..................Outside............TFSA..................RRSP
start............$5000
tsf.............<5,000>....................................5,000
20%txCrRec'd..............................................1,250
earn 30%on$6250.........................................1,875
End.................0.................0.......................8,125

Contribution room available.....5,000................<6,250>..... net <1,250>