Comments on: Portfolio Allocation – RRSPs, TFSA’s and Taxable Accounts http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm Building Wealth through Saving and Investing Sat, 21 Nov 2009 03:00:37 -0500 http://wordpress.org/?v=abc hourly 1 By: FrugalTrader http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm/comment-page-1#comment-94353 FrugalTrader Wed, 29 Jul 2009 00:58:25 +0000 http://www.milliondollarjourney.com/?p=639#comment-94353 Mark, if you are considering holding dividend stocks for the long term (aka until retirement), the holding them outside your RRSP provides many benefits. First, you get the dividend tax credit, and second, you'll only be taxed on the capital gains when you sell. Within an RRSP, you'll pay no tax on the dividends, but you'll have to pay tax on RRSP withdrawals at your marginal rate. As well, depending on your income and province, dividend income outside an RRSP can be extremely tax efficient. For example if you are from Ontario, you can make up to $70k in regular income and only pay around 7% tax on dividend distributions. Mark, if you are considering holding dividend stocks for the long term (aka until retirement), the holding them outside your RRSP provides many benefits. First, you get the dividend tax credit, and second, you’ll only be taxed on the capital gains when you sell. Within an RRSP, you’ll pay no tax on the dividends, but you’ll have to pay tax on RRSP withdrawals at your marginal rate.

As well, depending on your income and province, dividend income outside an RRSP can be extremely tax efficient. For example if you are from Ontario, you can make up to $70k in regular income and only pay around 7% tax on dividend distributions.

]]> By: Mark in Nepean http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm/comment-page-1#comment-94347 Mark in Nepean Wed, 29 Jul 2009 00:21:07 +0000 http://www.milliondollarjourney.com/?p=639#comment-94347 Hi Everyone, Interesting thread. A question for all of you....how many of you hold CDN dividend-paying stocks in your RSP? I would seem to be a good move to hold them inside an RSP (for long-term equity growth) and outside, to take advantage of low taxation... Thoughts? Hi Everyone,

Interesting thread. A question for all of you….how many of you hold CDN dividend-paying stocks in your RSP? I would seem to be a good move to hold them inside an RSP (for long-term equity growth) and outside, to take advantage of low taxation…

Thoughts?

]]> By: Wealth Manager http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm/comment-page-1#comment-83724 Wealth Manager Sat, 23 May 2009 03:48:27 +0000 http://www.milliondollarjourney.com/?p=639#comment-83724 Great thread. At this point I've opted to look at our family accounts (1 spouse, 2 kids) as 3 categories: 1. RESP: one family RESP in a self directed account. 2. Non-Reg/TFSA: two of each, treated as one allocation 3. RRSP: two accounts, treated as one allocation (just starting to convert to this from years of independent management) I would like to get some advice/feedback on how best to approach #3 however. At the moment, we have the exact same stocks/ETFs in each account - hence two buys, two sells for everything. I've been thinking about breaking this down (e.g. 3 in one, 3 in the other instead of 6 in each) to minimize trading costs, and easier tracking. How best do I break this down? Both accounts are roughly the same size and assuming a simple 50% Canadian equity, 30% Foreign equity and 20% Fixed income allocation (simple illustration), how does one spread this across two accounts? Canadian equity in one and the foreign/bonds in the other? I think rebalancing will be very difficult with this model since I can't move things between accounts. I need to thing more seriously about this - I'm sure many of you have so I'd like to hear what you've come up with! Great thread.

At this point I’ve opted to look at our family accounts (1 spouse, 2 kids) as 3 categories:
1. RESP: one family RESP in a self directed account.
2. Non-Reg/TFSA: two of each, treated as one allocation
3. RRSP: two accounts, treated as one allocation (just starting to convert to this from years of independent management)

I would like to get some advice/feedback on how best to approach #3 however. At the moment, we have the exact same stocks/ETFs in each account – hence two buys, two sells for everything. I’ve been thinking about breaking this down (e.g. 3 in one, 3 in the other instead of 6 in each) to minimize trading costs, and easier tracking.

How best do I break this down? Both accounts are roughly the same size and assuming a simple 50% Canadian equity, 30% Foreign equity and 20% Fixed income allocation (simple illustration), how does one spread this across two accounts? Canadian equity in one and the foreign/bonds in the other? I think rebalancing will be very difficult with this model since I can’t move things between accounts.

