TFSA gains. Pull them out or leave them be?

[16hypen3sp]

Lets say you have a maxed out TFSA that's fully invested. You have gains of $3k from those investments. Do you guys just leave it alone or do you do anything with those gains? I'm thinking of pulling my gains out from my TFSA and putting it into my RRSP for tax purposes. But I've never touched my TFSA before so I'm unsure of the consequences or if there are any.

[shakalaka]

There are no tax implications for the money accrued in a TFSA. So you can make however much income in your TFSA or withdraw it ultimately there are no tax consequences of that.

Based on that I wouldn't advise taking your income out of TFSA and putting into RRSP because you wouldn't be taxed on that income anyway and the entire purpose of RRSP's is to defer taxes on taxable income for a later time.

I am no expert but that's my understanding of this. I am sure someone else will correct me if I am wrong.

[16hypen3sp]

The main problem I have here is that I have a nasty tax bill coming, I'll owe about $10k on top of what I've already paid in income taxes. Because of this, I am trying to consolidate any extra cash I have into my RRSP before the Mar. 1 deadline to reduce the tax bill.

My last resort is using my line of credit to add into my RRSP. Really don't want to do that tho.

The taxman cometh.

[ThePenIsMightier]

That money is supposed to help you in retirement. If you take it out now to pay this shitty tax, you'll never end up replacing its value in your retirement plans and you've lost what that $3k would've grown into.
I'd suggest a Net Present Value sort of analysis comparing taking this money out with borrowing money to pay the Tax Man. If you buckle down and set an aggressive repayment schedule on your loan, I suspect you'll come out far ahead in the long run.

[lasimmon]

Depends how you really use your TFSA. I don't really see an issue with pulling it out and throwing it in your RRSP. You are not throwing the money away and reducing your tax obligation at the same time.

[bjstare]

He's not reducing his tax obligation, he's deferring it. My vote goes to leaving it in TFSA. Let it grow and still never incur any additional taxes.

[KPHMPH]

I vote pulling it out as cash and then investing in RRSPs to reduce your tax bill.

You basically have tax free money turning into extra tax free money.

[buh_buh]

TFSA is also tax free money turning into extra tax free money.
In a way, it's almost the same thing if you invest in the exact same stock in your TFSA vs. RRSP, except in a RRSP you will pay taxes on it at a later date.
The difference is you are lowering your current tax bill by purchasing RRSP but having to pay taxes again on it at a later date.

[ExtraSlow]

The idea of a net present value analysis is pretty good. I think you'll find that your tax bill due this year will override considerations of things decades away.

I'd be very hesitant to borrow money to invest in RRSP.

[arcticcat522]

If he were to withdraw from his TFSA, would that contribution room be added next year, or do they track income generated? I think whatever he takes out, he would be able to add back next calender year. Correct me if I'm wrong. I would take out the money to reduce the tax burden.

[sabad66]

It really depends on how you plan living in your retirement. If you're going to be living modestly and not pull out a lot of money from your RRSP (would be a RIF at that point) every year and thus would be in a low tax bracket then i'd say move into RRSP is better. If you want to really enjoy life and pull bigger amounts out of your accounts then TFSA is a better place to leave your money as its completely tax free regardless of how much you pull out every year.

[sabad66]

If he were to withdraw from his TFSA, would that contribution room be added next year, or do they track income generated? I think whatever he takes out, he would be able to add back next calender year. Correct me if I'm wrong. I would take out the money to reduce the tax burden.

yes, by pulling out gains, you are "creating" new room in your TFSA. for example say he's contributed the max since it started which would be 63,500 since the program started in 2009 until 2019 but it has grown to 70,000 his room would be 0 at that point. but then if you pull out all 70,000, his room would now be 70,000 + whatever the max is next year in 2020. Not just 63,500 + the max for 2020.

[prae]

The idea of a net present value analysis is pretty good. I think you'll find that your tax bill due this year will override considerations of things decades away.

I'd be very hesitant to borrow money to invest in RRSP.

I don't get the hesitation on borrowing to invest in an RRSP. In the past I frequently borrowed small four figures to max out my RRSP contributions and paid the loans back immediately upon receipt of my tax refund. In OP's case I suppose it's a bit different as he'll just be reducing a net obligation, rather than having line of sight to an immediate refund to be used for repayment.

