TFSA Contribution 2018

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
BRIAN5000
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Re: TFSA Contribution 2018

Post by BRIAN5000 »

In case of non-registered investments, wouldn't the estate have to pay lots of taxes on realized capital gains at death at an even worse tax rate before giving the money to the surviving spouse?
IIRC Rollover of non-registered goes to my spouse with an election to pay tax or defer till tax she dies, when it goes to children the CG taxes will be due.
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Re: TFSA Contribution 2018

Post by qasimodo »

longinvest wrote: 21 Dec 2017 16:56
qasimodo wrote: 21 Dec 2017 16:53
longinvest wrote: 21 Dec 2017 16:36
[*] The investor wouldn't benefit from a lower tax rate on RRIF withdrawals versus the avoided marginal tax rate on RRSP contributions.
One scenario: rollover of RIF balance to a surviving spouse's RIF and leading to taxation at a higher bracket
In case of non-registered investments, wouldn't the estate have to pay lots of taxes on realized capital gains at death at an even worse tax rate before giving the money to the surviving spouse?

The RRIF money continues to enjoy tax-free growth after the death of the first spouse.

I'm still seeking enlightenment.
a - AFAIK capital gains can also be rolled over to a surviving spouse (and the tax deferred)
Upon the death of the surviving spouse the tax on the capital gains will be 50% of that on an equal sum from a RIF

b - I am not suggesting which vehicle is more appropriate, rather pointing out characteristics that are sometimes overlooked (from personal experience as executor for one parent and "financial manager" for remaining parent)
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Re: TFSA Contribution 2018

Post by longinvest »

BRIAN5000 wrote: 21 Dec 2017 17:14
IIRC Rollover of non-registered goes to my spouse with an election to pay tax or defer till tax she dies, when it goes to children the CG taxes will be due.
That's great! Thanks.
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Re: TFSA Contribution 2018

Post by longinvest »

qasimodo wrote: 21 Dec 2017 17:24 a - AFAIK capital gains can also be rolled over to a surviving spouse (and the tax deferred)
It's a good thing to know.
qasimodo wrote: 21 Dec 2017 17:24 Upon the death of the surviving spouse the tax on the capital gains will be 50% of that on an equal sum from a RIF
When considering the avoided taxes on RRSP contributions, this is not true. The RRIF doesn't generate any taxes on the investor's part of the RRIF money. Taxes due are just the avoided taxes with cumulative growth. I don't want to go into a long discussion about this; plenty of examples have been provided elsewhere. I point this out because having the wrong understanding of how RRSPs/RRIFs and TFSAs work, relative to a non-registered account, can lead to bad decisions.

It's simplest to remember that the main advantage of RRSPs, RRIFs, and TFSAs is that they allow investments to grow tax free. The main difference between a RRSP/RRIF and a TFSA is when taxes on contributions are due. In the case of RRSP/RRIF, taxes are due on withdrawal (along with the cumulative growth of the government's loan). In the case of the TFSA, taxes are due before contribution. The RRSP/RRIF opens an opportunity for tax arbitrage (avoiding a higher marginal tax rate to pay taxes at a lower rate later).

Some people claim that the OAS clawback reduces the tax arbitrage, or even makes it negative. Yet, they offer taxable investing as an alternative, ignoring the tax-free growth advantage of RRSP/RRIF which can span decades, completely overwhelming any negative tax arbitrage.

Of course, in the case of a negative tax arbitrage, a TFSA would be the better investment. I was trying to find such a situation where an investor would end up in OAS clawback territory, in retirement, and would not be saving enough when younger to fill both his TFSA and RRSP (yet he cumulates enough savings to hit the clawback territory) without using non-registered investments, of course, as he is not even able to fill all his registered space. I'm looking for this situation because it's a situation where one would have to choose between RRSP and TFSA to avoid OAS clawback.
qasimodo wrote: 21 Dec 2017 17:24 b - I am not suggesting which vehicle is more appropriate, rather pointing out characteristics that are sometimes overlooked (from personal experience as executor for one parent and "financial manager" for remaining parent)
After-death issues are effectively complex. The surviving spouse gets to be taxed on income from combined inherited and saved investments, leading to a higher marginal tax rate. The deceased OAS pension disappears. A survivor having accumulated a full CPP pension gets no survivor pension.