I need to thing more seriously about this – I’m sure many of you have so I’d like to hear what you’ve come up with!

]]> By: DAvid http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm/comment-page-1#comment-72467 DAvid Wed, 04 Mar 2009 02:11:20 +0000 http://www.milliondollarjourney.com/?p=639#comment-72467 dumdumdum, $5000 per year, even when contributions are indexed for inflation, would likely be about $500,000 in 30 years. (based on 5% growth and 2% inflation) For the average Canadian $5000 is about 7% of their income, an RRSP allows contributions of about 18% or about 2.5 time as large an investment. You might find your retirement sorely lacking if you are depending on the income from the TFSA to make up the difference in your retirement income. Your plan would have you earning about $4000 per month tax free in 2040 dollars, about equal to living on $2000 / month today, plus of course any other government supported income you may be able to access at that time. DAvid dumdumdum,
$5000 per year, even when contributions are indexed for inflation, would likely be about $500,000 in 30 years. (based on 5% growth and 2% inflation)

For the average Canadian $5000 is about 7% of their income, an RRSP allows contributions of about 18% or about 2.5 time as large an investment. You might find your retirement sorely lacking if you are depending on the income from the TFSA to make up the difference in your retirement income.

Your plan would have you earning about $4000 per month tax free in 2040 dollars, about equal to living on $2000 / month today, plus of course any other government supported income you may be able to access at that time.

DAvid

]]> By: dumdumdum http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm/comment-page-1#comment-72463 dumdumdum Wed, 04 Mar 2009 00:46:44 +0000 http://www.milliondollarjourney.com/?p=639#comment-72463 When (if) I retire, I would like to have most of my money in a TFSA and just enough in the RRSP so that my monthly withdrawals are well under the basic personal tax exemption (i.e. less than about $850 per month in 2009 dollars), and I can get the Canada pension if it still exists. I'm still sort of young so the TFSA wins. When (if) I retire, I would like to have most of my money in a TFSA and just enough in the RRSP so that my monthly withdrawals are well under the basic personal tax exemption (i.e. less than about $850 per month in 2009 dollars), and I can get the Canada pension if it still exists. I’m still sort of young so the TFSA wins.

]]> By: CanadianFinance http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm/comment-page-1#comment-72427 CanadianFinance Tue, 03 Mar 2009 16:33:51 +0000 http://www.milliondollarjourney.com/?p=639#comment-72427 mjw2005, I wrote a bit last week about buying the 4 largest REITs, the 0.55% MER is a little steep for such a small index. http://canadianfinanceblog.com/2009/02/25/real-estate-investment-trust-reit-portfolio.htm I am a fan of having REITs in the TFSA and bonds in the RRSP, since the REITs are likely to grow at a faster rate and then be tax free at retirement. With RRSP room towards retirement and looking to change my portfolio, I would also be able to sell REITs from the TFSA and buy more bonds in an RRSP. mjw2005, I wrote a bit last week about buying the 4 largest REITs, the 0.55% MER is a little steep for such a small index.

http://canadianfinanceblog.com/2009/02/25/real-estate-investment-trust-reit-portfolio.htm

I am a fan of having REITs in the TFSA and bonds in the RRSP, since the REITs are likely to grow at a faster rate and then be tax free at retirement. With RRSP room towards retirement and looking to change my portfolio, I would also be able to sell REITs from the TFSA and buy more bonds in an RRSP.

]]> By: FrugalTrader http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm/comment-page-1#comment-72380 FrugalTrader Tue, 03 Mar 2009 03:16:24 +0000 http://www.milliondollarjourney.com/?p=639#comment-72380 mjw, wxjunkie: I will most likely be purchasing individual REITS as REI.UN is a large portion of the XRE ETF reit index. I actually haven't had the chance to open a tfsa yet, but when I do, it will be with <a href="http://milliondollarjourney.com/questrade-review.htm" rel="nofollow"><b>Questrade</b></a>.. mjw, wxjunkie: I will most likely be purchasing individual REITS as REI.UN is a large portion of the XRE ETF reit index. I actually haven’t had the chance to open a tfsa yet, but when I do, it will be with Questrade..

