An oxymoron: TFSA usage for income generation

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adrian2
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An oxymoron: TFSA usage for income generation

Post by adrian2 »

It seems to me that maximizing a TFSA usage for income generation, for living expenses, can be done at most in one year only. If the generated income, be it dividends or interest, is withdrawn and consumed, the TFSA balance is no longer maximized and next year's income will be lower than otherwise.

As long as there is a balance in other accounts that the TFSA can replace (which is the case for many forum members), the TFSA usefulness keeps increasing; but this should eventually plateau and then decline.
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Re: An oxymoron: TFSA usage for income generation

Post by StuBee »

I'm sorry Adrian, but I am having trouble grasping your argument. Perhaps if you were to express it in other words I would better understand. If indeed it is an oxymoron then I am all ears!!! But, ISTM that tax free income is hard to beat...
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Re: An oxymoron: TFSA usage for income generation

Post by adrian2 »

The moment you withdraw income from your TFSA and consume it, the TFSA is no longer maximized.

If you contribute to your TFSA to keep it maximized, it's sort of mental accounting that you used it for income generation.

For simplicity, imagine you start with a clean slate and you have no other accounts than the TFSA. It's just yourself, earning a salary and/or a pension, having certain expenses during the year, and the only account you have is the TFSA: can you maximize the income generation from the TFSA in more than one year?
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Re: An oxymoron: TFSA usage for income generation

Post by Descartes »

An oxymoron is a figure of speech in which apparently contradictory terms appear in conjunction; e.g. “cruel kindness” or “living death”.
There is no contradiction in using a TFSA for income generation.

Maybe you mean something like "you can no longer maximize your TFSA contribution limit once you decide to use some of what is generated for expenses" but ..so what? I'm missing the startling revelation here.
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Re: An oxymoron: TFSA usage for income generation

Post by StuBee »

Now I think I see what you mean. IOW's the moment you start to withdraw from your TFSA, you are no longer maximizing it. But, OTOH, as soon as you are into net withdrawal, you cannot maximize anything that requires new money. I have unused space in both my RRSP's and TFSA's. (Though the unused RRSP space may be useful if there remains unused income in our RESP's).

If I was young again, I can imagine through the accumulation phase, building up a mid 6-figure (or higher) TFSA before the withdrawal phase and then withdrawing annually a mid 4-figure (or even 5-figure) annual tax-free income.

But, of course you are 100% right if I simply turn around and top up the TFSA with non-registered capital. This, of course, is what I ought to do if it were not for the fact that most of this capital is non-realized capital gains (which would not be the case if I was young again...)
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Re: An oxymoron: TFSA usage for income generation

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Descartes wrote:An oxymoron is a figure of speech in which apparently contradictory terms appear in conjunction; e.g. “cruel kindness” or “living death”.
You're right.
Maybe https://en.wikipedia.org/wiki/Contradictio_in_terminis is a better phrase.
Descartes wrote:There is no contradiction in using a TFSA for income generation.

Maybe you mean something like "you can no longer maximize your TFSA contribution limit once you decide to use some of what is generated for expenses" but ..so what? I'm missing the startling revelation here.
I guess my point is that its utility starts to decline straight after a potential one year peak; in contrast, an RRSP can be used for income generation on an ascending graph (it's mandated minimum is indeed ascending).
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Re: An oxymoron: TFSA usage for income generation

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StuBee wrote:Now I think I see what you mean. IOW's the moment you start to withdraw from your TFSA, you are no longer maximizing it. But, OTOH, as soon as you are into net withdrawal, you cannot maximize anything that requires new money.
In contrast, a RRIF functions in withdrawal only mode: does not require new money (not even allowed).
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Re: An oxymoron: TFSA usage for income generation

Post by Spudd »

I don't understand why the RRSP is different than the TFSA in this analogy? What do you mean by "its mandated minimum is ascending"?

