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In a "normal" (non-RRSP, non-TFSA) account, which is called a non-registered account, when you make money on an investment you have to pay tax on it. The amount you have to pay depends on a lot of things, most importantly your tax bracket and whether the money you made is classified as interest, dividends, or capital gains. Note that this means that any interest you're earning in your non-registered savings account is taxable. However, it's likely that you've never paid any tax on it because your bank will only send you a tax slip at the end of the year if you earned more than $50. You're still expected to self report any interest you earned when you file your taxes but I don't think very many people do, so amounts under $50 are effectively tax free. In a TFSA, when you make money on an investment you don't have to pay any tax on it, period. This is a pretty sweet deal, especially when compared to non-registered accounts (it's a bit more complicated when compared to RRSP's). However, there are a few restrictions. The first one is that you can only deposit a limited amount of money into a TFSA, which increases each year. This is your "contribution room". The second one is that you can't ever deposit more than your available contribution room in a single calendar year, even if you withdraw money during that same calendar year. So, if your contribution room is $5000 then you can make one deposit of $5000, or two deposits of $2500, or five deposits of $1000, or however you want up to $5000 total over the course of the year. But you can't deposit $5000, withdraw $1000, then deposit $1000 in the same year. That would be $6000 of deposits in one year, even if you just redeposited the same $1000 you withdrew earlier. This doesn't mean you can't ever withdraw and redeposit though because you could deposit $4000, withdraw $1000, then deposit $1000 and still be at the $5000 limit (although the account would only hold $4000 of deposits at that point). I hope that makes sense. Now, your contribution room is calculated as your unused contribution room from the previous year plus the sum of your withdrawals from the previous year plus the yearly increase which is currently $5500/year. Whether your TFSA grows or shrinks in value is irrelevant as far as these rules are concerned. This means that depending how your investments did your contribution room could be bigger or smaller than other people's contribution room. For example, imagine your contribution room was $5000, you deposited $5000, and it grew to $6000. If you withdrew all your money then your next year's contribution room would be the $6000 you withdrew plus the $5500 yearly increase so it would be $11500. However, if instead your TFSA shrank to $4000 and you withdrew it then your next year's contribution room would only be $4000 + $5500 = $9500. As long as you were 18 or older in 2009 and you've never contributed to a TFSA then your contribution room is currently $25500. That's because the yearly increase was $5000 in 2009-2012 and $5500 in 2013. As for what you should do with a TFSA, well, that depends entirely on your situation. I put investments in mine and I'm planning to use those investments for retirement but that's me and your situation is probably different (for example, it may make more sense for you to put some or all of your retirement savings in an RRSP). Oh, and one important thing to note that people often get wrong is that non-registered accounts, RRSP's, and TFSA's are all just types of accounts. You can put cash in them or bonds or stocks or mutual funds or ETF's or whatever. If you open a TFSA at your bank they will probably only let you put cash in, but if you open a TFSA at a brokerage of some sort you can put whatever you want in.