But, to be fair, the survivor can remarry and might have less expensive hobbies than the deceased. It's a really complex issue.

Anyway, while I agree that I had overlooked inheritances, it would be fair to say that inherited money had generated no taxes for the person inheriting the money, so having to pay some taxes on it later isn't the issue I was trying to address.

I'm still looking for the unicorn who doesn't save enough to fill both his TFSA and RRSP, and yet ends up in clawback territory in retirement (without having inherited the money).
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Re: TFSA Contribution 2018

Post by longinvest »

Just to put things in perspective, a 15% OAS clawback on a 10% RRIF withdrawal represents a 1.5% tax leakage on the entire investment. The investment would have attracted more taxes in a non-registered account. A stock investment cumulating a 10% annual growth, some of it (dividends) immediately taxable, the rest half-taxed when selling, would be attracting significantly more taxes, overall, than the OAS clawback tax leakage.
Last edited by longinvest on 21 Dec 2017 18:38, edited 5 times in total.
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Re: TFSA Contribution 2018

Post by adrian2 »

qasimodo wrote: 21 Dec 2017 16:21
deaddog wrote: 21 Dec 2017 15:19
adrian2 wrote: 21 Dec 2017 15:03
http://www.finiki.org/wiki/TFSAs_versus ... ntribution concludes with: "The after-tax values are identical."
The only difference might be any clwbacks the RRSP income might incurr.
While the example assumed 40% tax rate on RSP (RIF) withdrawal, a fairly common scenario would likely be: 40% tax on annual withdrawal and max rate (50%+) of lump sum on death of surviving spouse
I would argue the other way around: while the entire RRSP contribution saves tax @ 40%, it's quite likely that part of the RRIF withdrawals will be taxed at less than 40%.
OAS and max CPP don't even fill up the first tax bracket, and there's a long way from there to 40% MTR.

For RRIF withdrawals the relevant tax rate is not the MTR, but the average tax rate.
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Re: TFSA Contribution 2018

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adrian2 wrote: 21 Dec 2017 18:36 For RRIF withdrawals the relevant tax rate is not the MTR, but the average tax rate.
You risk opening another can of worms. There are arguments for and against average vs MTR as have been discussed before.
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Re: TFSA Contribution 2018

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longinvest wrote: 21 Dec 2017 18:09
I'm still looking for the unicorn who doesn't save enough to fill both his TFSA and RRSP, and yet ends up in clawback territory in retirement (without having inherited the money).
The power of compounding; Put away $500 permonth in a Registered plan starting at age 30 until you are 65. Compound that at 10% until you are 72 and have to withdraw the minimum.
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Re: TFSA Contribution 2018

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adrian2 wrote: 21 Dec 2017 18:36
For RRIF withdrawals the relevant tax rate is not the MTR, but the average tax rate.
Why is that. I have no choice but to take the RRIF withdrawal. It is added to my other income and taxed at the MTR.

If I have the average tax rate withheld at the source then I have to dig in my pocket to pay the additional tax the RRIF causes.

It is like the old agrument that it is not worth working overtime because the tax hit causes you to earn less per hour after tax than strait time.
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Re: TFSA Contribution 2018

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deaddog wrote: 21 Dec 2017 20:02
longinvest wrote: 21 Dec 2017 18:09
I'm still looking for the unicorn who doesn't save enough to fill both his TFSA and RRSP, and yet ends up in clawback territory in retirement (without having inherited the money).
The power of compounding; Put away $500 permonth in a Registered plan starting at age 30 until you are 65. Compound that at 10% until you are 72 and have to withdraw the minimum.
Wait a minute. This person has no non-registered investments and makes no RRIF withdrawals from age 65 to 72?