]]> By: Remus http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm/comment-page-1#comment-72355 Remus Mon, 02 Mar 2009 20:59:02 +0000 http://www.milliondollarjourney.com/?p=639#comment-72355 Hi guys Regarding "In TFSA’s, right now, it seems foreign dividends will face a withholding tax". Do you know that is 15% if you filled in that form with your broker or it is 30% regardless. Also do you have any idea inside the RSP the withholding tax is 0? For instance I use E-trade and part of the account opening process is either a form W8-BEN or a copy of your canadian driving license. With that on file though I would assume the tax should be less meaning just 15% inside the TFSA no? And for RSP 0 foreign tax as I think I've read somewhere that the RSP is covered under a tax treaty with the US. Oh yes I was speaking here about US dividends. For other countries I have no clue... for instance how much gets withheld for an Asian dividend. Hi guys

Regarding “In TFSA’s, right now, it seems foreign dividends will face a withholding tax”. Do you know that is 15% if you filled in that form with your broker or it is 30% regardless.
Also do you have any idea inside the RSP the withholding tax is 0?

For instance I use E-trade and part of the account opening process is either a form W8-BEN or a copy of your canadian driving license. With that on file though I would assume the tax should be less meaning just 15% inside the TFSA no? And for RSP 0 foreign tax as I think I’ve read somewhere that the RSP is covered under a tax treaty with the US. Oh yes I was speaking here about US dividends. For other countries I have no clue… for instance how much gets withheld for an Asian dividend.

]]> By: wx_junkie http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm/comment-page-1#comment-72351 wx_junkie Mon, 02 Mar 2009 19:29:08 +0000 http://www.milliondollarjourney.com/?p=639#comment-72351 And further to mjw's post #9, who (broker) have you decided you will use to purchase income trust units from inside your TFSA? And further to mjw’s post #9, who (broker) have you decided you will use to purchase income trust units from inside your TFSA?

]]> By: mjw2005 http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm/comment-page-1#comment-72349 mjw2005 Mon, 02 Mar 2009 19:06:52 +0000 http://www.milliondollarjourney.com/?p=639#comment-72349 Great post FT....Just wondering are you planning on buying a REIT ETF or individual REITS? Great post FT….Just wondering are you planning on buying a REIT ETF or individual REITS?

]]> By: Ray http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm/comment-page-1#comment-72338 Ray Mon, 02 Mar 2009 17:17:43 +0000 http://www.milliondollarjourney.com/?p=639#comment-72338 Portfolio allocation I definitely a very complex topic to understand and with the TFSA this year it only gets harder. Most of how you allocate your portfolio will depend on your personal situation (tax bracket, time, family, future plans). I personally am trying not to fully maximize my RRSP, this is because I am in a low tax bracket and am expecting be in a higher tax bracket in a few years. I also may need to withdraw from the investments over the next couple of years, so having it in RRSP right now will be very counter productive, as I will get tax refund on a lower tax bracket and will be taxed at a higher tax bracket. TFSA I would mainly hold bonds and non-canadian dividend paying stocks. I am getting married this year so there is a lot of unknown factors till we get through the wedding planning. Portfolio allocation I definitely a very complex topic to understand and with the TFSA this year it only gets harder. Most of how you allocate your portfolio will depend on your personal situation (tax bracket, time, family, future plans). I personally am trying not to fully maximize my RRSP, this is because I am in a low tax bracket and am expecting be in a higher tax bracket in a few years.
I also may need to withdraw from the investments over the next couple of years, so having it in RRSP right now will be very counter productive, as I will get tax refund on a lower tax bracket and will be taxed at a higher tax bracket.

TFSA I would mainly hold bonds and non-canadian dividend paying stocks.

I am getting married this year so there is a lot of unknown factors till we get through the wedding planning.

