[flayto]

Curious to know if anyone is thinking of using this strategy. Let's say you have a TFSA with a discount brokerage and, starting with a $5000 investment, you grew it to $8000. What I'm thinking of doing is withdrawing just the profit I made on the original investment, and putting it into an RRSP, for the tax refund, then using the refund to put back into the TFSA.

Let's say you withdraw just the profit from your TFSA, or $3000. You are not charged capital gains on this since it's in a TFSA. Now you take the $3000 and put it into your RRSP (assuming you have contribution room). Let's say your marginal tax rate is 22%. Putting that $3000 in your RRSP reduces your taxable income by that amount, and ends up adding 22% x $3000 = $660 to your refund. At refund time, take that $660 and put it back into your TFSA.

To me, the advantages to this are:
-In effect, you have increased your RRSP's size by $3000, but only reduced your TFSA's size by $3000-$660 = $2340.
-You don't have to lose any of the securities (or whatever you are invested in) you owned in your TFSA since you can just re-buy the same ones in your RRSP (assuming you have an appropriate RRSP account that allows you to do that)
-If you contribute regularly to an RRSP, you can instead take the money you would have used and contribute it to your TFSA to rebuild up to the amount you withdrew in the previous year (plus another $5000 in 2010) without worrying about the RRSP since you already put in a lump sum of $3000

Of course, you will be taxed when it comes time to take money out of your RRSP, but now you have an additional $3000 of capital in there that you didn't have before, and if you're young enough, many years left to grow it.

What do you think of this strategy? Pros? Cons?

 

[leslie]

The premise behind your idea is that the tax credit on RSP contributions is a 'benefit'. It is NOT. This misunderstanding causes all kinds of wrong conclusions. Your last paragraph does not capture reality. All the original tax credit PLUS ALL THE GROWTH IN VALUE OF THAT CREDIT gets taxed away at withdrawal.

Please go through the logic explained in the first 2 video of this series https://www.youtube.com/channel/UCYf70uCj5q4GRWYC0wVtdxg to understand how exactly the RRSP works (not just its mechanics).

 

[steve41]

The effect of income tax (not a simple marginal tax rate, but the complete tax formula with various brackets, thresholds, clawbacks, age credits etc) makes these types of determinations very specific to each person's situation.

In addition, you have to consider whether you are concerned with just your lifestyle and not what kind of estate issues you might have. Furthermore, is it conceivable that you may have need for a major lump sum draw sometime in the future. Normally, when there is an expectation of a smooth continuous after tax income, the RRSP and TFSA are a virtual saw-off, with the RRSP just winning out in most cases. If estate concerns exist or you are certain that there will be a need for a future lump sum draw... the TFSA can make sense.

BTW, by 'estate concerns', I am referring to the situation that you die prematurely. In that situation, the TFSA strategy would have been better (for your estate)... it is an actuarial issue.

There is no cut and dried answer, however.

 

[Rickson9]

I wouldn't do this. Personally I would only consider this option if I had absolutely no money whatsoever outside of my TFSA.

 

[Kinny]

I wouldn't do this. Personally I would only consider this option if I had absolutely no money whatsoever outside of my TFSA.

I agree. If you don't have money set aside for RRSP contribution, then it may work to your benefit. But, I think you are putting yourself in a long process if you do the TFSA > RRSP > TFSA route. If you have extra cash set aside, it's wise to use it directly, to top up your RRSP and TFSA, and try not to withdraw from it, if possible.

Also, I believe TFSA has withdrawal fees!?? You may end up losing more then saving...

 

[DAvid]

-If you contribute regularly to an RRSP, you can instead take the money you would have used and contribute it to your TFSA to rebuild up to the amount you withdrew in the previous year (plus another $5000 in 2010) without worrying about the RRSP since you already put in a lump sum of $3000

Of course, you will be taxed when it comes time to take money out of your RRSP, but now you have an additional $3000 of capital in there that you didn't have before, and if you're young enough, many years left to grow it.

What do you think of this strategy? Pros? Cons?

So let me get this straight: you withdraw $3000 from your TFSA to add to your RRSP. You also have enough cash on hand to replace the $3000 withdrawn, plus add another $5000 in the TFSA?

Why not just contribute the $3000 directly to the RRSP without playing the shell game, take the $660 refund and top up whatever you wish?

DAvid

 

[flayto]

Great responses everyone, thank you!

After reading what everyone has written, I think I'm going to nix this idea and just keep my profits within my TFSA.

 

[DavidJD]

I wouldn't comment if this scenario you proposed and then dropped is good or not, however if you were to do something similar, you should try to transfer units in kind betweeen accounts to avoid trading fees.

If you transfered 300 units at that day's market price of say $10, your withdrawal from the TFSA would be $3,000 and there would be no trading fee (TDW has one free withdrawal per year and each transaction is $25 afterwards). If you timed it to have a market price above $10 on the day you transferred into your RRSP, you benefit would be greater - again with no trading fee . Say the market had low volume but the price for the day was $11.50, your 300 units would be worth $3,450 regardless if the days volume could have traded your 300 units at $11.50.

 

[DAvid]

In addition to my earlier comment, it strikes me that if your current marginal tax rate is only 22%, you will likely see better benefit from the TFSA. RRSP contributions provide a greater benefit to those in higher marginal tax rates on contribution, with the expectation their average tax rate on withdrawl will be less. Few folks contributing to RRSPs expect to be earning sufficient income that they would likely be in a tax bracket higher than 22%.

DAvid