Still a unicorn.

P.S. I assumed 8% nominal in a 2% world, with retirement at 65. The historical real return of the stock market was around 6%.
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Re: TFSA Contribution 2018

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deaddog wrote: 21 Dec 2017 20:12
adrian2 wrote: 21 Dec 2017 18:36
For RRIF withdrawals the relevant tax rate is not the MTR, but the average tax rate.
Why is that. I have no choice but to take the RRIF withdrawal. It is added to my other income and taxed at the MTR.
It's precisely because you have no choice but to take it; there is no sequencing of which income is first and which one is optional (last).
For contributing to an RRSP, the situation is reversed: you do have in fact two tools to optimize, how much to contribute and how much to deduct from taxes every year.

But my main point is that for most people who deducted RRSP contributions fully at 40% MTR it's unlikely they will pay tax fully at 40% for the RRIF withdrawal. Just what will fill the taxable income all the way up, without counting the RRIF amount (for it to come @ 40% MTR)?

I'm not saying it cannot happen, I'm just positing that for a majority of retirees in the 40% MTR, they are there only when the RRIF is added; therefore part of the RRIF gets taxed at a lower rate.
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Re: TFSA Contribution 2018

Post by longinvest »

Don't forget the main advantage of RRSPs is tax-free growth, not the tax arbitrage.
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Re: TFSA Contribution 2018

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longinvest wrote: 21 Dec 2017 18:09 I'm still looking for the unicorn who doesn't save enough to fill both his TFSA and RRSP, and yet ends up in clawback territory in retirement (without having inherited the money).
Some of us are still working at age 71, albeit part-time. On the other hand, my malpractice insurer defines "part-time" as earning less than $90,000 a year.

As another example, a colleague of mine at Bell Canada used all his savings to buy Bell shares through the employee stock purchase plan, which at the time was outside RRSPs. When he died, he was a millionaire several times over, yet had zero in his RRSP.

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Re: TFSA Contribution 2018

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Ok, yes, working into one's 70s would be such a case. Yet, I suspect the investor would have filled both his RRSP and TFSA all along. I wouldn't sacrifice years and years of tax-free growth to avoid a small negative tax arbitrage.
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Re: TFSA Contribution 2018

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longinvest wrote: 21 Dec 2017 22:39 Ok, yes, working into one's 70s would be such a case. Yet, I suspect the investor would have filled both his RRSP and TFSA all along. I wouldn't sacrifice years and years of tax-free growth to avoid a small negative tax arbitrage.
Fair enough. I do know one fellow still working in his seventies because he has to. Three divorces and a lavish lifestyle mean that he has no significant savings, even at his age.

He seems to have had a lot of fun, though.

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Re: TFSA Contribution 2018

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ghariton wrote: 21 Dec 2017 22:47 He seems to have had a lot of fun, though.
I bet!

Thanks for the case, killing my unicorn theory.
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Re: TFSA Contribution 2018

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ghariton wrote: 21 Dec 2017 22:31
longinvest wrote: 21 Dec 2017 18:09 I'm still looking for the unicorn who doesn't save enough to fill both his TFSA and RRSP, and yet ends up in clawback territory in retirement (without having inherited the money).
...As another example, a colleague of mine at Bell Canada used all his savings to buy Bell shares through the employee stock purchase plan, which at the time was outside RRSPs. When he died, he was a millionaire several times over, yet had zero in his RRSP.

George
Yes the same would happen in any surviving technology company and at least 5 Canadian banks. RRSP might not be zero but was heavily constrained to $2500 then $3500 per year due to DB pensions.

Take a typical bank. Long term total return of 13% per year of which 3.8% is dividends. So little tax paid along the way.
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Re: TFSA Contribution 2018

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kcowan wrote: 22 Dec 2017 08:35 Take a typical bank. Long term total return of 13% per year of which 3.8% is dividends. So little tax paid along the way.
This is missing the tax paid before the initial non-registered investment, which would have been avoided had the money been put into an RRSP. All in all, the investor would have been better to put the money (along with the tax savings) into his RRSP, invest the money and the "government loan" into the bank stock, collect the 3.8% dividend tax-free for years and years, then, at death, pay back the loan to the government along with the cumulative gain on the loan, and keep all his initial "net capital" with 100% of the gains (including 100% of the capital gains and 100% of the dividends) on his net capital.