]]> By: Sarlock http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm/comment-page-1#comment-72334 Sarlock Mon, 02 Mar 2009 16:50:45 +0000 http://www.milliondollarjourney.com/?p=639#comment-72334 I have treated our investment portfolio as one big combined group, allocating funds to each investment slot based on what types of investments are tax favourable. Another thing to note in the above list is capital gains: those are only taxed at 50% if held outside of your RRSP. This is a major advantage. A capital gain in an RRSP, while not taxed at the time it is made, is taxed at 100% of the gain when withdrawn. Unless you expect your tax rate to be signifcantly lower upon retirement when you withdraw your RRSP funds, capital gains are better off made outside your RRSP. Even better, capital gains are not taxed at all inside a TFSA. That makes your TFSA the much better choice to locate any investments that are capital gains focused. For my wife and I, our TFSA's are the place where we hold fixed income securities. This is the "safe" part of our portfolio where the interest income is earned tax free. In a couple of years, once our contribution room grows to a higher percentage of our overall investment portfolio, I will begin investing in capital gains focused investments as well. RRSP's is the place I hold mostly foreign equities. Outside, in a taxable investment account, we hold our Canadian dividend earning portfolio. These dividends are taxable each year, but with the dividend tax credit (something you don't get in your RRSP, you pay full tax upon withdrawal) it makes it advantageous to hold these stocks in a taxable account. It ultimately depends on what your tax bracket is now and what you expect your tax bracket to be upon retirement. As I expect my post-retirement income to be comparable to what it is now, I am not maxing out my RRSP (I am focusing on a spousal primarily, as my wife's income after retirement will be much lower than mine). I also have a fear that our tax rates are going to be much higher than they are now in 10-15 years. We will have a lot of boomers to fund retirement for and a less productive nation (per capita) to fund it with. I have treated our investment portfolio as one big combined group, allocating funds to each investment slot based on what types of investments are tax favourable. Another thing to note in the above list is capital gains: those are only taxed at 50% if held outside of your RRSP. This is a major advantage. A capital gain in an RRSP, while not taxed at the time it is made, is taxed at 100% of the gain when withdrawn. Unless you expect your tax rate to be signifcantly lower upon retirement when you withdraw your RRSP funds, capital gains are better off made outside your RRSP. Even better, capital gains are not taxed at all inside a TFSA. That makes your TFSA the much better choice to locate any investments that are capital gains focused.

For my wife and I, our TFSA’s are the place where we hold fixed income securities. This is the “safe” part of our portfolio where the interest income is earned tax free. In a couple of years, once our contribution room grows to a higher percentage of our overall investment portfolio, I will begin investing in capital gains focused investments as well.

RRSP’s is the place I hold mostly foreign equities.

Outside, in a taxable investment account, we hold our Canadian dividend earning portfolio. These dividends are taxable each year, but with the dividend tax credit (something you don’t get in your RRSP, you pay full tax upon withdrawal) it makes it advantageous to hold these stocks in a taxable account.

It ultimately depends on what your tax bracket is now and what you expect your tax bracket to be upon retirement. As I expect my post-retirement income to be comparable to what it is now, I am not maxing out my RRSP (I am focusing on a spousal primarily, as my wife’s income after retirement will be much lower than mine). I also have a fear that our tax rates are going to be much higher than they are now in 10-15 years. We will have a lot of boomers to fund retirement for and a less productive nation (per capita) to fund it with.

]]> By: James http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm/comment-page-1#comment-72329 James Mon, 02 Mar 2009 15:40:48 +0000 http://www.milliondollarjourney.com/?p=639#comment-72329 DG: I would be interested in seeing what has happened to QCASH's portfolio since his last update, and what is portfolio allocation is now. Maybe you can persuade him for an update. DG: I would be interested in seeing what has happened to QCASH’s portfolio since his last update, and what is portfolio allocation is now.
Maybe you can persuade him for an update.

]]> By: Endowment Life Insurance Policy http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm/comment-page-1#comment-72324 Endowment Life Insurance Policy Mon, 02 Mar 2009 14:53:06 +0000 http://www.milliondollarjourney.com/?p=639#comment-72324 portfolio allocation is not easy topic. nicely written! portfolio allocation is not easy topic. nicely written!

]]> By: FrugalTrader http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm/comment-page-1#comment-72321 FrugalTrader Mon, 02 Mar 2009 14:22:23 +0000 http://www.milliondollarjourney.com/?p=639#comment-72321 DG: I consider the RESP as a completely separate portfolio as technically, the money is for my child in 18 or so years. Within that account, I have a diversified index portfolio. FP: I'm with you, I don't count my short term accounts either. DG: I consider the RESP as a completely separate portfolio as technically, the money is for my child in 18 or so years. Within that account, I have a diversified index portfolio.