It seems to me that if you withdraw from either, their balances will decline according to how much you withdrew, and will only grow if you add new money or if the investments within themselves grow. But I can't grasp why you feel the RRSP is different from the TFSA?
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Re: An oxymoron: TFSA usage for income generation

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Spudd wrote:I don't understand why the RRSP is different than the TFSA in this analogy? What do you mean by "its mandated minimum is ascending"?
As you age, the government forces you to withdraw an ever increasing amount from a RRIF, thereby increasing your income / spending power.
Spudd wrote:It seems to me that if you withdraw from either, their balances will decline according to how much you withdrew, and will only grow if you add new money or if the investments within themselves grow. But I can't grasp why you feel the RRSP is different from the TFSA?
Let's simplify and consider the case where you use both accounts for retirement.
Let's simplify further that retirement is exactly 20 years and each year you withdraw and consume the income plus 5% of the initial balance, therefore depleting the accounts in exactly 20 years (forget about the mandated minimum withdrawals for a moment).
In the RRSP/RRIF case, each year your entire withdrawal is income, the tax deferral has worked in an 'ideal" way, sheltering future income all the way until year #20 in retirement.
In the TFSA case, the sheltering effect declines every year in retirement, basically decreasing the efficacy of the account on a straight line.

That's why I wrote that income generation from the TFSA is maximized in one year only: the year you start depleting it.

Even though it may not be 100% correct for language purists, I've chosen the "oxymoron" phrase as an attention grabbing headline, guilty as charged, Your Honour! :)
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Re: An oxymoron: TFSA usage for income generation

Post by Spudd »

Well, but presumably you're spending the money you withdraw from the TFSA, so it's still not being taxed. Otherwise, why withdraw it?

Also, why would the next year's income be lower if you only withdrew dividends/interest? It seems to me it should still be the same, assuming your investments continue to pay at the same rate.

The only thing I can see is that your balance ceases to be at the maximum limit of the account if you're drawing on it, but that's kind of irrelevant if it's generating tax-free income for you. And if you don't sell the investments within, it should keep on doing so indefinitely.

I must be dense because I really don't get it.
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Re: An oxymoron: TFSA usage for income generation

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Spudd wrote:I must be dense because I really don't get it.
+1
Not you Spudd, me. :lol:
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Re: An oxymoron: TFSA usage for income generation

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Spudd wrote:Also, why would the next year's income be lower if you only withdrew dividends/interest? It seems to me it should still be the same, assuming your investments continue to pay at the same rate.

The only thing I can see is that your balance ceases to be at the maximum limit of the account if you're drawing on it, but that's kind of irrelevant if it's generating tax-free income for you. And if you don't sell the investments within, it should keep on doing so indefinitely.
My implicit assumption is that the TFSA, at the rime of retirement, will have grown to be big enough, but not gargantuan. So the dividends/interest from it will be somewhere around $20k...$30k in today's money, a nice chunk of change, but not entirely enough for a living, therefore you'll need to touch the capital (see above for straight line depletion).

Another concern I'd have at retirement time is what the equity portion should consist of.
- Canadian equities, due to the dividend tax credit, attract very little tax in the taxable income range I'm considering (again looking through my tinted glasses of not having a full CPP+OAS).
- US equities, one saves an extra 15% withholding tax if kept in a RRIF/RRSP, so why waste TFSA space with them?
- International equities, again the withholding tax is recoverable in a non-registered account, and unrecoverable in a TFSA.
So I'm back to filling up the TFSA with fixed income, at least in retirement, therefore unlikely to be able to live comfortably without touching its capital.
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Re: An oxymoron: TFSA usage for income generation

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adrian2 wrote:
Spudd wrote:Also, why would the next year's income be lower if you only withdrew dividends/interest? It seems to me it should still be the same, assuming your investments continue to pay at the same rate.

The only thing I can see is that your balance ceases to be at the maximum limit of the account if you're drawing on it, but that's kind of irrelevant if it's generating tax-free income for you. And if you don't sell the investments within, it should keep on doing so indefinitely.
My implicit assumption is that the TFSA, at the rime of retirement, will have grown to be big enough, but not gargantuan. So the dividends/interest from it will be somewhere around $20k...$30k in today's money, a nice chunk of change, but not entirely enough for a living, therefore you'll need to touch the capital (see above for straight line depletion).

