The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Montross on November 21, 2013, 08:14:44 AM
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Hi there – long-time lurker, first-time poster. I know a fair amount about TFSAs and RRSPs here in Canada, but haven’t been able to find much information about taking money from a TFSA and putting it into an RRSP. Here’s the situation I’m looking at.
My girlfriend works full-time and has been putting her savings into a high-interest savings account sheltered by a TFSA. So far, she’s got about $20k sitting there earning a very modest interest rate. I would like her to convert this account into something with a better return and/or dividends such as an index fund. I’m also thinking an RRSP would be a better vehicle than a TFSA for this since she can take advantage of the tax breaks (she’s worked the entire calendar year at a pretty good salary). She’s never contributed to an RRSP and has been working full-time for about three years, so she has quite a bit of unused contribution room.
Assuming she went ahead and did this, are there any complications that arise from taking a high-interest savings account within a TFSA and using the cash to purchase index funds that are sheltered in an RRSP? Is it as simple as transferring the money in the HISA to her chequing account, then purchasing an index fund and sheltering it in an RRSP? My thinking is if she did it before the end of the year, she’d then get all her TFSA contribution room back next as well while still being able to get a tax refund this year.
Any thoughts or advice on this would be hugely appreciated!
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Yep, I do believe it's that simple. She's withdrawing from her TFSA, so as you note, will have that room back next calendar year. And she's making a new RSP contribution, so she has until Feb 28 for it to count for 2013 taxes. That's good advice you're giving, assuming that she doesn't need ready access to a large amount of cash in the foreseeable future. And it sounds like she's only moving 1/4 to 1/2 of her money, not all of it. I wish I could convince my husband to do something similar with all his saving account money.
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Assuming she went ahead and did this, are there any complications that arise from taking a high-interest savings account within a TFSA and using the cash to purchase index funds that are sheltered in an RRSP? Is it as simple as transferring the money in the HISA to her chequing account, then purchasing an index fund and sheltering it in an RRSP? My thinking is if she did it before the end of the year, she’d then get all her TFSA contribution room back next as well while still being able to get a tax refund this year.
Any thoughts or advice on this would be hugely appreciated!
Yes, it's very simple to do this and withdrawing the money from the TFSA before December 31st is important, as you already mentioned. And as long as she has the money deposited into an RRSP account prior to March 1st, 2014 she'll get her refund in the upcoming tax season. Then she can use the tax refund to re-invest money into the TFSA, if that sort of thing appeals to her.
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If your girlfriend is interested in optimizing a diverse portfolio of Canadian, US & International investments, while investing aggressively (highly recommended for young people with long-term investment horizons) then these links are a good resource.
http://canadiancouchpotato.com/2012/09/20/foreign-withholding-tax-which-fund-goes-where/
http://canadiancouchpotato.com/couch-potato-faq/
A really simple idea that tax-optimizes her portfolio with would be:
1. Deposit the $20K RRSP money into an aggressive US Equity ETF (example, Vanguard Small Cap Value ETF (VBR) for hyper-aggressive growth, or Vanguard Total Stock Market ETF (VTI) which is a growth ETF but not quite as aggressive).
2. Continue making TFSA monthly contributions into a Low-MER Canadian Index Fund, such as TD Canadian Index e-series (TDB900), or good but not as good: RBC Canadian Index (RBF556).
3. If she really doesn’t like to invest aggressively then TD Canadian Bond Index e-series
(TDB909) is a more conservative fund that works well in either an RRSP or TFSA. But if you want my opinion, investing conservatively is for people near retirement age. Young people should invest fairly aggressively, and learn to stomach the wild roller-coaster rides of high-risk investing. It usually works out very well in the long run if you're patient and your target time horizon is measured in decades.
Note:
- I’m not a financial advisor, but the ETFs and Funds I’m suggesting are commonly recommended on websites that promote high-risk, high-reward, low-MER investing.
- The reason I recommend an ETF for the RRSP and monthly contributions to a TFSA index fund are the transaction costs involved with an ETF. Unless you can get a really great price on ETF purchases, they’re best purchased in bulk (such as this opportunity to make a $20K lump sum deposit into an RRSP ETF). Small, regular monthly deposits work well with low-MER index funds, which seems to be what your GF is currently doing with her TFSA.
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Good idea Montross.
I am not an expert either, but what you propose makes sense and should be fairly problem free. My only question is what is her tax bracket now and what will it be (anticipated) in future. I ask this since the only perk for her putting money into an RRSP is that she gets some additional income now. Let's say she is being taxed in one of the lowest tax rates right now, but given her likely career path would be earning more in a few years, I would wait off on the RRSP contribution until her earnings are higher. All RRSPs do is allow you to defer when taxes are paid. You can keep the money in the TFSA and invest in those funds and earnings would also be tax free.
Oh, one thing to consider, depending on your plans, is to put extra into her RRSP and withdraw it during maternity leave. Typically income steeply drops and it is basically a way for people to reduce their overall taxation over a span of a couple years. You lose the contribution room, but if there is room in the TFSA the contribution loss becomes moot.
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Thanks for the feedback everyone. We'll be putting her hard-earned employees to work in an ETF within an RRSP (still looking at those canadiancouchpotato links to figure out which one). The maternity idea is a good one too, we might have to take advantage of that.