TFSA Advice

[Boat]

Right now I have my TFSA through scotia bank. I believe its a non directed tfsa, as it only lets me pick Scotia Branded GIC's and Mutual funds.

Currently, I have all of my investments in one of their mutual funds. Its called the "Scotia Bond Fund" or BNS314 When I say all of my investments, its over 10 grand. In this single fund.

My 1-2 year goal is to use the money for a downpayment of my house.

Can you provide some advice on what I should do:

Should I continually put all my eggs in one basket? Should I try some other cookie cutter investments from scotia?

Should I immediately switch to something like itrade?

At this point I want stability and liquidity of my investments. I'm not a huge investing guru but I dont want inflation/management fees to eat away at my investments either.

[Zewind]

Just looked that fund up. Im very surprised how well its done over the past year.

Are currently contributing weekly/bi-weekly/monthly to the TFSA?

Is this your first home purchase? (If so have you thought about using your RRSP to help with the down payment)

With a 1 to 2 year timeline for the purchase, staying in conservative investments will keep you happy. As you mention, you're not an investment guru; so itrade wouldnt be the best option. Call your main branch at Scotia and ask if they can provide some suggestions.

[Abeo]

+1, I'm in the same boat. I have my RRSP's figured out, just the rest needs a home. I have an ING TFSA account, and am thinking of throwing it all in there for now (at 2%)... but can't help but thinking I should be investing it somehow.

[msommers]

Another for RRSPs. Max 25,000 for first time home buyers and min. repayment of 1,667/year for 15 years. The only thing you lose out on is the potential interest you may have gained with it in the RRSP still. A max $25,000 0% "loan" over 15 years is pretty sweet.

[Boat]

Originally posted by Zewind
Just looked that fund up. Im very surprised how well its done over the past year.

Are currently contributing weekly/bi-weekly/monthly to the TFSA?

Is this your first home purchase? (If so have you thought about using your RRSP to help with the down payment)

With a 1 to 2 year timeline for the purchase, staying in conservative investments will keep you happy. As you mention, you're not an investment guru; so itrade wouldnt be the best option. Call your main branch at Scotia and ask if they can provide some suggestions.

Yup, I got in October pretty late.

Essentially I'm contributing as much as I can to max it, then my next question was regarding the Home Buyers Plan.

Thanks for the advice!

[Boat]

Originally posted by Abeo
+1, I'm in the same boat. I have my RRSP's figured out, just the rest needs a home. I have an ING TFSA account, and am thinking of throwing it all in there for now (at 2%)... but can't help but thinking I should be investing it somehow.

Explore something else, it sounds like you are doing the "cash" tfsa option. If you look at inflation rates, they are probably at 2-3%. There should be some Mutual funds (like mine) that you can put your money into.

[Boat]

Originally posted by msommers
Another for RRSPs. Max 25,000 for first time home buyers and min. repayment of 1,667/year for 15 years. The only thing you lose out on is the potential interest you may have gained with it in the RRSP still. A max $25,000 0% "loan" over 15 years is pretty sweet.

I'm a first time buyer btw.

So you're saying if I put 25,000 in there, and take out 25,000 for my house, It will still say I have 25,000 in there? I dont really understand how the contribution space works for that

[Abeo]

Originally posted by Boat


Explore something else, it sounds like you are doing the "cash" tfsa option. If you look at inflation rates, they are probably at 2-3%. There should be some Mutual funds (like mine) that you can put your money into.

Yeah... I guess I'm a bit gunshy, as I watched what my RRSP mutual funds did from 2009 till now (I have just made back what I lost last summer/autumn). Part of me figures 2% is better than a potential loss.

[Zewind]

Originally posted by Boat


I'm a first time buyer btw.

So you're saying if I put 25,000 in there, and take out 25,000 for my house, It will still say I have 25,000 in there? I dont really understand how the contribution space works for that

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html


Originally posted by Abeo


Yeah... I guess I'm a bit gunshy, as I watched what my RRSP mutual funds did from 2009 till now (I have just made back what I lost last summer/autumn). Part of me figures 2% is better than a potential loss.

Talk to an advisor, but stay within your comfort limits. All advisors have a risk assesment profile which shows your tolerence for gains and losses in the market.

[msommers]

Originally posted by Boat


I'm a first time buyer btw.