[ExtraSlow]

I forgot this was beyond. 85% of Canadians will not have enough saved to worry about it in retirement. However on beyond.ca, only the lowest 1% would be considered average elsewhere.

[msommers]

I would only pull it out if it's going to bring you down from the top tax bracket to the 2nd highest tier, assuming you have a lot in the highest tax bracket to begin with.

Keeping it in the TFSA is a sure-fire way to avoid paying tax indefinitely on that money. Overall that would be my preference because there are the few oddball people out there still making a lot of money when they are required to withdraw from their RRSP and don't actually defer much, if any tax.

[Buster]

Borrowing money to put into your RRSP is generally a bad idea. So don't do that.

Without knowing your actual tax bracket, it is hard to determine the degree to which the RRSP transition will help you.

The fact that the tax bill is coming really doesn't change what your overall tax strategy should be. That is, if you had paid appropriate installments throughout the year, your overall strategy on this would remain the same. My guess is that you would benefit from putting money into your RRSP.

[ExtraSlow]

I don't get the hesitation on borrowing to invest in an RRSP. In the past I frequently borrowed small four figures to max out my RRSP contributions and paid the loans back immediately upon receipt of my tax refund. In OP's case I suppose it's a bit different as he'll just be reducing a net obligation, rather than having line of sight to an immediate refund to be used for repayment.

Yeah, I didn't clarify that. What I should have said is I would be hesitant to borrow money LONG TERM for an RRSP contribution. If you can pay back soonish, that's different.

[Buster]

Yeah, I didn't clarify that. What I should have said is I would be hesitant to borrow money LONG TERM for an RRSP contribution. If you can pay back soonish, that's different.

You were right originally. RRSP loans are generally a bad idea, pushed by banks who like the sweet (non tax deductible) interest.

[HiTempguy1]

Borrowing money to put into your RRSP is generally a bad idea. So don't do that.

Without knowing your actual tax bracket, it is hard to determine the degree to which the RRSP transition will help you.

The fact that the tax bill is coming really doesn't change what your overall tax strategy should be. That is, if you had paid appropriate installments throughout the year, your overall strategy on this would remain the same. My guess is that you would benefit from putting money into your RRSP.

This is the confusing part. No one should be getting whacked with $10k in tax (unless massive capital gains or something), he needs to fire his accountant.

[prae]

This is the confusing part. No one should be getting whacked with $10k in tax (unless massive capital gains or something), he needs to fire his accountant.

He drives for uber. Do they withhold income tax? I don't believe they do. That's no fault of his accountant, simply a reality of how he generates his income.

- - - Updated - - -


You were right originally. RRSP loans are generally a bad idea, pushed by banks who like the sweet (non tax deductible) interest.

Agree with you both there.

[sabad66]

This is the confusing part. No one should be getting whacked with $10k in tax (unless massive capital gains or something), he needs to fire his accountant.

In theory it’s better to have to pay tax. It means you did not give the government a free loan over the year (your tax refund).

Of course in practice almost nobody is ever prepared for getting a big one-time bill like this

[HiTempguy1]

In theory it’s better to have to pay tax. It means you did not give the government a free loan over the year (your tax refund).

Of course in practice almost nobody is ever prepared for getting a big one-time bill like this

Well that's exactly my point. He wasn't prepared, otherwise this wouldn't be a question.

Same reason my business pays GST on a yearly basis vs quarterly.

[Buster]

The CRA won't let you do that indefinitely.

[msommers]

Yeah they were pretty quick to tell me both GST and Income Tax needed to be paid quarterly. Bastards.

[tonytiger55]

Borrowing money to put into your RRSP is generally a bad idea. So don't do that.

Without knowing your actual tax bracket, it is hard to determine the degree to which the RRSP transition will help you.

The fact that the tax bill is coming really doesn't change what your overall tax strategy should be. That is, if you had paid appropriate installments throughout the year, your overall strategy on this would remain the same. My guess is that you would benefit from putting money into your RRSP.

Pretty much this.
Just to add. It also depends on your short, medium and long terms goals in terms of financial strategy.

