Reader Mail: New Graduate, TD e-Series, RRSP or Non-Reg?
New graduate, Mike, emailed me with some investing questions. He’s new to the work force, and is diligently looking to find ways to invest and save money.
I am a new grad, just started working permanently last year. I have contributed every year to my TFSA (right now, it’s parked with Canadian Western Bank, which offers 3% on their Demand account). I haven’t contributed to RSPs because I haven’t earned sufficient income to justify doing so. As such, I have carried forward my totals every year.
I project that I will contribute by Jan/Feb 2013. In the mean time, I have excess funds in my account that I don’t use. Because of the lower MERs, I want to either invest in ETFs or TD E-series funds. Right now, I’m leaning towards the E-series, but will definitely consider ETFs with Questrade as I get a better handle on how to select ETFs (though your advice with this would be appreciated as well).
1) If I were to start a non-registered TD E-series fund this year, would I have to start another account next year if I were to contribute to my RSP through E-series? Or is it possible to convert my non-registered into registered?
2) How does taxes work if I were to start up a non-registered E-series fund? I assume TD would send me a T3. Can I rely on their tax slip information or do I have to keep track of additional information? I’m likely taking the couch potato strategy on this by just leaving it there without selling (unless I require the cash) and contributing every four months or so.
Before I start, I must say that new grads asking these types of questions, especially regarding index investing, are already way ahead of the pack. Second, jumping on the soap box for a moment, I believe that consumer/student debt should be paid off first before jumping into the investment game.
Now, onto Mikes scenario. He has savings money in a TFSA, no money in RRSPs (not yet anyways), and is curious about non-registered investing with index type investments, like TD e-Series. If there salary income in the mix, then over the long term, it’s more efficient to keep investments in tax sheltered registered accounts first. Then, if/once the contribution room and cash get used up, then look into moving into non-registered accounts. More about this subject in the portfolio allocation article.
Another point is that Mike mentions being in a lower tax bracket, so he doesn’t contribute to an RRSP. One strategy that I would suggest is to contribute to the RRSP but carry forward the tax deduction to a higher income year. That way, investing within the RRSP can start before going to the non-registered route.
Yet another benefit of putting the investments in a registered account is that it simplifies income tax filing. No need to hold onto those T5′s and other investment slips, or track your capital gains/losses or return of capital.
Say that I’m not convincing enough, and Mike would still like to invest in his non-registered account. To answer his questions:
1. If investments are in a non-reg account, they can be transferred “in-kind” to a registered account, it’s not really “converting” per se. The only issue with that is that if there are any capital gains on the date of transfer, capital gains tax will be accrued. To add salt to the wound, capital losses cannot be claimed when transfers are made in-kind from a non-reg to a registered account. To get around this, simply sell the shares and contribute cash to the registered account.
2. As mentioned, taxes and tracking the adjusted cost base is a real turn off when using a non-registered account. TD, or any mutual fund would send you tax slips for any distributions (dividends, interest, etc), but the investor is responsible for tracking capital gains/losses and the adjusted cost base if he/she buys in small increments.
To be a bit repetitive here, if I was in this position, I would look at investing within registered accounts (TFSA/RRSP) before considering investing within a non-registered account.
Do you have a financial question that you would like answered? Email me and I’ll give it a shot!
P.S. For readers of Chinese descent – Gung Hay Fat Choy (Happy Chinese New Year)!