The TFSA and RRIFmetic New July 20/08
Until now, the conventional wisdom on saving for retirement has been to max your RRSP, and if this isn't enough, dump the excess, say, into your nonreg pot.
The only exception to this adage, is that those individuals who are way ahead of the curve needn't completely max their RRSP, and in the odd situation... say the schoolteacher with the gold plated pension who just won the lotto... there is no reason to be saving at all.
The standard advice for the rest of us working slobs is to put as much in your RRSP as you can afford.
Many advisors don't feel the need for a detailed analysis in the form of a tax-based number crunching program... they feel it is overkill. In other words, the decision is pretty simple... once the client has stated... "I can afford to put $7500 in my RRSP this year", then the advisor moves on to the next stage of the consult, namely... "What type of investments should we embark on, given your risk profile and my understanding of the market?"
Now, the dynamic has changed... the TFSA has been introduced to the investing public as an alternative to the RRSP, and all of a sudden the spotlight has been turned on income tax... and especially the effect of income tax over time. The focus has shifted from 'investment' planning to 'financial' planning. ...(said he, hopefully)
The question which is going to be repeated thousands of times around the Canadian water cooler is going to focus on the topic.... "all things being equal, is it better to pass up the immediate RRSP tax refund in favor of reducing taxes later on (sometimes much later on) when retirement funds are withdrawn?"
Rules of thumb will, of course, prevail..." for some individuals, first max your TFSA, then put the remainder into your RRSP; for others....", but it is my guess that many advisors will be asked to show exactly how the numbers work, and especially the effect of income tax, time and investments as they relate to optimizing each client's specific planning situation.
Because clients are going to want to see this 'income tax-over-time' effect demonstrated, a goal-based tax-accurate illustrator/tool such as RRIFmetic will be manditory.
The tax free savings account was just introduced in the current RRIFmetic release. (July 20 2008)
The way we have introduced it, is as a column in the data entry grid (negatives for contributions, positives for withdrawals). This allows you to craft or contour any TFSA strategy over any time frame, such as an even withdrawal stream, a lump sum withdrawal, etc. For instance a large (+ve) entry, if it is very large, will deplete the TFSA completely
Be warned... unlike the RSP/nonreg capital, the TFSA won't automatically flow capital... you must generate the cash flows manually. In this way, the TFSA is similar to the DCG entities, loans, RESPs... etc. (their behaviour is driven by the user, whereas the RSP/nonreg flows are automatically driven by the smoothing/reverse tax math)
Remember, the user is responsible for setting the size and timing of these entries. Currently, the maximum allowable annual TFSA contribution is $5000, and it is indexed. (you will have to get creative if you are going to defer the contributions, BTW)
When the program sees no further entries in the TFSA column, and there is still a balance in the account, it will fabricate an equal pmt withdrawal stream for the remainder of the plan such that it just runs out at the runout age. It will prompt for this to happen, and if you enter "0", then it will skip the process and allow the TFSA to grow and go to the estate.
Note... the above applies (generally) to those working/saving for retirement. For those retired folks who are looking to move nonreg capital to their TFSA, go here.
Hope this makes sense.
(Also, we have added another investment type to the mix. In addition to the TFSA,we have inserted a return of capital (ROC) entity)
If you have any input as to the TFSA or ROC which you think might be useful, please let us know,