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Sep 13, 2013 23:14
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| # ¿ Apr 23, 2024 15:01 |
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Alright, let's compare RRSP's and TFSA's then. But first we have to talk about types of income. When you make money on an investment it's classified in one of three ways: Interest is just simple interest, e.g. interest from a savings account, a GIC, a bond, etc... Interest is taxed at your marginal rate, which is the rate of your tax bracket. That means interest is taxed at the same rate as the money you earn at work. Dividends are cash payments from companies to their shareholders. You get dividends from owning dividend-paying stocks directly or from owning a mutual fund or ETF that owns dividend-paying stocks. Taxation of dividends is kind of complicated because companies pay dividends using cash that they already paid (corporate) tax on. It would be unfair to tax dividends at your marginal rate since that would be double taxation so dividend taxes are calculated using a formula that tries to approximate "what you would have paid if it was interest" minus "what the company already paid" but the exact formula varies by province. There's also something to do with accounting for foreign dividend taxes when you get dividends from a foreign company but that's beyond my knowledge. Capital Gains are money you make from the value of something increasing between when you bought it and when you sold it. For example, if you bought a stock at $50 and sold it at $100 you would have $50 of capital gains. Capital gains are taxed at only half your marginal rate, which is pretty awesome. Conversely, if you bought a bond at $110 and sold it at $100 you would have $10 of capital losses. The nice thing about capital losses is you can use them to offset capital gains, and you can even offset capital gains from the past or future. As rhazes mentioned above, this is why people like to put bonds in registered accounts (RRSP's or TFSA's). In a non-registered account, a bond that earns $30 interest with a $10 capital loss is worse than a bond that just earns $20 interest because $10 of capital loss is only "worth" $5 of interest because of the difference in taxation. Here's a calculator that shows the different tax rates on the different types of income. You should be able to see that the capital gains tax rate is always half the marginal rate and that the dividend tax rate varies significantly by province and tax bracket but is usually quite favourable. What you should take away from this is that you usually pay a lot of tax on interest and not very much tax on dividends or capital gains. Now, here's how RRSP's work. When you contribute money to an RRSP, the government doesn't charge you any income tax on the money you contributed to your RRSP. They do this by subtracting the contribution amount from your taxable income for that year. So let's say you made $60k and contributed $10k to your RRSP. The government would subtract your $10k contribution amount from your $60k taxable income and pretend that you only actually made $50k. The amount of tax you have to pay on $50k is less than the amount on $60k so you get a tax refund for the difference. We say that you've contributed "pre-tax" money to your RRSP. All of the money in your RRSP has never had any tax paid on it - no income tax on the contributions and no tax on the gains, whether interest or dividends or capital gains. The kicker is that all withdrawals from your RRSP are taxed at your marginal rate (as long as you aren't withdrawing early and taking a penalty). You might be thinking that this sounds like it kind of sucks because that means capital gains in your RRSP which would have been taxed at half your marginal rate are now going to be taxed at your full marginal rate. You're right, but the whole point of RRSP's is that you should contribute to your RRSP when your marginal rate is high (e.g. when you're making lots of money) and you should withdraw from your RRSP when your marginal rate is low (e.g. when you're no longer working). If you do it the other way around and contribute to your RRSP when your marginal rate is low then withdraw when it's high then you're throwing money away. So how do you decide between an RRSP and a TFSA? Consider how the money is taxed in each case: RRSP Money is earned -> money is contributed to account -> money grows in account -> money is withdrawn -> tax is paid TFSA Money is earned -> tax is paid -> money is contributed to account -> money grows in account -> money is withdrawn So in both cases the tax is being paid, it's just a question of when it's paid (aside from the fact that RRSP's tax all gains at the same rate). As long as we're talking about retirement savings, your strategy should be to pay the least amount of tax possible by adjusting when you pay the tax by adjusting whether you contribute to an RRSP or a TFSA. You can probably guess how to do that... If your marginal rate is high, and you think it will be low when you retire, contribute to an RRSP. In all other cases, contribute to a TFSA. Don't forget that this advice is not necessarily meant for everyone. For example, contributing to an RRSP is a bad idea if you might need the money early because of the early withdrawal penalties. I'm sure there are other considerations too, this is not meant to be an in depth guide. Please feel free to correct any mistakes I've made or add any of your own advice. acetcx fucked around with this message at 01:23 on Sep 14, 2013 |
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Sep 14, 2013 01:19