FP: I’m with you, I don’t count my short term accounts either.

]]> By: Four Pillars http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm/comment-page-1#comment-72320 Four Pillars Mon, 02 Mar 2009 14:12:49 +0000 http://www.milliondollarjourney.com/?p=639#comment-72320 Bernstein (Four Pillars of Investing) is pretty big on the one portfolio idea. In my opinion it makes sense for similar accounts ie if you have several retirement accounts (2 rrsps, 1 spousal rrsp, pension) then it makes sense to combine them when looking at your asset allocation. In theory you can combine your short term accounts (emergency fund, cash in bank) into that portfolio as well but I don't really see the point. Short term accounts are always going to be cash (or something similar) so combining them with your retirement savings isn't going to change that. RESP is another account that I analyse separately because it has a different timeline than all the other accounts and a different asset allocation. Bernstein (Four Pillars of Investing) is pretty big on the one portfolio idea. In my opinion it makes sense for similar accounts ie if you have several retirement accounts (2 rrsps, 1 spousal rrsp, pension) then it makes sense to combine them when looking at your asset allocation.

In theory you can combine your short term accounts (emergency fund, cash in bank) into that portfolio as well but I don’t really see the point. Short term accounts are always going to be cash (or something similar) so combining them with your retirement savings isn’t going to change that.

RESP is another account that I analyse separately because it has a different timeline than all the other accounts and a different asset allocation.

]]> By: J. http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm/comment-page-1#comment-72319 J. Mon, 02 Mar 2009 14:12:15 +0000 http://www.milliondollarjourney.com/?p=639#comment-72319 The decision to prioritize between RRSP and TFSA depends on whether or not you expect to increase your income in the future (thus, higher tax). If the answer is yes, TFSA makes sense, if no, RRSP may be the best (RRSP makes the most sense if you expect your future income to drop.) As somebody in the beginning of the career, I plan to fund TFSA first and then RRSP (at least enough to drop my gross to the next tax bracket). Yes, I read all the gloomy news on the weekend, but I don't need any of my money in RRSP or TFSA for 30-40 years, so my portfolio is quite aggressive. RRSP - Mutual funds (Mostly in Canadian equity but some bonds + cash equivalents.) TFSA - 100% Equity (Planned): I'm planning to start with American equities and then add world equities. Non-Registered - Individual stocks (For the time being, I'm not using this as a serious investment vehicle. I have a fairly insignificant amount of money in here to play around with stocks for learning.) The decision to prioritize between RRSP and TFSA depends on whether or not you expect to increase your income in the future (thus, higher tax). If the answer is yes, TFSA makes sense, if no, RRSP may be the best (RRSP makes the most sense if you expect your future income to drop.)

As somebody in the beginning of the career, I plan to fund TFSA first and then RRSP (at least enough to drop my gross to the next tax bracket). Yes, I read all the gloomy news on the weekend, but I don’t need any of my money in RRSP or TFSA for 30-40 years, so my portfolio is quite aggressive.

RRSP
- Mutual funds (Mostly in Canadian equity but some bonds + cash equivalents.)

TFSA
- 100% Equity (Planned): I’m planning to start with American equities and then add world equities.

Non-Registered
- Individual stocks (For the time being, I’m not using this as a serious investment vehicle. I have a fairly insignificant amount of money in here to play around with stocks for learning.)

]]> By: DG http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm/comment-page-1#comment-72318 DG Mon, 02 Mar 2009 14:05:22 +0000 http://www.milliondollarjourney.com/?p=639#comment-72318 The book Intelligent Portfolio calls the concept "Household Portfolio". You've left out RESPs; what sort of investments should go there? I would argue that you should not put highly volatile investments here; there is a risk that your children won't go to school or won't use it all... what if high risk investments perform like gang-busters? I also like bonds in the TFSA versus RRSP because they can serve as an easily available emergency fund, but maybe the easy availability is a bad thing... The book Intelligent Portfolio calls the concept “Household Portfolio”.

You’ve left out RESPs; what sort of investments should go there? I would argue that you should not put highly volatile investments here; there is a risk that your children won’t go to school or won’t use it all… what if high risk investments perform like gang-busters?

I also like bonds in the TFSA versus RRSP because they can serve as an easily available emergency fund, but maybe the easy availability is a bad thing…

]]>