$5000 to invest...

Tempted to do a short term trade on Lulu. Pretty beat up right now. Should be good for a few points.

Anyone else take a position?

There is no "one size fits all".

Agreed, and that's why I wanted a clarification rather than a blurb.

I'm thinking max out the TFSA before trying to top up the RRSP, because that money's easily accessible.

Agreed, and that's why I wanted a clarification rather than a blurb.

I'm thinking max out the TFSA before trying to top up the RRSP, because that money's easily accessible.

RRSP gives you a short term tax advantage, but you'll pay full tax on all of your earnings. So, if you hope your $5000 is going to grow into $50,000….assume 30% tax…you'll save $1500 now and pay $15000 later.

Take the same growth with a TFSA…You'd get zero benefit now but you won't pay the $15,000 at a later date. Yes, the $15,000 is an inflated number and $15,000 won't be worth $15,000 20 years down the line….but the general thinking is that a TFSA is basically the only opportunity you will ever have in your life to earn money that will be totally tax free and you should take advantage of that fact. But, if you're just going to put that into a low interest something or other, the benefit probably isn't there. Treating a TFSA like some sort of short term savings account isn't a good idea. You generally don't want high risk/high reward investments if you need the money in the short term, and you don't really get much benefit of the TFSA if you're only earning a percent or two.

RRSP gives you a short term tax advantage, but you'll pay full tax on all of your earnings. So, if you hope your $5000 is going to grow into $50,000….assume 30% tax…you'll save $1500 now and pay $15000 later.

Take the same growth with a TFSA…You'd get zero benefit now but you won't pay the $15,000 at a later date. Yes, the $15,000 is an inflated number and $15,000 won't be worth $15,000 20 years down the line….but the general thinking is that a TFSA is basically the only opportunity you will ever have in your life to earn money that will be totally tax free and you should take advantage of that fact. But, if you're just going to put that into a low interest something or other, the benefit probably isn't there. Treating a TFSA like some sort of short term savings account isn't a good idea. You generally don't want high risk/high reward investments if you need the money in the short term, and you don't really get much benefit of the TFSA if you're only earning a percent or two.

That's not an apples to apples comparison. If you're contributing 5K to an RRSP you get the tax rebate immediately. If you contribute to the TFSA, you pay tax…

So if you had 5 thousand dollars, if you put it into an RRSP - all 5K goes into the RRSP. If you wanted to put it into the TFSA, the govn't would tax that amount and you'd end up putting in 3K (going on a 40% marginal tax rate).

Assuming a an 8% return in both accounts, then taxing the RRSP amount when you go to withdraw, you end up with about 6500 in your hand for either the RRSP or the TFSA (10 yr period).

http://www.theglobeandmail.com/globe-investor/personal-finance/the-wealthy-barber-explains-tfsa-or-rrsp/article1356709/?page=all

You can run the numbers in excel pretty quickly to see it in action.

And to be fair, Chilton also blasts that calc if you spend your rebate on consumer goods (personally I don't). So in the end, different vehicles serve different people at different times.

RRSP gives you a short term tax advantage, but you'll pay full tax on all of your earnings. So, if you hope your $5000 is going to grow into $50,000….assume 30% tax…you'll save $1500 now and pay $15000 later.

Take the same growth with a TFSA…You'd get zero benefit now but you won't pay the $15,000 at a later date. Yes, the $15,000 is an inflated number and $15,000 won't be worth $15,000 20 years down the line….but the general thinking is that a TFSA is basically the only opportunity you will ever have in your life to earn money that will be totally tax free and you should take advantage of that fact. But, if you're just going to put that into a low interest something or other, the benefit probably isn't there. Treating a TFSA like some sort of short term savings account isn't a good idea. You generally don't want high risk/high reward investments if you need the money in the short term, and you don't really get much benefit of the TFSA if you're only earning a percent or two.

that's pretty flawed thinking wrt RRSP benefits and not an entirely correct explanation. as long as the money stay in the RRSP you don't pay tax on those earnings or investment income. you only pay tax on the amount you withdraw and even then that's taken into consideration with all your other earnings for the tax year. so the money in an RRSP can continue to grow tax free until you're 71 when it has to be converted into an RRIF. but even there the money can continue to grow tax free and you are only taxed on the amount you withdraw of which there is a minimum that you must withdraw each year.

so you're 30% tax example only stands if you withdraw the entire $50k within one tax year.
besides that, even if both investments yield the same rate of return the RRSP is giving you additional money back right now which you can further reinvest putting you even further ahead of the game. for a young investor looking to build income for their retirement an RRSP is probably one of the best tools out there. as well, money from an RRSP can be withdrawn tax free if it is used as a downpayment on your first home with the caveat being that you must repay a certain percentage each year or be tax on that amount.

at the end of the day a good investment strategy will include a variety of investment types, but i strongly feel that for the young investor an RRSP is the best way to get started and build some wealth and once they are older and more financially established then they can start to take a higher degree of risk to persue teh riches.

