The point of TFSA | Canadian Tire | Discussion forum

You can only deposit $5000 per year If you take out $3000 in one year you cannot put that amount back plus $5000 per allowed you would be over your limit then pay 1% penalty EXMPLE 1 JAN 2009 YOU ADD $5000 JAN 2010 YOU ADD $5000 JULY 2010 YOU TAKE OUT $4000 JAN 2011 YOU CAN ONLY ADD $5000 YOU CANNOT ADD THE EXTRA $4000 WHICH YOU TOOK OUT YOU WOULD PAY 1% PENALTY EXMPLE 2 JAN 2009 YOU ADD $5000 JAN 2010 YOU ADD $5000 JULY 2010 YOU TAKE OUT $4000 NOV 2010 YOU PUT BACK IN $4000 YOU WILL PAY 1% PENALTY AS YOU HAD ALREADY PUT IN YOUR $5000 LIMIT AND DOES NOT MATTER IF YOU HAD MADE WITHDRAWL

NHL, you are completely wrong. Any withdrawals from a TFSA can be added back the next year IN ADDITION to the $5000 per year increase in contribution room.

To use your example, JAN 2009 deposit $5000, JAN 2010 deposit $5000, July 2010 withdraw $4000. In this case, you would be able to add $9000 in Jan 2011 ($5000 extra contribution room plus making up the $4000 withdrawl).

This issue was discussed at length in another thread here.

Agreed about the time-value of the TFSA vs. RRSP. Taxes are going to skyrocket in the next 10-20 years to support the health needs of the ageing baby-boomer population (immigration is not the answer). If you're currently in the lowest tax bracket (generally if you make $43,000 or less, depends on what province you're in), you will almost certainly be paying HIGHER taxes on your RRIF withdrawals when you retire. People who are in the lowest tax bracket should seriously consider whether they want to use RRSPs at all. Even the income tax deduction and refund may not make it worthwhile. Maxing TFSA contributions may be the way to go (TFSA withdrawals are not taxed, and there is no impact on things like CPP, OAS and GIC payout levels). If you're in a higher tax bracket, RRSPs make sense, particularly if you're able to contribute enough to get your net income down to the low tax bracket threshold of about $43,000 (e.g. say you earn $50,000 per year and are able to set aside $7,000 for your RRSP, you won't pay tax at the higher level because you get to deduct the $7000 to bring your net income down to the lowest bracket threshold of $43,000). It would be a good idea to use the refund you get on the $7000 contribution (maybe $2000 or so) to fund a TFSA.

Even if a TFSA only saves an average income earner something like $30 in tax a year, it's still far better than nothing. That's equivalent to 4 free combo meals at McDonald's. 🙂 For someone who's frugal and only eats out once or twice a month these seemingly negligible savings make an impact.

I'm very glad the TFSA account option exists.

Even better than TFSA is the Registered Disability Savings Plan which some banks are now offering accounts for. Your first $1000 contribution per year (and sometimes even more) is DOUBLED by the government grants that are part of the program! Anyone who has an officially disabled relative or qualifies as disabled themselves (and the disability is severe enough that they gets the disabled tax credit on their tax returns currently) should be taking advantage of this new savings plan the government implemented.

Here's more info from BMO's site about it:

How Can a Plan Help?
Contributions have the potential to grow more quickly than if they were invested in taxable investments outside an RDSP. Plus, government incentives promote even faster growth. RDSP beneficiaries are eligible for Canada Disability Savings Grant (CDSG) and Canada Disability Savings Bond (CDSB) benefits. These all make a substantial contribution to a brighter financial future.

Even those who don't have the financial means to contribute to an RDSP can benefit from the CDSB program. Lower-income families may qualify for CDSB payments up to a lifetime maximum of $20,000

I should start a thread about the RDSP some time.

Of course the TFSA is ideal to use for trading stocks. For anyone who buys stocks this is a PHENOMENAL addition. Think of it this way....for someone who is 18...odds are they aren't going to have any significant money until they are at least 27-28 years old. At this point they will have $50,000 in TAX FREE investment space? Unreal. No, these accounts are somewhat limited for 2% interest savings....but for anyone with moxie to invest in stocks it's an amazing account. At 38 years old you have $100,000 BASE room for tax free gains. BOOOOYAAAAHHHH:eek:

In 10 years, everyone "will have $50,000 in TAX FREE investment space," not just stock investors. Even if an 18-yr-old earns no interest and owns no stock, at 38 he will still have "$100,000 BASE room for tax free gains." TFSA isn't really ideal for stocks, because capital gains are only 50% taxable. I would argue that TFSA is ideal for MICs, because they pay 8% interest and that is all taxable.

Yeah, but stocks generally provide much higher returns over the long run. If you gain say 10% on some stock over one year with an initial capital outlay of $10,000, that's a capital gain of $1,000 of which $500 (50%) is taxable at your marginal rate. If you instead "invest" that $10,000 in a one-year GIC at 2%, you get $200 of interest income, 100% of which is taxable at your marginal rate (i.e. the entire $200). So if the stock was sheltered in a TFSA, you avoid paying tax on $500 of income. If the GIC was sheltered in a TFSA, you avoid paying tax on $200 of income. Of course, there is no guarantee that the stock will rise by 10%, and it is entirely possible that the stock could LOSE value. Having a losing stock inside a TFSA sucks because you can't claim a capital loss to offset any other capital gains you might have.

Okay, fine. Let's say that "stocks have the POTENTIAL to provide much higher returns...". When I said "long run", I meant over a person's total investing time-horizon. This can vary of course, but say someone starts an RRSP at age 35, converts to a RRIF at age 71, and dies at age 85. That's a total of 50 tax-sheltered investing years. Stocks han fluctuate dramatically in that time frame, or not do anything at all for 10 years like between 2000 and 2010 (forgetting the financial crisis and recovery). Also, dividend-paying blue-chips like IBM, AT&T, etc... outperform government bonds and most corporate bonds, so pick your stocks wisely. Choosing a market-capturing ETF is probably best for the average investor. As for MICs, they can have big payouts, but those payouts can stop immediately if the underlying asset gets in trouble. In this case, the underlying assets are mortgages, and many of those mortgages are commercial mortgages or even worse, speculative bridge-financing instruments that can collapse at any minute. As the saying goes... "let the buyer beware".

Problem is that many boomers for whatever reasons didn't or couldn't save up enough for retirement, so many are now piling into stocks at the last minute to try and capture some decent returns before they retire. Others are investing in funds with unsustainably-high returns, like Dividend 15 Split Corporation, etc... Both of these scenarios could turn out badly. While the days of 10% yearly stock returns are behind us, 4% to 6% isn't unreasonable. This may not seem like much, but interest rates on GICs and government bonds aren't likely to increase beyond 2-2.5% in the forseeable future dut to the cash flooding into the market from the US Fed printing press.