Margin vs TFSA, the great debate

Every time that I run the numbers comparing the returns from a TFSA account tot he returns of a margin account I have always come up with the TFSA making more sense in the long run. I have been rethinking this based on another factor that, while I had considered it, I hadn't really accounted for it fully.

Flexibility.

My determinations have been comparing using a particular balance in the TFSA then looking at needing a larger balance to produce the same results if within a margin account. The tax advantage of the TFSA seemed to be rather large. It may be.

The other advantage of TFSA over margin is the ability to carry US cash in the account while I carry Canadian in the margin. Converting US can be a benefit when the USD is higher than the CDN$.

That advantage is also a disadvantage. In margin the US gets borrowed for the term of the trade against the CDN cash I have, then converted back when the trade is closed. I don't actually have to pay conversion fees this way, but there will be some interest charged. I figure that if I consider taxation at 40% then it accommodates the small interest charge as well.

The reason I am re-considering this is due to my current drawdown. Even though I have still a good profit, in the 80% area yet, my account is not as large as it was recently. Our new trade plan has use doing 7,8,9 and 10 trades per day starting next week.. not that that has changed, it's just that I don't know if I want to fight the "small account" syndrome any longer. Very small trades are tough to make any headway when we change to tighter stops and smaller value increments in the trade movements... that basically means more contracts.

If I take all my working cash right now, leave all my day trade holdovers as they are technically still valid trades and add that to my margin account and even perhaps liquidate my stock positions (they are quite profitable but 100-400 share trades are not going anywhere fast) I could muster together a $20,000 trade account. If profits only match my current performance (not counting the mass liquidation of the last day) then the next quarter could see a $25,000 profit, taxable to bring it to $15,000 at year end. Seeing as I get to continue to use the full profit before taxes for the entire year it covers the cost of the taxes through the compounding over the year.

Cashflow is my primary goal so comparing the two:

TFSA, current profits = $10,889 (162% of %6700)
Margin extrapolated = $32,400 (162% of $20,000)
TFSA extrapolated using current balance = $13,395 (162% of $8,269)

Of course if I had $20K in my TFSA I would not even be considering this but the TFSA is limited in contribution room so I cannot add to it, I HAVE to grow it or wait until January to add up to $5,000. Meanwhile my cash flow struggles to match my targets...although I am doing well enough.

Is waiting three months to have the $20K balance worth the wait? Or is that assumption even correct... math and spreadsheet time again.

Well, it turns out my idea was wrong even though my three month assumption was correct.

Starting with $20,000 now and using the past three month's performance (fudged heavily against me though, using 125% overall instead of the real 162%) then doing the exact same progression based on the $8,269 TFSA yields some interesting results.

The race ends even in 2.5 years after accounting for full 40% taxation being applied each year. At this point TFSA pulls ahead. Adding the $5,000 allowable contribution in each January actually makes this race even at 1.5 years as the tax hit drops the margin balance to match the TFSA balance, then TFSA takes off.

I have not added any accounting to claim expenses or anything here, I doubt that it would make much difference.

So, I need to decide which way I am going to go and just plain stick to it. Assuming that all of my swing trades in my margin account pan out as expected I would have a larger account base to start with if I wished, the $20K is assuming that I am only using free cash and stock values and does not account for any future trade profits pending. If I add even $10K to make it $30K startup the timeline to even is pushed out 3.5 years, but TFSA still ends up ahead in the long run.

I guess that I am undecided right now. I expect to decide so I can set up the transfers, if I do, in July as I am not trading the first week so it gives the brokers time to convert and transfer the cash ready for week two in July. Meanwhile I will continue with my TFSA plan.

Jeff.