For the TFSA, which asset class would make the most sense to contribute. My assumtion would be non-divident bearing stocks, for the higher tax rate these pay on capital gains.

But I haven't seen any indication of this, all the banks seem to be pushing cash, which seem to be the worst use of this vehicle.

Tina Tehranchian: When it comes to growth, stocks have beaten cash instruments over the long term. However, interest income generated by cash instruments is fully taxable whereas only 50% of realized capital gains are included in your income which means you will pay half as much tax on your capital gains when you sell the stocks in your portfolio.

So from a tax perspective, it would be more tax effective to shelter interest income in a TFSA than capital gains or dividend income that are taxed at more favourable rates. Also, keep in mind that if you invest in growth stocks that do not pay dividends, your growth is effectively tax sheltered until you sell your stocks so the tax sheltering inside the TFSA would not be of a benefit in this case. In addition, if you incur a loss on the sale of your stocks you cannot write off the losses against future gains inside a TFSA as it is a tax neutral vehicle.

Therefore if you have a mix of cash, bonds and stocks in your non-registered portfolio it would make sense to shelter the interest income generated by the cash and bonds in the TFSA. On the other hand if you expect very high growth on your stock portfolio then having the stocks inside your TFSA will help lessen the capital gains taxes you would pay when you eventually sell them.

I have $40,000 in student loans. My wife is in medical school. I just started working and am making $50,000 year. I want to reduce my debt load and at the same time save for a downpayment on a home. Given my situation should I invest in TFSA's? Could you suggest another option if my goal is to purchase a home in the next 3-4 years?
Thanks

Tina Tehranchian: The good thing about student loans is that you will get a tax credit on the interest on pay on your loan. However, you need to reduce your loan balance to qualify for a mortgage based on your income and debt level. The TFSA is a great savings vehicle for saving for a down payment on a home. You can also use the RSP home Buyers Plan. The 2009 Federal Budget has increased the amount you can borrow from your RRSP under the Home Buyers Plan from $20,000 to $25,000. At your tax bracket, you can get a 31% tax refund on up to $10,000 of RRSP contributions.

You can use the savings from your RRSP contributions to pay down your debt. Since you plan to withdraw any savings in the next 3 to 4 years to purchase a home you should invest in very conservative instruments in your RRSP. Once you have accumulated the $25000 in your RRSP and reduced your student loan balance then you should use the TFSA as a savings vehicle.

I am going to contribute to a spousal RSP in 2009. If I withdraw any income the RSP generates in 2009 and 2010,will the income be taxed to my wife or myself.

Tina Tehranchian: Any withdrawals from a spousal RRSP in the year of contribution and two calendar years after the contribution will be taxed to the contributing spouse. Therefore, in your case, any withdrawals in 2009 and 2010 up to the amount that you contributed in 2009 will be taxed as your income as the contributor to your wife’s RRSP.

Hi Tina...I'm currently at a crossroads and not sure which way to go from here.

Situation:
I'm 33 years old, about to get married and looking to start a family in the next year or so.
I just spent the last year paying off my credit card debt. As of last week zero balance!! I've also put some aside every paycheck towards an emergency fund that now has roughly 3-4 months worth of mortgage payments set aside. My RRSP contributions are the basic employee contribution plus a 2% company match. Nothing special. The total balance of my RRSP's are roughly $28K right now. I also have about 3 years left on my car loan and a small amount on a line of credit which adds up to about $50 a month payment in interest.

Now that I have my credit cards paid off, I'm wondering what is my best option for redistributing my card payments to? I could have my line of credit paid off within a year if i divert it towards that. Or should i put more towards an RRSP or some kind of tax write off investment in this economy? Should I put extra into my mortgage? I'm going to transfer my nest egg into a TFSA so that will max that out. Pay my car off, which would take about 16 months? Keep adding some to my nest egg and split the rest?

I'm currently not house poor with my payments and 50/50 on job security right now.

Tina Tehranchian: Congratulations on paying off your credit card debt and building up an emergency fund. Although you have provided quite a bit of information about your personal finances, you have not provided enough information for me to be able to give you proper advice. For example, the interest rate you are paying on your line of credit and mortgage, the amount of money you will need to pay for your wedding and most importantly your annual income that determines your tax bracket and the type of refund you would be entitled to by contributing to your RRSP. Transferring your non-registered savings to a TFSA is definitely a good move and will help shelter the interest income from taxes.

If you are in a high tax bracket contributing to your RRSP could result in over 40% in tax savings that you can use to pay down your line of credit. However, as mentioned before you have not provided all the information necessary for a proper recommendation. Since you are at an important juncture at your life and are getting married soon now is a good time to sit down with a certified financial planner in your area and review your financial goals and set up solid strategies for reaching those goals.

How to determine what amount should be put into an RRSP? Where will I see the most benifit?

Tina Tehranchian: Taxation of income in Canada is done on a graduated basis. Therefore you can achieve optimal tax savings by contributing enough money to your RRSP to reduce your taxable income to the next lower tax bracket. This is purely from a tax savings stand point though. Depending on what your retirement income needs, debt level and overall financial situation are, you may need to contribute more or less to your RRSP.