Do you have any major financial purchases coming up..? i.e Car, ex wife/child payments, new home, pay down mortgage etc.

Are you planning to borrow in the future (mortgage, new car etc)? Not paying your taxes could have an effect if the lender will loan to you (i.e the lender may look at it like this, if you not pay your taxes, how will you pay creditors..?). Are you being charged interest on the tax owed..?

Putting the cash into the RRSP will generally benefit you as Buster mentioned. BUT the RRSP is a tax deferral tool. So it depends on the overall picture of your finances and what your goals are.

[arcticcat522]

Why is borrowing ti fund your RRSP a bad thing? Is that just a generalization about being a bad idea to borrow to invest (like a margin account) For example, I'm getting a little more than 5000 as a refund and going to borrow 5000 at .99% to add to my RRSP. It will be paid back when the refund is in my account. I'll still have a couple grand plus an extra 5000 in my RRSP. I don't see a down side......i also realize I should decrease the amount of tax taken off my cheque, but I would rather get a return than owe.

[Disoblige]

Why is borrowing ti fund your RRSP a bad thing? Is that just a generalization about being a bad idea to borrow to invest (like a margin account) For example, I'm getting a little more than 5000 as a refund and going to borrow 5000 at .99% to add to my RRSP. It will be paid back when the refund is in my account. I'll still have a couple grand plus an extra 5000 in my RRSP. I don't see a down side......i also realize I should decrease the amount of tax taken off my cheque, but I would rather get a return than owe.
How are you borrowing at 0.99%?

[muse017]

How are you borrowing at 0.99%?
0.99%?? Let me get some loan from there,

Only time I borrowed money to fund RRSP was to purchase my first home. After that, I don't think its financially make sense to do it.

[Buster]

Why is borrowing ti fund your RRSP a bad thing? Is that just a generalization about being a bad idea to borrow to invest (like a margin account) For example, I'm getting a little more than 5000 as a refund and going to borrow 5000 at .99% to add to my RRSP. It will be paid back when the refund is in my account. I'll still have a couple grand plus an extra 5000 in my RRSP. I don't see a down side......i also realize I should decrease the amount of tax taken off my cheque, but I would rather get a return than owe.

Plus a loan of $3000, in this case.

[Misterman]

I don't get the hesitation on borrowing to invest in an RRSP. In the past I frequently borrowed small four figures to max out my RRSP contributions and paid the loans back immediately upon receipt of my tax refund. In OP's case I suppose it's a bit different as he'll just be reducing a net obligation, rather than having line of sight to an immediate refund to be used for repayment.

You're robbing Peter to pay Paul no matter how you slice it. Even if you avoid any interest at all on the loan, you're investing for the purpose of a bigger tax refund, despite that you will pay far more in taxes in the future on that investment. People get very hung up on percentages when it comes to RRSP's, without ever considering the net overall dollar figure. If you're in a 40% tax bracket now, that seems great to get that 40% of your investment back in form of tax return right away. But when you compound that money to 300% by the time you're 65, and withdraw it at a 30% tax bracket, you physically pay more tax dollars by the time it's withdrawn despite being in a lower bracket. The government isn't stupid, they run the most well thought out racketeering scams of all time.

Obviously there is math that needs to be applied to every specific scenario. Personally I am no fan of RRSP's.




In theory it’s better to have to pay tax. It means you did not give the government a free loan over the year (your tax refund).

Of course in practice almost nobody is ever prepared for getting a big one-time bill like this

My tax bill is like 40 grand. But yeah it's weird people aren't prepared for this. I consult, so I take 35% of every invoice and transfer it to a secondary business account that I keep purely for tax money at year end. After I pay my taxes I generally have a whack of cash left over, so that either becomes business investment or fun money.




Well that's exactly my point. He wasn't prepared, otherwise this wouldn't be a question.

Same reason my business pays GST on a yearly basis vs quarterly.

First year in business? Otherwise how are you getting away with paying GST yearly? After first year they generally make you pay quarterly installments.

[arcticcat522]

I don't follow about the 3000. The .99 is an introductory rate from a pre approved credid card for 6 months. There is also a 3% fee that my banker is going to refund.