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When I opened my TD e-Series account I walked into a TD branch and asked them to open a mutual fund account for me. Then I downloaded the account conversion form, filled it out, and mailed it in. It was actually pretty painless. Since you want both a TFSA and a non-registered account you're going to have to open two accounts when you go to the TD branch. They shouldn't have a problem with that. Then you will probably have to fill out the conversion form twice, once for each account, and mail both forms off. It's possible that TD offers some way to consolidate the accounts so you may want to call and ask in advance. They have a phone number listed here. You're going to want to call the first number, not the second one, because TD Waterhouse is the brokerage arm of TD and it doesn't sound like you want to open a brokerage account. EDIT: The penalty for exceeding your TFSA contribution room is quite steep: 1% of the excess amount per month. I wouldn't recommend overcontributing, just open a non-registered account too. acetcx fucked around with this message at 17:31 on Sep 15, 2013 |
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Sep 15, 2013 17:27
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If you are truly terrified of investing then my recommendation is to take a look at the ING Direct mutual funds. There are four funds. Each fund has four components - Canadian bonds, Canadian stocks, US stocks, and international stocks - but in different proportions as listed below. Streetwise Balanced Income Portfolio - 70%/10%/10%/10% - very conservative Streetwise Balanced Portfolio - 40%/20%/20%/20% - fairly balanced Streetwise Balanced Growth Portfolio - 25%/25%/25%/25% - fairly balanced Streetwise Equity Growth Portfolio - 0%/50%/25%/25% - very aggressive ING Direct handles the rebalancing for you so you just need to pick one of the funds, put a bunch of money in it, and do nothing else. It's extremely easy to get started and they support automatic contributions. The downside to the ING Direct funds is that they have an MER of 1.07% which is higher than you would pay by following the same strategy using TD e-Series funds (approximately 0.4%) or ETF's (varies). The upside is how easy they make everything. If it seems too complicated or too terrifying to get started then start here. You don't have to stick with it forever, eventually you'll become more confident and maybe switch to TD e-Series or ETF's or whatever. But it's important to start somewhere and paying 1.07% for a few years is a small price to pay if you're suffering from indecision. Disclaimer: I started with ING Direct funds myself, then switched to a combination of TD e-Series and ETF's after a couple of years.
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Oct 30, 2013 18:17
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If you buy a bond at 8% and a year later interest rates go up to 9% then think about what would happen if you tried to sell your bond. The next buyer could buy your old 8% bond or a new 9% bond so if they were the same price they'd always pick the 9% bond. The market solves this by making your old 8% bond trade for less than face value so that it has an effective 9% interest rate over its remaining duration. It works the other way around, too. If interest rates go down, existing bonds become more valuable. However, keep in mind that the face value of the bond never changes so the market price of the bond only matters if you're trading bonds, not if you're holding them for their full duration.
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Mar 30, 2014 17:48
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TDB900 (Canadian stocks) and TDB902 (US stocks) have distributions in December. TDB909 (Canadian bonds) has distributions monthly. TDB911 (international stocks) has distributions in March, June, September, and December. You can verify this yourself by clicking here and read the "fund facts" document for the fund you're interested in. It's near the top right of the first page.
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Oct 19, 2014 17:24
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Yeah, the fund price will drop by exactly the amount of the distribution on the distribution date. So if the fund is worth $20/unit and there's a $0.10/unit distribution then the new fund price will be $19.90/unit (plus or minus any of the usual daily movement in the price). There's no way to game distribution dates. Note that this is why looking at price graphs can be misleading if they don't include distributions (i.e. there will be a drop on the distribution date even if the index didn't drop). The same thing is true of dividends and if you think about it it makes sense. If a company is worth a billion dollars and it pays out 10 million dollars worth of dividends then the company must now be worth 990 million dollars. The share price must drop by an equivalent amount. If you think about it even more this means that aside from tax considerations there's no real advantage whether the growth in a stock comes from capital gains or dividends. A stock's growth is (capital gains + dividends) so whether it's mostly capital gains or mostly dividends or something in between doesn't really matter (other than taxes). This is why I think it's a bit silly when people glorify dividend stocks - what you care about is total growth. A dividend stock that has 2% growth and a 3% dividend in a year is worse than a growth stock that has 6% growth in a year. You want the stock with the most growth and if you want a regular income stream then you can just sell some of your shares in the growth stock on a regular basis.
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Oct 20, 2014 02:28
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cowofwar posted:Best bet for TFSA transfers is to sell in December, transfer out, and then transfer in to your new account the same amount + that year's contribution in January. I agree with this although I'd add a bit of a warning. One year I tried to do this with a TFSA mutual funds account. I put the order in to sell the funds and withdraw the proceeds on December 24th. It settled on... January 2nd. I was screwed. So, be very careful about counting how many business days are left in the year and how many business days it might take for the transaction to settle.
