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Joined: 07/06/2011

When can I contribute into a TFSA?

Gary Cooper
Joined: 07/11/2010
Each year, you are allowed to

Each year, you are allowed to contribute an additional $5,000 into your TFSA, and the amount accummulates if unused.

There are no time restrictions, other than the calendar-year limit.  So you can contribute weekly, monthly, all at once or whatever, until you have reached your limit - then you must wait until the following January to begin contributing again.

TFSAs have been available since 2009, so the total amount available to deposit so far is $15,000

You can withdraw at any time and when you withdraw funds, you get that room back to re-contribute (unlike an RSP).  So let's say that you have contributed $10,000 so far and then you withdraw $2,000.  Since your total room as of 2011 is $15,000 you would still have $5,000 in available room, plus you would now get the additional $2,000 back, so you would be able to deposit $7,000 (before the end of 2011 - and in January 2012, that would grow to $12,000).

One other note: contribution numbers are a function of what you have deposited, and are not affected by how much your account has grown (in this way, they are like RSPs).  So if you had contributed $12,000 to date and then your account grew to $15,000, you would still have $3,000 in avialable room.

Also, if your account grew to $50,000 and you withdrew $25,000 you would then have an additional $25,000 in available room.

Mike Gilchrist
Joined: 06/27/2010
TFSA Continued.....

Yes, TFSAs are a significant savings tool introduced in 2009 tax year. They are a great place to save due to the lack of taxation on any gains. Gary is right on all points, but I wanted to clarify that money withdrawn does not become contribution room until the following year. So, if you took out $5000 in February of 2010, that withdrawal does not become contribution room until January of 2011. You don't want to overcontribute to the TFSA as there are penalties for doing so.

Joined: 08/15/2011

If I can only contribute to one, should I choose TFSA or RRSP?

Gary Cooper
Joined: 07/11/2010
Yes. (sorry, I couldn't


(sorry, I couldn't resist)

It is always a function of your personal situation, but some of the issues to consider include:

1) Marginal Tax Rate: for your RSP, the tax break that you receive is a function of your marginal tax rate. If your income is over $128,800, you would receive a full 39% tax savings on your RSP deposit. If your income is in one of the lower brackets, the savings would decline accordingly. So if it were a year where your income was very low for whatever reason, the benefit of an RSP contribution would be mostly lost. In that situation, you would be better off contributing to your TFSA and then you could always transfer to your RSP in another year when your income was higher.

2) Flexibility: one of the best features about the TFSA is that a) you can withdraw funds from the account, and b) if so, you maintain the availability to re-deposit it. In my opinion, most investors vastly under-rate the value of liquidity - until such time as they need it, and then it is too late. The TFSA gives you a tremendous amount of liquidity freedom while allowing your money to grow tax-free.

3) Working Capital: Like liquidity, I believe that many investors do not give enough consideration to working capital, or having cash available for emergencies or other bumps in the road. One rule of thumb is 3 months salary as an amount to keep aside. The point here though, is that if you do not have a great deal of savings readily available, you may want to lean towards the TFSA. If on the other hand you have plenty of liquidity and this is money that is definitely earmarked for retirement (and assuming you have a relatively high marginal tax rate), then you may want to consider the RSP option.

4) Time Value of Money: this is a tricky one because a lot of assumptions are required. The issues to keep in mind are pretty straight-forward, however. Since all of your RSP funds are taxable at withdrawal (including your deposit), the closer you are to retirement, the less benefit there is in making a deposit. If you have 30 or 40 years until you have to take it out, there is plenty of time for compounding to perform its magic. However, if you have less than 10 years, then it is very unlikely that the RSP is the better way to go. All of the assets in a TFSA account remain tax-free, which is tough to beat - especially when you also consider the liquidity that it provides.

Again, there is no right answer set in stone - it depends on you and your current situation. What I can say for certain however, is that on a go forward basis, what you would want to do is utilize regular savings from income in your RSP, and utilize other less tax-inhibited dollars (from dividends, proceeds from sale items, or whatever) to take advantage of your TFSA. Of course, life is rarely that stright-forward.

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