The problem is, Dirk, that you assume 30% tax. Many (most) people will retire with less income than during their working years, so putting into an RRSP now means that money earned today can be taxed at a lower rate on retirement when withdrawn from the RRSP (or folded over into a RRIF to generate a monthly income).

So there really is no catch-all one size fits all answer, and even the best answers require some guesswork on what one's income will be after retirement and what taxation rates will be at that time. It can even be affected by what province you reside in now and what province you think you'll live in after retiring - provincial rates and brackets differ from federal! Serious crystal ball gazing needed.

So, if your guess is that you'll be in the highest tax bracket after retiring (and you're in the highest bracket now, RRSP really doesn't provide a benefit. Earnings will be taxed at the same rate anyhow. Greatest benefit would be to put money into a TFSA first.

If you're in the lowest tax bracket now, but figure to be earning more later, then probably the TFSA is your best first choice for any savings you can put away. Save that RRSP contribution room to drop yourself into a lower rate during the high earning years.

Anyone that figures to earn a good deal less after they retire should top out RRSP first to get those highest tax rate earnings off the books.

If you have extra $$$ to put into a non-registered account, spend some time to learn about how thinks like capital gains, dividends, options, etc. are taxed. It can really affect the final outcome.

So if you had 5 thousand dollars, if you put it into an RRSP - all 5K goes into the RRSP. If you wanted to put it into the TFSA, the govn't would tax that amount and you'd end up putting in 3K (going on a 40% marginal tax rate).

What makes you believe you'd pay taxes twice on money placed in a TFSA?

I just had this same conversation with a financial advisor about a week back while I was moving my stuff into a SDRSP with TD Waterhouse. Essentially bringing the money into my management vs the no show planner you would most likely end up with. Sorry but that's the reality. When you have no investments meaning no decent commission then you get a shitty planner.
If you don't want to stare at the money every day just go with ETFs. VDY and other types. Check their annual performance. Don't look at daily unless you plan on dealing daily. Max the RRSP first (you can pull 20k tax free when you buy your first place) then your Tax free trading account (TFSA). Just open a TD Waterhouse and get started.

Do you own due diligence on everything and SCREW advisers or anyone for that matter.

They hold what is only true "what is in it for me"

In terms of cash flow think of the following.

you have a cup that is for water like everyone else and most will drink when thirsty, but don't.

When the cup is 1/2 full don't take a drink.
When the cup is full, still don't take a drink.
When the cup is overfilling then and only then…

Lick the side of the cup.

What makes you believe you'd pay taxes twice on money placed in a TFSA?

Not twice. I'm saying that putting 5K into the RRSP is the equivalent of putting 3K into the TFSA.

Put another way. You earn 5K, the gov't takes 40% (top marginal rate) giving you 3K in your hand. You invest 3K that in the RRSP and the government gives you 2K back (which you put in the RRSP, making it a full 5K deposit). You put the 3K in the TFSA, you don't get the tax rebate, so you can't top it up to 5K.

Not twice. I'm saying that putting 5K into the RRSP is the equivalent of putting 3K into the TFSA.

Put another way. You earn 5K, the gov't takes 40% (top marginal rate) giving you 3K in your hand. You invest 3K that in the RRSP and the government gives you 2K back (which you put in the RRSP, making it a full 5K deposit). You put the 3K in the TFSA, you don't get the tax rebate, so you can't top it up to 5K.

How do you get 2K back by putting 3K into an RRSP? You save 40% marginal rate on what you put into RRSP, so 40% of 3K is 1.2K.

I think the way it works is;

You earn $5k, pay 40% tax ($2k).
Borrow $2k, deposit the earned (but taxed) $3k plus the borrowed $2k for $5k RSP deposit.
Get $2k return and pay off the loan. Minimal interest for the 1-2 months that the loan is outstanding.

The front-end difference would still be there, as the TFSA deposit is taxed before the deposit so only $3k to put in.

BUT, the TFSA gains are never taxed, where RRSP deposits and earnings will be taxed the moment they are withdrawn.

How do you get 2K back by putting 3K into an RRSP? You save 40% marginal rate on what you put into RRSP, so 40% of 3K is 1.2K.

You put 5K in your RRSP, the Govt sends you a check for 2K after you file if your marginal rate is 40%. You "borrow" the 2K for those few weeks either from yourself or through an RRSP loan.

Makes sense.

Is there an echo in here?