Maxed out my TFSA and RRSP contribution room, now what?

[IngaB]

Hello,

What do families in Canada do when they have maxed out on their TSFA and RRSP room, but still wish to continue putting aside funds for retirement?

About our family: 42F earning $115k and 45M earning $100K. Own a townhouse in Toronto (mortgage paid off). Own one car (paid off). Take one vacation a year. 5-year old child. Save approximately 60-65% of take home pay (use Excel to track all revenues and spending).

About our investments: Use passive investing and re-balance all accounts once a year. Mostly use Canadian Couch Potato investment strategy. Most of our funds are in ETFs. To take we put aside about $550K, all through RRSP and TFSA.

Questions:
1) We finally reached a point where RRSP/TFSA room for both adults cannot accommodate our annual retirement contributions. In 2022, we have about $40K in available RRSP/TFSA room but plan to set aside about $140K towards retirement. How do we do this in a most income tax-efficient matter?

2) We are also contemplating finding a CPA who specialize in income tax matters and getting some independent professional advice (fee for service CPA). How do we find such a professional in Toronto? Any referrals from members of this forum?

Thank you in advance.

[cdn5cents]

Congrats!

1.  RESP ... 20% Government match up to $500/child/year subject to a $7200 lifetime benefit..Total contribution allowed to this account is 50K/child....Topping up this account will potentially facilitate more cap gains realized in your child's name if he/she should pursue Post secondary education 

2. Investment Account.... Consider Tax Efficient investment products that align with your Portfolio Risk Objectives.

[IngaB]

forgot to mention: fully contribute to RESP account as well ($2500 a year)

[Novik]

Here's a directory of Canadian fee based financial planners etc: https://www.valueofsimple.ca/links/directory-of-fee-only-planners/ I have not used but have perused. There's a wide variety in what they offer, cost and even fee model, so you should be able to find a decent fit.

If you have 140k to save this year and are looking to reduce your income taxes, may I suggest making some charitable donations? It will cost you but not as much as you'd think after the tax savings.

Other than that, you're looking at a taxable investment account. Asset location (which kinds of things you hold where) is something to do some reading on.

[daverobev]

Canadian 'eligible' dividends in your unregistered account. US domiciled stuff in RRSP. Canadian-domiciled non 'wrapper' ETFs in the TFSA. Bonds most likely unregistered as well due to the low rates.

Go and play with a tax calculator and see what adding $10k of eligible divis does.. not much!

[erp]

Congratulations! This is a big step and it means you're basically set.

Honestly, I think that the emphasis on which savings vehicle stores which asset is a little overblown - especially at relatively small values (under 2 million or so?). It's undeniably true that there are more and less tax efficient ways to hold assets in Canada, but at my net worth it seems like it's about a 0.2-0.3% drag. I'm willing to eat that cost for simplicity, and just keep the same indexes in my TFSA, RRSP and non-registered accounts.

At some point, it definitely makes sense to migrate to a model where you're holding the components of the index directly, but I suspect that's once you're holding assets in excess of several million.

Do look at things like RESPs, RDSPs, and any other vehicle you can though - that's just a bargain.

[Heckler]

Canadian ETFs to taxable non-registered, rebalance to your asset allocation in your other accounts by selling off Canada to prop up bonds or international.  (it's tough to sell off high flying equities to buy stagnant bonds though, trust me)

Build up your cash emergency fund/first years FU money in savings accounts and regret not seeing it grow.

Be careful about your RSP limits, they're easy to blow over at this point and be subject to 1% overcontribution taxes (let me know if you know what I need to do about this now, either remove the funds for a $50 de-registrations fee, or suck up the 1% tax till next years contribution room? - I'm leaning to the latter)

Treat all your accounts as one wrt to asset allocation.

That's what we're working on.

[Heckler]

I'm willing to eat that cost for simplicity, and just keep the same indexes in my TFSA, RRSP and non-registered accounts.

my spouse is currently paying negative income tax (-9.6%) on Canadian eligible dividends.   well worth it for me as a tax bonus.

[erp]

my spouse is currently paying negative income tax (-9.6%) on Canadian eligible dividends.   well worth it for me as a tax bonus.

Nice - that'd make a difference for sure. I'm spouseless, so it's all my income anyways.

Furthermore, while I do collect some eligible dividends, it's a pretty small fraction of my overall gains. If you've optimized for eligible dividends, then it definitely makes sense to try to lower the tax burden. Looking back over the last year though, I made less than $1000 in taxable dividends, and I'm not that concerned about optimizing taxes on that small an amount (at -10% is still $100, so that's a nice bonus, it's just enough added complexity that I'm happy to let it go).

Do you select a particular index to seek out eligible dividends, or are you selecting particularly promising companies on an individual basis?

[snacky]

I've opted for swap-based ETFs in my taxable account so I don't have any earnings or dividends to declare until I sell. I got the idea from this forum and Canadian Couch Potato.

[Heckler]

Do you select a particular index to seek out eligible dividends, or are you selecting particularly promising companies on an individual basis?

VCN, as per my AA.  Not seeking out divi's specifically, just growth and diversification.  I've got too many examples of individual companies (even massive ones like Nortel and Blackberry) going bust to ever want to stock-pick.

[highflyingstache]

You may want to look into Justin Bender, Canadian Portfolio Manager Blog. He's a coworker of Dan's (Couch Potato fame) and goes really into the weeds of asset allocation, foreign withholding taxes and whatnot. Well worth looking into as you consider taxes and efficiency (and different "levels" of difficulty) in building your non-tax deferred/protected accounts.

[Missy B]

Do you select a particular index to seek out eligible dividends, or are you selecting particularly promising companies on an individual basis?

VCN, as per my AA.  Not seeking out divi's specifically, just growth and diversification.  I've got too many examples of individual companies (even massive ones like Nortel and Blackberry) going bust to ever want to stock-pick.

No argument with using a div index fund like VCN - simplest and safest. You can get into individual stocks at low risk and with better returns if you're willing to do the research, which isn't long or complicated.

My criteria is simple:
-Canadian eligible dividends
-with a 20+ yr history of dividends
-4.5% or better yield
-recent and forecasted future growth of 5% or better
-continued paying through Black Swan events (never suspended)

I use https://dividendhistory.org

I have stocks with div lower than 5% that I bought for capital appreciation; all these have growth rates of 10-15%. It does take a shockingly long time for a 2.5% dividend with a 15% growth rate to catch up to the compound return of a 5%/5% stock, about 20 years.

The dividend tax credit actually reduces my tax payable. More income, less tax payable. If I ever get to the point where I have no other income (rental property, self-employment) then my income will be entirely tax free. (Varies by province, but this year its about 60K).

I wish to hell I'd figured out this simple strategy when I was a young lass, frugal but without benefit of internet and the ease of looking at stock performance history online. And of course there was no online trading then, and it was much more expensive to trade.