Another concern I'd have at retirement time is what the equity portion should consist of.
- Canadian equities, due to the dividend tax credit, attract very little tax in the taxable income range I'm considering (again looking through my tinted glasses of not having a full CPP+OAS).
- US equities, one saves an extra 15% withholding tax if kept in a RRIF/RRSP, so why waste TFSA space with them?
- International equities, again the withholding tax is recoverable in a non-registered account, and unrecoverable in a TFSA.
So I'm back to filling up the TFSA with fixed income, at least in retirement, therefore unlikely to be able to live comfortably without touching its capital.
So because you want to save 15% of (assumed) 4% dividend rate = 0.6%, you are willing to give up tax free growth in the TFSA and replace it with fixed income? My preference is to put the fixed income in the RRSP and pay the tax on withdrawal, and put the potential long term growth in the TFSA where the tax saved far outweighs the withholding tax on the dividends.
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Re: An oxymoron: TFSA usage for income generation

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2of3aintbad wrote:
adrian2 wrote:Another concern I'd have at retirement time is what the equity portion should consist of.
- Canadian equities, due to the dividend tax credit, attract very little tax in the taxable income range I'm considering (again looking through my tinted glasses of not having a full CPP+OAS).
- US equities, one saves an extra 15% withholding tax if kept in a RRIF/RRSP, so why waste TFSA space with them?
- International equities, again the withholding tax is recoverable in a non-registered account, and unrecoverable in a TFSA.
So I'm back to filling up the TFSA with fixed income, at least in retirement, therefore unlikely to be able to live comfortably without touching its capital.
So because you want to save 15% of (assumed) 4% dividend rate = 0.6%, you are willing to give up tax free growth in the TFSA and replace it with fixed income? My preference is to put the fixed income in the RRSP and pay the tax on withdrawal, and put the potential long term growth in the TFSA where the tax saved far outweighs the withholding tax on the dividends.
Emphasis: at retirement time.
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Re: An oxymoron: TFSA usage for income generation

Post by SQRT »

Agree that TFSA's are not easy to use for income generation. Really just keep replenishing the pot to keep the max tax free potential. Bit of a revolving door, for a fairly small benefit, at least at this point.

I raised a similar question a while back that questioned how one would draw the TFSA down in the later stages of life. Several people said they viewed it as. "dead money" that will simply form part of their ultimate legacy. I agreed with this. Others said they intended to just draw if down like any other account apparently not worried about the loss of tax effectiveness.
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Re: An oxymoron: TFSA usage for income generation

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Spudd wrote:I don't understand why the RRSP is different than the TFSA in this analogy? What do you mean by "its mandated minimum is ascending"?

It seems to me that if you withdraw from either, their balances will decline according to how much you withdrew, and will only grow if you add new money or if the investments within themselves grow. But I can't grasp why you feel the RRSP is different from the TFSA?

The TFSA is different because you can keep topping it up if you take a withdrawal. Can't do this with RSP's or RIF's. So in order to maximize the tax benefit stemming from the TFSA you need to keep it topped up. Thus when you switch from accumulation to withdrawal mode, there are relative "tax costs". There are tax costs associated with the drawdown of RSP's and RIF's as well but these cannot be avoided.
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Re: An oxymoron: TFSA usage for income generation

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adrian2 wrote:
2of3aintbad wrote:
adrian2 wrote:Another concern I'd have at retirement time is what the equity portion should consist of.
- Canadian equities, due to the dividend tax credit, attract very little tax in the taxable income range I'm considering (again looking through my tinted glasses of not having a full CPP+OAS).
- US equities, one saves an extra 15% withholding tax if kept in a RRIF/RRSP, so why waste TFSA space with them?
- International equities, again the withholding tax is recoverable in a non-registered account, and unrecoverable in a TFSA.
So I'm back to filling up the TFSA with fixed income, at least in retirement, therefore unlikely to be able to live comfortably without touching its capital.
So because you want to save 15% of (assumed) 4% dividend rate = 0.6%, you are willing to give up tax free growth in the TFSA and replace it with fixed income? My preference is to put the fixed income in the RRSP and pay the tax on withdrawal, and put the potential long term growth in the TFSA where the tax saved far outweighs the withholding tax on the dividends.
Emphasis: at retirement time.
Yes, I've been thinking about this because retirement time for me is soon. The way I look at it is that there some knowns and some unknowns. What is known is my CPP, my OAS whenever I decide to take it after age 65, and the minimum withdrawal rate from a RIF. What is unknown: my expenses as I get older, or in an emergency, and the rate of return in any non-guaranteed investment. So I want to structure my RSP / RIF so that every year I can make the minimum withdrawal with no market risk, and that means a certain amount of fixed income maturing every year. I am going to pay tax on that withdrawal regardless of the investment. If in any particular year, I need more income than I am getting, I may need to withdraw more from my RIF or my TFSA or my non-registered investments (or take out a loan). So I can make the decision at that time, but until then I want my TFSA to be my growth vehicle, not my income vehicle.
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Re: An oxymoron: TFSA usage for income generation