[Misterman]

I don't follow about the 3000. The .99 is an introductory rate from a pre approved credid card for 6 months. There is also a 3% fee that my banker is going to refund.

I assumed it was a facetious comment about you "borrowing" 3000$ coming by way of tax return, that you'll be paying back when you start withdrawing RRSP.

[Buster]

No, I didn't read his post clearly enough.

As far as I can tell, he's just using a credit card to cover the gap between when he has to pay into the RRSP and when he gets his refund back (ie they match). If that's what he's doing, I don't really consider that borrowing to invest. That's just a weird way to give the government a free loan and the banks a couple of months of interest on said loan amount.

[arcticcat522]

That is what I'm doing. I suppose the only better way would be to take less tax off per pay period and increase my contributions throughout the year. It would be difficult to for me to plan for that. Unless you have another option for me to look at

[Buster]

I'd be inclined, just out of convenience, to simply skip the whole credit card bit, take your refund, put it into your TFSA, then use it to top up your RRSP for the following year. But it really is better to not let the gov't hold YOUR money all year.

[blownz]

My only comment for people is to not over do it with RRSP's in your early years as later on you will likely be in a much higher tax bracket and can really make better use of RRSP deductions. Especially with the increased Federal and Provincial tax rates in the last few years I am pissed that I didn't save more room for now.

Definitely max out TFSA account first and RRSP's second in your earlier years.

[Disoblige]

My only comment for people is to not over do it with RRSP's in your early years as later on you will likely be in a much higher tax bracket and can really make better use of RRSP deductions. Especially with the increased Federal and Provincial tax rates in the last few years I am pissed that I didn't save more room for now.

Definitely max out TFSA account first and RRSP's second in your earlier years.
Although this is a good point, you can still put money into your RRSPs and just don't use it for tax refund. It'll just be unused contribution and you'll be making money at the same time.

[Misterman]

My only comment for people is to not over do it with RRSP's in your early years as later on you will likely be in a much higher tax bracket and can really make better use of RRSP deductions. Especially with the increased Federal and Provincial tax rates in the last few years I am pissed that I didn't save more room for now.

Definitely max out TFSA account first and RRSP's second in your earlier years.

Would need to see math on the different options based on someones personal income situations. But I would be hard pressed to believe that the increased tax return by waiting 10 years to invest when your income is much higher, would offset the 10 year loss of compounding you'd have in your RRSP by investing from day one.

I would say definitely better to max out TFSA first though.

[rx7boi]

+1 on maxing TFSA first. Liquid and tax sheltered growth.

[Xtrema]

The main problem I have here is that I have a nasty tax bill coming, I'll owe about $10k on top of what I've already paid in income taxes. Because of this, I am trying to consolidate any extra cash I have into my RRSP before the Mar. 1 deadline to reduce the tax bill.

My last resort is using my line of credit to add into my RRSP. Really don't want to do that tho.

The taxman cometh.

You do know that $3K in RRSP at top bracket will only save you about ~$1500 from that tax bill?


My only comment for people is to not over do it with RRSP's in your early years as later on you will likely be in a much higher tax bracket and can really make better use of RRSP deductions. Especially with the increased Federal and Provincial tax rates in the last few years I am pissed that I didn't save more room for now.

Definitely max out TFSA account first and RRSP's second in your earlier years.

Shelter growth vs potential saving later. It really depends on what you are after. A bird in hand is worth 2 in the bush.

Also, I think that advice probably only works for people who lives at parent's basement. There is no way anyone on the bottom 2 tax brackets can have money left over to invest on retirement. Heck, my buddy who popped out 3 kids can only started to put significant money into RRSP at 40. He does make 6 digit but only 1 income.

Say your income is taxed at 36%, $16.7K invested in RRSP will net you enough return to max out TFSA as well.

TFSA is definitely a more flexible vehicle.

If you can afford to max out both, max out both. If your RRSP grows to big, retire early and go enjoy life.

[16hypen3sp]

This is the confusing part. No one should be getting whacked with $10k in tax (unless massive capital gains or something), he needs to fire his accountant.

It's not the accountant. Without getting into specifics, it's basically capital gains.


In theory it’s better to have to pay tax. It means you did not give the government a free loan over the year (your tax refund).