The trick is to remember that the investor's net RRSP contribution is equal to (gross RRSP contribution - tax rebate). The tax rebate is like a government loan that must be paid back on withdrawal with growth (instead of a predetermined interest rate). The higher the growth, the higher to payment. But, also, the higher the growth, the higher the tax-free growth the investor harvests on his net RRSP contributions.

It's a case where paying more taxes is a sign of having more money, net of taxes. I prefer to be richer and pay taxes than poorer and pay no taxes.
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Re: TFSA Contribution 2018

Post by longinvest »

Maybe I should stop trying to repeat myself and just point back to Finiki:
fniki: TFSAs versus RRSPs - Comparison using the net RRSP contribution

Yes, there is such a concept as a net RRSP contribution. It would be illogical to compare a gross RRSP contribution investment with an equal non-registered investment, as this would result into the RRSP contributor spending more (spend the tax rebate) during the contribution year.
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Re: TFSA Contribution 2018

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adrian2 wrote: 21 Dec 2017 21:46
deaddog wrote: 21 Dec 2017 20:12
adrian2 wrote: 21 Dec 2017 18:36
For RRIF withdrawals the relevant tax rate is not the MTR, but the average tax rate.
Why is that. I have no choice but to take the RRIF withdrawal. It is added to my other income and taxed at the MTR.
It's precisely because you have no choice but to take it; there is no sequencing of which income is first and which one is optional (last).
That fact makes the TFSA superior to the RRSP. If there is no net difference in after tax returns just the fact that you have a choice makes the instrument superior. I prefer less government in my life. :)
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Re: TFSA Contribution 2018

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deaddog wrote: 22 Dec 2017 11:43 That fact makes the TFSA superior to the RRSP. If there is no net difference in after tax returns just the fact that you have a choice makes the instrument superior. I prefer less government in my life. :)
I prefer to use both! :)

And there is a difference in after tax returns when holding US-listed securities which pay distributions: in a TFSA, the withholding tax to Uncle Sam is a dead weight which is avoided in an RRSP.
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Re: TFSA Contribution 2018

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adrian2 wrote: 22 Dec 2017 12:01
deaddog wrote: 22 Dec 2017 11:43 That fact makes the TFSA superior to the RRSP. If there is no net difference in after tax returns just the fact that you have a choice makes the instrument superior. I prefer less government in my life. :)
I prefer to use both! :)

And there is a difference in after tax returns when holding US-listed securities which pay distributions: in a TFSA, the withholding tax to Uncle Sam is a dead weight which is avoided in an RRSP.
I didn't have a choice. :)

RRSP was all that was available and I didn't take full advantage of it probably to my detriment. (Too soon old; too late smart)

Today I would/will take advantage of the TFSA mainly for the flexibility. (Contributions can be withdrawn and replaced)
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Re: TFSA Contribution 2018

Post by Peculiar_Investor »

Every member of our family has now electronically transferred their 2018 contribution into their TFSA. The funds will be invested in accordance with each person's Investment policy statement (IPS) to the most underweight asset class to rebalance back towards targets.
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Re: TFSA Contribution 2018

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Does this suggest we must wait til December 2018 before CRA declares the limit for 2019 ?
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Re: TFSA Contribution 2018

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fundamental wrote: 26 Sep 2018 10:45 Does this suggest we must wait til December 2018 before CRA declares the limit for 2019 ?
We must at least wait until Statistics Canada publishes the appropriate CPI numbers. Unless I'm mistaken, the CRA applies a simple formula (rounding to the nearest $500) to calculate the contribution limit based on CPI and the initial $5,000 limit in 2009.
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