Tax Free Savings Account -Go open one!!

[Reef Pilot]

Originally Posted by Reef_Geek

is this how it works with TFSA trading accounts?

Yes. Let's say that now you have 25.5K available in your new TFSA. You open up a trading account, and buy a stock for 20K. You were really lucky, and it doubles. Now you have 45.5K tax free room in you TFSA.

Of course, it can go the other way, too. If your 20K stock buy turned into a 10K sell, your TFSA room just dropped down to 15.5K.

But like I said for frequent trading, it is great (just like an RRSP account) where you don't have to declare all your cap gains (or losses), like you do in your regular taxable trading account. I use my taxable accounts more for longer term investments, and dividend stocks. Makes things a lot easier at tax time when you don't have so many transactions to enter in your computer (and all those avg cost calcs along the way).

And unlike RRSP's you don't get taxed when you take money out of a TFSA. So they are great for taking money out occasionally when you need it, and you don't get taxed for it. Then you just put it back, when you have more savings again.

[Reef_Geek]

Originally Posted by Reef Pilot

Yes. Let's say that now you have 25.5K available in your new TFSA. You open up a trading account, and buy a stock for 20K. You were really lucky, and it doubles. Now you have 45.5K tax free room in you TFSA.

Of course, it can go the other way, too. If your 20K stock buy turned into a 10K sell, your TFSA room just dropped down to 15.5K.

Bear with me here, I'm a bit slow.

Scenario 1. TFSA contribution room is $25.5K, and I put $20K into stocks under TFSA status. Got lucky and stocks now worth $45.5K.

1) My understanding is that I still have $5.5K of contribution allowed since I did not make use of it all to begin with. Correct?

2) My understanding is that, within the account, I can still churn the holdings without counting it against my contribution room. So for example, within the account total value of $45.5K, I can sell $5K of stock X, where the sales goes into cash holdings that stays within the account, and use that cash to buy $5K of stock Y, all without the government fining me for over-contribution. Is this correct?

Scenario 2. TFSA contribution room is $25.5K, and I put $20K into stocks under TFSA status. Got unlucky and stocks now worth $10K.

1) My understanding is that I still only have $5.5K of contribution allowed since I did not make use of it all to begin with. The depreciation of $10K in value does not add any incremental contribution room (ie doesn't mean I can add another $10K due to depreciation, just that if I actually sell and withdraw $10K, then I can re-use that room). Correct?

[Reef Pilot]

Originally Posted by Reef_Geek

Bear with me here, I'm a bit slow.

Scenario 1. TFSA contribution room is $25.5K, and I put $20K into stocks under TFSA status. Got lucky and stocks now worth $45.5K.

1) My understanding is that I still have $5.5K of contribution allowed since I did not make use of it all to begin with. Correct? YES

2) My understanding is that, within the account, I can still churn the holdings without counting it against my contribution room. So for example, within the account total value of $45.5K, I can sell $5K of stock X, where the sales goes into cash holdings that stays within the account, and use that cash to buy $5K of stock Y, all without the government fining me for over-contribution. Is this correct? YES

Scenario 2. TFSA contribution room is $25.5K, and I put $20K into stocks under TFSA status. Got unlucky and stocks now worth $10K.

1) My understanding is that I still only have $5.5K of contribution allowed since I did not make use of it all to begin with. The depreciation of $10K in value does not add any incremental contribution room (ie doesn't mean I can add another $10K due to depreciation, just that if I actually sell and withdraw $10K, then I can re-use that room). Correct?YES

Basically, you are restricted to the annual limits for contributions from outside the TFSA. But you can grow (or lose) that amount with your investments, without any tax consequences. And whatever you take out you can replace (aside from your annual incremental contributions) tax free.

The only downside is that you don't get a tax deduction for contributions as in an RRSP. But you more than make that up (if you are a good trader) by not having to pay tax when you withdraw it, like you do with your RRSP.