Of course in practice almost nobody is ever prepared for getting a big one-time bill like this


Well that's exactly my point. He wasn't prepared, otherwise this wouldn't be a question.

Same reason my business pays GST on a yearly basis vs quarterly.

To be clear, I AM prepared to pay the tax bill, as I have the cash on hand to do that. Last year I had the same thing, a $10k tax bill, which I paid and moved on. THIS year, I don't want pay the government, I want to defer the tax using my RRSP. I need to contribute a total of about $20k to my RRSP. I have already contibuted $6k, but if I use cash on hand plus gains from TFSA, I can get close to deferring most of the tax bill, hence the question at hand.

So scenario A: I just take the entire $10k tax bill and pay it with cash on hand.

Scenario B: I use cash on hand to contribute to my RRSP and have a smaller tax bill.

Scenario C: I use cash on hand plus TFSA gains to have an even smaller tax bill.

Scenario A seems stupid to just give the cash to the government, B seems most straight forward.

EDIT: I'm getting most of the numbers from using the tax calculator linked below.
https://finance.alberta.ca/calc-script/tax_calc-2018.html

[16hypen3sp]

You do know that $3K in RRSP at top bracket will only save you about ~$1500 from that tax bill?

Yes, I have other funds to go along with it.

[Xtrema]

Yes, I have other funds to go along with it.

1st of all, I hope you know that only 50% cap gain in counted as income. So a tax bill of $10K is cap gain of ~$40K at top bracket of 48% in AB.

2nd, if it's cap gain, you should have cash on hand outside of TFSA. Dump $20K out of that $40K of gain into RRSP will totally get rid of the tax bill. You probably don't need to involve TFSA at all.

[16hypen3sp]

1st of all, I hope you know that only 50% cap gain in counted as income. So a tax bill of $10K is cap gain of ~$40K at top bracket of 48% in AB.

2nd, if it's cap gain, you should have cash on hand outside of TFSA. Dump $20K out of that $40K of gain into RRSP will totally get rid of the tax bill. You probably don't need to involve TFSA at all.

I wish it were that simple. I have a huge chunk of those gains now tied up in GOOS stock... and I'm 'holding the bag' on it. I was up on it prior to last quarterly report, but, uhh, yah.... not anymore. However, if I sell at a loss on GOOS, I could make the $20k contribution without touching the TFSA.

[tcon]

I wish it were that simple. I have a huge chunk of those gains now tied up in GOOS stock... and I'm 'holding the bag' on it. I was up on it prior to last quarterly report, but, uhh, yah.... not anymore. However, if I sell at a loss on GOOS, I could make the $20k contribution without touching the TFSA.

Well at least selling at a loss this year will lower your tax bill for 2019

[sabad66]

Although this is a good point, you can still put money into your RRSPs and just don't use it for tax refund. It'll just be unused contribution and you'll be making money at the same time.

If you do this, you have to be careful not to over-contribute more than $2000 otherwise they charge you a penalty.

From turbotax website: https://turbotax.intuit.ca/tips/what-are-rrsp-excess-contributions-5562

Penalties for Excess Contributions
Contributions to an RRSP are not subject to income tax. If you over-contribute $2,000 or less to your RRSP, you cannot deduct those excess contributions from your taxable income, but you are not charged a penalty on those contributions either. Excess contributions over the $2,000 mark, however, are charged a penalty.

The penalty is the equivalent of a 1 percent tax per month on excess contributions. If you file your taxes late, the penalty increases.

[realazy]

If you do this, you have to be careful not to over-contribute more than $2000 otherwise they charge you a penalty.

From turbotax website: https://turbotax.intuit.ca/tips/what-are-rrsp-excess-contributions-5562

Penalties for Excess Contributions
Contributions to an RRSP are not subject to income tax. If you over-contribute $2,000 or less to your RRSP, you cannot deduct those excess contributions from your taxable income, but you are not charged a penalty on those contributions either. Excess contributions over the $2,000 mark, however, are charged a penalty.

The penalty is the equivalent of a 1 percent tax per month on excess contributions. If you file your taxes late, the penalty increases.

Contribution room and unused contribution are different things.

You can contribute within your contribution room and choose not to apply them the same year that you contributed. You just don't get the tax deduction.