Hello and thank you for your time.

1)If you have dividend funds in your RRSP account, what happens to the dividends? Are they just paid out and you decide what you want to purchase with them within your account or can you have an automatic dividend reinvestment back into that company set-up?

Tina Tehranchian: Mutual fund distributions are automatically reinvested in the same fund in an RRSP account so your distributions will purchase more units of the same fund for you. You can choose to receive the monthly distributions from dividend funds in cash and in that case they will be deposited in your account and you can decide what to reinvest them in.

I lost my job a few months back and am having trouble make ends meet. My wife is still working. The bills are coming fast and furious. We have a home worth 400k with a mortgage of 252k at 5.1%. RRSP combined worth about 50k (was worth 25%-30% more). Unsecured debt of 25k (at rates of 0.9 to 1.9 APR that will last until May) then go up. Currently operating at a deficit each month of around $1500-$2000. Should I use available lines of credit to substitute income (lines of credit worth 35k with zero balance and rates ranging between 5% and 8%) or cash in some of my RRSP to avoid going further into debt.

Tina Tehranchian: Dear JP, unfortunately many people are in your situation these days and it can be very stressful. The first step for you should be to try to reduce your expenses. You may have already tried to do this but reviewing your spending and cutting down to the bare bones should be the first step. With regards to cashing your RRSP, I would leave that as the last option because any withdrawal will be added to your income this year and you will have to pay tax on it.

In addition you will lose that RRSP contribution room forever and cannot make it up in the future. It is still early in the year and hopefully you will be able to find a job soon. However, if time passes and you haven’t found a job yet, you can always resort to withdrawing funds from your RRSP and paying down any debt that you will incur in the coming months.

At least at that point you will be sure that you will be in a lower tax bracket this year due to not working for several months and the tax hit from your RRSP withdrawals will be less. Hopefully if the markets recover a bit in the next few months you will not have to sell at a steep loss either.

My question is regarding purchasing my first home. My husband and I are both in our mid 20's and are currently saving for a down payment. We have already opened TFSA's and put in the max $5000 each. Otherwise, we have about $50k in our Savings Account and we have absolutely no debt (nothing owing on our credit cards, student loans paid off, etc.) If our income (together) is about $80k per year, what else should we be doing in order to maximize our savings to purchase our first home? I have never had an RRSP, should we be contributing to one as a way of saving money?

Tina Tehranchian: Dear Lindsay, congratulations to you and your husband for having no debt and for having saved a good amount for the down payment on your first home. Assuming that you each earn $40,000, if you each contribute $25,000 to your RRSP, you will benefit from $6250 in tax savings (based on a marginal tax bracket of 25% in Alberta).

The 2009 Federal Budget has increased the limit for withdrawal from your RRSP under the Home Buyers Plan to $25,000. Since you and your husband have not owned a home in the past you could qualify for the RRSP Home Buyers Plan. Provided you contribute $25,000 each to your respective RRSP accounts at least 90 days before you purchase a new home you can withdraw the $25,000 tax free from your RRSP and use the tax deduction for the year of your contribution as well. This way you can have an additional $12,500 to use for the down payment on your first home.

However, keep in mind that you will have to pay back the amount that you withdraw from your RRSP under the Home Buyers Plan to your RRSP over a 15 year period and if you miss any of those payments it will be added to your income in that year and you will have to pay tax on it. I suggest you seriously consider using the RRSP Home Buyers plan and discuss it with your financial advisor to make sure it makes sense in your situation when considering your other long term and short term goals.

on Tax saving account, is there any limitation on how many times you can withdraw money per year? What if I have withdrawn one time and want to deposit back within short time (of course not exceeding the $5000 limit). Thks.

Tina Tehranchian: As far as the TFSA rules are concerned there are no limitations on how many times you can withdraw per year or how soon you can replace your withdrawals. However, depending on what you have invested the money in your TFSA in (stocks, bonds, mutual funds, GICs, etc.) you may have to pay brokerage fees and penalties on redemption. In addition make sure the financial institution you have your TFSA account with does not charge any fees for withdrawals from the account.

Married couple 43 & 41, no kids - our assets are as follows;
$360K house
$155K RRSP
$15K cash

Debts are;
$145K mortgage @ 4.5%
$15K other low interst debt

My question; all the RRSP's are locked in safely in money market or GIC's and we were lucky to avoid the market crash.
We are going to do a small home reno +/-15K
and do a little travel.
Otherwise, we are looking for direction on finance. Job stability is good to very good.
What should we do now?

Tina Tehranchian: Dear Glen, you need to set your long term and short term financial goals and then plan accordingly. I don’t have some important information that I would need to give you more direction, such as your income, your pension plan information (if any), your group benefit and personal insurance information, and your RRSP contribution room. Based on the information you have given me looks like you are conservative investors, in which case provided you have maximized your RRSP contributions, I suggest you concentrate on paying down your mortgage.

You should also set up TFSA accounts for yourself and your wife and shelter $10,000 of your cash in the two TFSA accounts. I strongly recommend that you seek help from a certified financial planner in your area. You can visit the Financial Planners Standards Council web site at www.fpsc.ca to locate one.