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Until now, the conventional wisdom on saving for retirement has been to max your RRSP, and if this isn't enough, dump the excess in 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.

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 forgo the immediate RRSP tax refund in favor of reducing taxes later on (sometimes much later on) when retirement funds are withdrawn?"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 most individuals, first max your TFSA, then put the remainder into your RRSP", 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.

Hopefully this will give the RRIFmetic enterprise an added shot in the arm. Because clients are going to want to see this income tax-time effect demonstrated, a goal-based tax-accurate illustrator/tool will be manditory. RRIFmetic is in the final stages of releasing a new 'TFSA-inclusive' version of the program, but in the meantime read this.....

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The tax free savings account was just introduced in the current budget. (Feb 2008) Now... prior to having it formally inserted in RRIFmetic, here is a (sort of) way to show the effect of the TFSA using RRIFmetic as it exists.....

First of all... if you are using the deferred capital gains entity(s), then this simply won't work. However, if not, then this should do the trick.

-first, you have to set the capital gains rate (which is normally 50%) to zero. To do this, bring down the 'options' menu, select 'reset base data' and observe the entry for the capital gains rate near the bottom of the window. It should be 50%. Change it to zero, and "OK" out of the window. A prompt will remind you of the non-standard rate, and another prompt asks if you want to make it a permanent change. Answer 'yes' to each prompt.

(don't worry, every time you bring up the program, it will warn you that the rate is other than 50%)

Now for the TFSA....

Pick the DCG #1 and enter 5001 in the DCG contribution or 'annual cg investment', enter zeros in the ACB and capital gain/loss) and the rate (6% say) for the growth rate.

The final step is the timing... Say you were 55, planned to retire at 64 and runout age is 95. Enter 55 in 'starts', 64 in 'stops', 65 in 'start and '95' in 'ends'.

What this will do is direct $5000 into the TFSA during your working years, and pull it out as a tax-free SWP over the retirement phase. The program takes care of finding the $5000, so you needn't worry about anything else. The only problem is that the reporting/charts, etc will refer to the TFSA as DCG, but apart from that everything else is fine.

Further note.... the $5000 TFSA yearly limit will index depending on the cpi. This is why you enter 5001 instead of 5000 so the $5000 tfsa limit will index each year (this is the quirky method I use to index the DCG annual cg investment)

Finally... you may, if the salary is too low, not be able to invest the full $5000. The results after an amortize or smooth will look very wrong. Solution?.... simply reduce the $5000 to something that works.

OOPS, one more caution... because you have set the cap gains rate to zero, you cannot use any capgains component in the nonreg distribution. Interest and/or dividends, but no capgains!

March 12, 2008 Read this!!! OK..... I am now in the final stage of imbedding the TFSA as a separate entity into RRIFmetic, and although it appears pretty certain the deed is done, it will be held back until I know for certain.

The way I plan to introduce it for now, 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. 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 will be similar to the DCG entities, loans, RESPs... etc. (their behaviour is driven by the user, whereas the RSP/nonreg flows are driven by the smoothing/reverse tax math)

Hope this makes sense.

March 29, 2008 ...new

There will be another method which will essentially turn the entire non-reg capital entity into a TFSA by eliminating the tax drag on growth. This method will apply only for those plans where there is no (or less than $5K) starting nonreg capital. In order to ensure the plan's validity, the user will have to check, after the compute, that any nonreg capital which gets dumped into the 'nonreg-tfsa' pot falls below the $5K limit. (or the program will check this itself)

(Also, I am adding another investment type to the mix. In addition to the TFSA, I am inserting 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 me know, in the meanwhile, stay tuned, I will release it when I hear for certain the formal announcement re the TFSA.

Steve Salter

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