Post by Descartes »

adrian2 wrote:Even though it may not be 100% correct for language purists, I've chosen the "oxymoron" phrase as an attention grabbing headline, guilty as charged, Your Honour! :)
It is not about purity. It is about clarity.
You are trying to communicate your thoughts to another person.
The wrong words are just static in your broadcast, making it difficult for your audience to understand.
..but your sentence will be commuted ..this time :P
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Re: An oxymoron: TFSA usage for income generation

Post by cardhu »

I, too, found the opening post a little unclear, but it seems to be related to the premise, discussed frequently over the years, that the TFSA should generally not be used as a source of regular income unless and until it is the last asset one owns. There can be exceptions in the short term, to smooth out bumps, where such withdrawals can be replaced relatively quickly.
StuBee wrote:as soon as you are into net withdrawal, you cannot maximize anything that requires new money.
Sure you can … no new money is required, to keep TFSA maxed … assets can simply be shifted in from other accounts, such as RRSP or non-reg … so retirees can continue to take maximum advantage of new contribution room, well into their retirement… If there are unrealized gains, then shifting assets from non-reg would produce a measurable tax-drag … but the payback period by reinvesting the assets in TFSA can be very short, to overcome that tax-drag … shifting assets from RRSP to TFSA, on the other hand, does not produce the same effect, in fact for people with a sizable RRSP, it would usually have the opposite effect … there would be no obstacle to overcome at all – no tax-drag, and no payback period required -- the benefit would be immediate and only gets bigger over time.
Spudd wrote:I don't understand why the RRSP is different than the TFSA in this analogy?
RRSP has a terminal tax (upon death) … TFSA doesn’t … RRSP withdrawals are taxable income … TFSA withdrawals are not … the longer you delay drawing from RRSP, the less tax efficient it becomes, because the period of withdrawals will be compressed into a shorter time period … no such effect exists with the TFSA.
adrian2 wrote:International equities, again the withholding tax is recoverable in a non-registered account, and unrecoverable in a TFSA.
Foreign withholdings are unrecoverable in ALL accounts ... barring a direct appeal to whichever country withheld the tax in the first place, those amounts are gone forever, never to be recovered ... the best you can hope for within Canada is to apply the foreign tax credit, which reduces the amount of ADDITIONAL Canadian tax that you must pay, OVER AND ABOVE the amount already withheld by the foreign gov’t ... and if your income isn’t high enough, you won’t get dollar-for-dollar credit, with the result that the foreign income would be taxed at higher-than-ordinary-income rates. I can see holding low-yielding foreign equities in non-reg, but high-yielding equities are better held in registered accounts.
adrian2 wrote:As you age, the government forces you to withdraw an ever increasing amount from a RRIF, thereby increasing your income / spending power.
Not exactly … they force you to withdraw an ever-increasing percentage of the account balance … for most people, that does not translate into an ever-increasing income/spending power … quite the opposite, actually.
2of3aintbad wrote: My preference is to put the fixed income in the RRSP and pay the tax on withdrawal, and put the potential long term growth in the TFSA where the tax saved far outweighs the withholding tax on the dividends.
Different strokes … my preference is to put the highest-expected-return assets in whichever account offers the greatest tax-savings … that, by a country mile, is the RRSP … so potential long-term growth assets go in RRSP, where the tax saved far outweighs what could be saved in TFSA … fixed income can go either in TFSA or non-reg.
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Re: An oxymoron: TFSA usage for income generation

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cardhu wrote:
adrian2 wrote:As you age, the government forces you to withdraw an ever increasing amount from a RRIF, thereby increasing your income / spending power.
Not exactly … they force you to withdraw an ever-increasing percentage of the account balance … for most people, that does not translate into an ever-increasing income/spending power … quite the opposite, actually.
In the early years of mandatory RRIF withdrawals, it's quite possible that the internal growth is greater than the withdrawal. Even if it just balances out, the percentage of the account balance, as you correctly point out, keeps increasing; therefore the absolute withdrawal amount may very well increase in time, at least in the first phase.
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Re: An oxymoron: TFSA usage for income generation

Post by cardhu »

adrian2 wrote:… it's quite possible….
Possible, yes, I never suggested otherwise.

emphasis: “for most people”

btw: its not a matter of the early years vs late years, the hurdle is more or less constant throughout the entire 71 to 94 age band.
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