TFSA

Heidi & I went to TD/Waterhouse yesterday to register for a Tax Free Savings Account (TFSA). If we want monthly documents mailed to us (showing account activity) it'll cost $50 per year. If we register for a "paperless" account (where we get all the activity info online) then there is no fee. We can contribute just $5K per year of after-tax monies. The TD/W gal said they've been swamped with people registering for these accounts (which have been available since Jan 1, 2009). Apparently TD/W is one of the few banks that allow you to trade in stocks, bonds and mutual funds with your TFSA account (as opposed to just a "savings" account). This TFSA thing seems strange to me, for retirees whose tax rate don't hardly change. It's (somehow) regarded as a big tax break. The old-fashioned way to set up a (registered) Retirement Savings Plan (RSP) was like so: [1] You get paid $A, before taxes. [2] You invest $A in an RSP. [3] After umpteen years the account has grown by a factor G and is valued at A*G. [4] You withdraw the A*G and pay taxes at the rate T. [5] You then have A*G*(1-T). With a TFSA the ritual is like so: [1] You get paid $A, before taxes. [2] You pay taxes at the rate T, leaving A*(1-T). [3] You invest $A*(1-T) in a TFSA. [4] After umpteen years the account has grown by a factor G and is valued at A*(1-T)*G. [5] You withdraw the A*(1-T)*G and pay no taxes. Okay, here's the big Math Question: Is A*G*(1-T) more or less than A*(1-T)*G?