[GracieLou]

The easiest way to think of them is keep contribution room and interest earned seperate. For the first 4 years each person was allowed $5,000 and this year they increased it to $5,500. So if anyone has not contributed yet they can do a total of $25,500. Interest made does not affect the amount you can contribute. If you withdraw from a TFSA you should wait until the next year to contribute again or you could over contribute for that year, depending of course on the amount you withdraw/deposit.

[Reef_Geek]

Ok. Yeah, I get it now. You're saying that the 20K investment, if depreciated and withdrawn at $10K, also means you've lost the room. Growing investments is the opposite, increasing your assets that are subject to no tax well beyond the initial government allowances. That makes sense. and if the person was really good at growing their portfolio, the benefits are huge.

Thanks. This opens up some interesting possibilities.

With limited funds, TFSA vs RRSP is a popular topic. It really depends on each person's financial situation. For example, someone who is retired, tax deferral via RRSP isn't really all that helpful because of the short time horizon. I understand your rationale, get taxed on investment principal, then grow it tax free, as opposed to grow the principal then get taxed on your withdrawals.

For me, RRSP remains important as it defers tax so I can use the monies that would have been lost to taxes and instead put it towards investment principal of a long investment horizon. That's all philosophical and nice, coming straight out of popular press books. But by far, the most beneficial part for me is that contributions are deducted from my taxable income and puts me into a lower income tax bracket. By the time that I withdraw from RRSP, the funds are taxed as income at that time but I'll presumably be in an even lower tax bracket. So not only do I get to pay tax later, I pay less tax than I would pay now.

Fortunately, I am in a position to use both RRSP and TFSA vehicles, though my holdings aren't all that sophisticated. I had an RBC direct investment account but they kept dinging me 25 bucks every quarter because my total holdings there was under $15K, so I shut it down and moved that towards my new TFSA allowance and more non-registered stuff.

[Reef Pilot]

Originally Posted by GracieLou

If you withdraw from a TFSA you should wait until the next year to contribute again or you could over contribute for that year, depending of course on the amount you withdraw/deposit.

Yeah, that seems to be a little quirk in how it works, not sure why. But at least you don't lose the room, and get it back next year.

Here is a little FAQ that helps explain more about the TFSA.
http://www.tdwaterhouse.ca/products-.../FAQ-index.jsp

[Cameron]

I prefer to hold stocks....fixed income and mutual funds are a waste of time. Less than 3% of fund managers outperform their benchmarks after 5 years. If you find a good fund hold it for a couple years then change as it will become to big and start to under-perform. Equities long term pay off, it's always better to be an owner than a loaner. My TFSA is sitting at $39,245 as of this morning(without my 5500 contribution this year). I also implement option strategies in my TFSA.

[Reef_Geek]

Originally Posted by Cameron

I prefer to hold stocks....fixed income and mutual funds are a waste of time. Less than 3% of fund managers outperform their benchmarks after 5 years. If you find a good fund hold it for a couple years then change as it will become to big and start to under-perform. Equities long term pay off, it's always better to be an owner than a loaner. My TFSA is sitting at $39,245 as of this morning(without my 5500 contribution this year). I also implement option strategies in my TFSA.

Wow, that's fantastic! I'm about 14% (not annualized) in the plus, but definitely not doubling like you. That's what I get for being a lazy investor, having a day job and relying on mutual funds I guess. But the day job ain't that bad.

So do you day trade then?

Which brokerage do you like best for their fee structure?

I'm thinking I can afford a portion of my portfolio in high risk tolerance.

[Cameron]

Originally Posted by Reef_Geek

Wow, that's fantastic! I'm about 14% (not annualized) in the plus, but definitely not doubling like you. That's what I get for being a lazy investor, having a day job and relying on mutual funds I guess. But the day job ain't that bad.

So do you day trade then?

Which brokerage do you like best for their fee structure?

I'm thinking I can afford a portion of my portfolio in high risk tolerance.

I don't day trade I trade on momentum and have a couple screens setup for my selections.