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Feb 13, 2015 19:08
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Yes, that works. You should be very careful with the timing though. I tried to do a similar thing in 2013 (with a mutual fund held in a TFSA). I submitted the sell order on Dec. 24th assuming that would be enough time and the following happened: Dec. 25: holiday Dec. 26: holiday Dec. 27: business day #1 Dec. 28: weekend Dec. 29: weekend Dec. 30: business day #2 Dec. 31: business day #3 Jan. 1: holiday Jan. 2: trade settles I was screwed for all of 2014 and it was entirely my fault because their website quoted three business days for trades to settle. The only other consideration is that if your TFSA contains anything other than cash then you would miss out on any market movements during the trade (this could be good or bad).
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Apr 4, 2015 21:44
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A friend of mine has dual citizenship and she has deliberately chosen not to contribute to her TFSA. I don't know exactly how she made that decision but you should almost certainly talk to an accountant about it. For what it's worth it's my understanding that TFSA's are not covered by any tax treaties between Canada and the US whereas RRSP's are covered. Any gains in your TFSA are probably subject to reporting and maybe even taxation in the US. This doesn't necessarily mean you shouldn't contribute to your TFSA at all just that it's probably going to be complicated. The bottom line is that you should probably talk to an accountant because I don't know very much about this.
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Jun 16, 2015 04:14
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You're in luck. The last two articles on Canadian Couch Potato were about calculating rates of return. You'll have to do a bit of work though, it's not as easy as it sounds. 1.) http://canadiancouchpotato.com/2015/07/13/calculating-your-portfolios-rate-of-return/ 2.) http://canadiancouchpotato.com/2015/07/20/how-contributions-affect-your-rate-of-return/
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Jul 22, 2015 01:06
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It's normal for the account number to not match up on the conversion form. I don't know why they do that. You will need to fill out one form for each account so that's one form for your TFSA and one form for your RRSP.
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Oct 9, 2015 06:14
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It could be even easier than that: "If you were born in 1998 your 2016 limit is $5500, otherwise it's $1000."
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Nov 19, 2015 20:01
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It might be that your investor profile with TD indicates that you're too conservative to be owning stock funds. If that's the case you'll have to call or setup a meeting to update your profile - I don't think you can do it online. Just check all the boxes that say you're looking for the riskiest and longest term investments and that should let you buy all the e-series funds you want.
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Jan 21, 2017 09:03
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I'm an investor who decides to invest in a 50/50 mix of two investments. In one universe I invest today. A year from now I end up with a 60/40 mix. In another universe I invest a year from now. I have a 50/50 mix. How can both be correct?
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Feb 6, 2017 11:49
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This greeted me when I went to login to TD today. You are protected! 
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Jun 1, 2019 15:46
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| # ¿ Apr 23, 2024 15:01 |
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The phrase you're looking for is "realized vs. unrealized capital gains". If you purchase an investment for $10k and it goes up to $11k that investment now has $1k of unrealized capital gains. You don't have to pay any tax on it until the gain is realized, which can happen in a few ways, but most commonly if you sell it. For scenarios more complicated than the simple example above you'll need to keep track of something called the "cost basis" or "adjusted cost base" of your investment. As you purchase more shares at different prices, or participate in a DRIP, or receive distributions containing return of capital (for ETF's), and so on, the cost basis will change. Then, when you sell, you use the cost basis to determine the capital gain (or loss). Let's say your $10k investment grew to $12k and your costs basis became $11k. If you sold $6k worth of shares (50% of your shares) the costs basis of those shares would be $5.5k (50% of the $11k cost basis) and you would realize a capital gain of $500. The remaining $6k of shares would similarly have a $5.5k cost basis. There is a technique called "tax loss harvesting" which is where you deliberately realize a large capital loss in order to save money on taxes now (or in the near future by carrying forward the loss) at the expense of a larger capital gain in the distant future. This is usually a good idea but it's worth learning about something called the "superficial loss rule" if you decide to pursue this strategy. My apologies if you already knew most of this but perhaps it will be useful to any thread lurkers. I should also note that all of this only applies to unregistered accounts. Registered accounts don't care about capital gains.
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Mar 26, 2020 03:45
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