So you're saying if I put 25,000 in there, and take out 25,000 for my house, It will still say I have 25,000 in there? I dont really understand how the contribution space works for that

Are you talking about RRSP or TFSA?

I'm talking about RRSP. If you put in 25,000 into the RSP, you can take that out towards a house because you're a first-time home buyer. This clause enables you to not pay tax or interest while taking it out. Effectively, you're taking a loan from yourself that does not require you to pay interest but does have minimum payment and minimum payback period (15 years) attached.

CRA link for more information:
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html

[a social dsease]

Originally posted by Boat


I'm a first time buyer btw.

So you're saying if I put 25,000 in there, and take out 25,000 for my house, It will still say I have 25,000 in there? I dont really understand how the contribution space works for that

You can withdraw up to $25k from your RRSP with no penalty, if you use it to purchase a house. You have 15 yrs to repay it, hence the annual repayment would be $25k/15yrs = $1667/yr.

You would also get a tax benefit from putting the money into your RRSP, of $25k x whatever your tax rate is.

It is a pretty good deal, especially if you already have $25k or more sitting in your RRSP.

However, as msommers said, you miss out on all the compound interest. Also, keep in mind that when you repay the money into your RRSP, you don't get a tax deduction on it (because you already did when you put the money in). If you are in the same tax bracket when you are paying it back as you are in now, then it doesn't matter, however if you are in a higher tax bracket later in life, than you'll actually be losing money.

I'm a 1st time home buyer myself, and I decided not to go the RRSP-HBP route because of this.


Here is an example (Assumption: you are in a 25% bracket now, and will be in a 40% bracket when you pay back):

Option A: You put 25k into your RRSP, your tax return is thus 25% x $25k = $6,250. You then withdraw the $25k and use it to buy a house. You then pay it back later at $1667/yr, however you do not receive any tax deductions on the $1667/yr. Total tax savings = $6250.

Option B: You have 25k, don't put it into an RRSP, just use it to buy your house. Then, every year, you take the $1667 you would have used to pay back the HBP, and put it into your RRSP anyways. Since you haven't already gotten a deduction on it, you do now. But now you are at a 40% tax bracket. So every year your $1667 contribution gives you a tax return of 40% x $1667 = $667. Total tax savings = 15 yrs x $667 = $10,005. So you save an extra $3755.

Unless you absolutely need that $6250 right away to buy your house asap, it might cost you more long term. Obviously there are many more factors in real life, but dumping money into an RRSP just to take it out again for the HBP may not be the best choice. I'd talk to a financial advisor to see if it makes sense for you.

If there are any tax gurus out there feel free to correct my math/assumptions if they are incorrect!

[ExtraSlow]

I would say, with a 2 year time horizon, you want a VERY low risk investment. A bond fund is probably appropriate. It's not worth it for you to try to squeeze out a couple extra percent return if it means taking on more risk.

One benefit of the RRSP is that if you take the $25k and drop it in the RRSP, you'll get the tax refund next year. Not sure what your marginal tax rate is, but you can figure that out. Then use that refund money, plus your $25k that you withdraw with HBP as your downpayment. Voila, you've get yourself $30-33 grand.

You do have to pay it back, or get taxed on that amount as income every year, but for someone starting out, that's usually a decent deal.

EDIT: Dang, a social dsease was both faster, and more clear.

[msommers]

I'll agree with a social disease, to a point. If you're already at max tax rate, use the FTHB plan because otherwise that money would be mortgage money that you're getting interest on.

Everyone is likely to increase in tax rates but by how much obviously depends. Hard to say for everyone to do one thing vs. the other. But for a social disease for him, that's definitely the way to go.

[Boat]

Originally posted by msommers


Are you talking about RRSP or TFSA?

I'm talking about RRSP. If you put in 25,000 into the RSP, you can take that out towards a house because you're a first-time home buyer. This clause enables you to not pay tax or interest while taking it out. Effectively, you're taking a loan from yourself that does not require you to pay interest but does have minimum payment and minimum payback period (15 years) attached.

CRA link for more information:
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html

RRSP.

Thanks for the info everyone, That would pretty much be my plan, max TFSA this year, then start putting money into RRSP only to take out <= 25,000 immediately after.

After I max my tfsa, what would be a viable option for the rest of my savings instead of RRSP before I buy a house? High Interest savings account?

[ExtraSlow]

Note the regulations on the HBP, that money has to sit for a certain amount of time. You can't withdraw the next day.