QUOTE (2ndstory @ Nov 12 2010, 11:26 PM)
That's what I was thinking, Thomas. When do I need money? Now when my expenses are the most. I have debts, mortgage etc. Invest in the RRSP and use the refund to pay down debt or reinvest makes sense to me.
Nik
A problem with both RRSPs and TFSAs is that you cannot recover capital losses. You may answer, so what! I am investing for profit, I anticipate more profits than losses!
In reality though, this is a lot more fundamental issue than many think. I have actively invested in RRSPs for several decades and I invested in stocks that I considered relatively 'safe' for an RRPS. Who would have guessed that the Royal Bank of Scotland or UBS would crater the way they did. Thank heaven I also owned Vermillion Oil and Gas in my RRSP for the last 15 years or so. But how are you supposed to invest in a climate of ever falling interest and bond yield and get a decent return without stocks?
You nearly MUST invest in some stocks! I did a simulation of RRSP proceeds based on the actual interest rates of the last 10 years or so. Yes the RRSP net worth went up, but after inflation and the withdrawal tax, the simulation broke basically even. The return was 4.7% or something like that and guess what, in spite of my added stock content, that was only slightly better than my real life performance!
My conclusion, RRSPs are good for capital preservation but not for increasing your net worth. I have not done a TSFA simulation, but here you do not invest pre-tax but after tax dollars and guess what? If your aftertax profits are not taxed you will do very well, thank you! Suppose you deposit $5000 in year one, invested at 10% (a lot higher than my real life RRSP experience!) your net worth will double every 7 years. So after 7 years that $5000 is worth $10,000 and there is NO tax payable.
With an RRSP you would put $5000 - tax return say $1900 if you are in Alberta's top margin. So $3100 invested results after 7 years in $10,000 net worth. Upon withdrawal it would be $3800 less or $6200. Exactly the same ROI as with an TSFA. But wait a minute, what would it be the after 14 years?
RRSP value: 20,000 or after tax: $20,000 minus $7600 Minus $3100 = $9,300 - ROI =300% over 14 years
TSFA value: 20,000 of after tax: $20,000 minus $5000 = $15000 - ROI =300% over 14 years
So which one is better?
Well, if the $1900 tax return from your $5000 RRSP contribution was providing you with exactly the same after tax return that you got in your RRSP there would be no difference. For example if you put it in your TSFA! But where else would you get such after tax returns outside an RRSP at the same risk level?
But now comes the clincher. After 14 years, you decide to withdraw the money from your RRSP and put it in real estate. Oops! Better do not get another $ 9,300 windfall because unless you use your normal contribution space you can not put it back in your RRSP!
In case of the TSFA, you withdraw your $15,000 and the following year you can put that $15,000 back plus your normal max contribution into your TSFA and continue to grow your net worth tax free. So of course the TSFA has some important advantages over an RRSP for the long term sophisticated investor.
Yes, $5000 may not sound much, but doing such contribution in 2 successive years ads up to $10,000 plus profits. A nice start for a downpayment wouldn't you say? And the beauty is that the year after you take it out, you have a max contribution space for your TSFA of over $15,000!
No, I don't think the TSFA is a bank scam. Definitely NOT!
BTW there is always a BTW! In real life I invested my TSFA $5000 in Bell Alliance Trust units yielding 10% (now tax free). It also appreciated somewhat although I gave that back in the second year. In Year 2 I invested an additional $5000 and put it in ETFs of the TSX60. Right now near the end of year 2, I have accumulated over $12,000. In year 3, after my $5000 new contribution it will be $17,000 plus next year's profits. Guess where I will get my down payment for my next real estate purchase? And... an in excess of $22,000 TSFA tax shelter in year 4.
