Author Topic: Beginning Investing in Canada  (Read 3061 times)

OfMoneyandModesty

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Beginning Investing in Canada
« on: September 19, 2014, 11:41:40 AM »
I'm ready to begin my journey investing. I am aiming for financial independence in 9 years (I'd still continue working after)... some of the online calculators say ~7 but I'm playing it safe and setting age 30 as my retirement goal. Here's a lowdown on my finances:

1st job: 1700$ per month income (just begun this new job, I'm hoping to get raises and promotions obviously. Hard work here I come!)
2nd job: 3500$ cash per month
I'm currently working 50 hours a week, though I take one weekend off the second job so one week is only 40 hours. I know its still a lot, but I really love my jobs and look forward to them every day!
Spending: $1400 per month, leaving....
$3800 to invest a month.

So to begin, my first employer matches a certain percent of my contributions to an RRSP. I'm new there so I'm not done my probation, I can begin to take advantage of that in a few months. I currently have no investments or debt whatsoever. I have $2500 in the bank. I only have that amount because I just finished paying off all of my debts.

So I am all for the ETFs that MMM talks about, but I'm not sure where to start with that! Canadian Couch Potato has a few recommendations. I'm not sure whats better for me, though Vanguard FTSE Canada All Cap is what I'm thinking about now. iShares S&P/TSX Capped Composite has a 0.06% MER but I'm not sure about that either, which would be better fore FIRE. Are there other options that would be good for me as well? I want to get into the American and Worldwide market too, of course. Do you guys have any suggestions of where I should start, or how often I should invest? I was reading about Questrade yesterday, where you can buy ETFs for free but you have to pay a commission to withdraw.  Does anyone have more info on how this works? I don't really understand it. If I plan on living off dividends, would I have to pay the commission for that? I know I'd have to pay it for rebalancing...

I'm seeing a financial advisor from TD tomorrow, a free consultation. I'm pretty sure he's just going to blow smoke up my ass and try to sell me bogus stuff with a high MER, so I wanted to have the low-down from other sources first to get an idea of what to talk about with him and what's good and whats not.
If I've missed any crucial info you need, let me know and I can edit it in. (:

RichMoose

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Re: Beginning Investing in Canada
« Reply #1 on: September 19, 2014, 12:33:55 PM »
Welcome! First, congratulations on paying off your debt! I'm guessing based on your age that you recently graduated from university. The first thing I would do is set up a small emergency fund. Open a PC Financial or Tangerine savings account and dump 3-6 months of expenses in that. This way you won't be selling shares to fund your lifes expenses. Does your employer make you enrol in a group RRSP though Great West Life or something like that for the match? Or do they match to a self-directed account? Or do they match only to a Locked-in RRSP (LIRA) account? Some good questions to ask HR if you don't already know the answer before you meet with TD.

TD isn't all bad. Their TD-e series mutual funds are the lowest MER index funds available in Canada. Problem is they still don't compete with ETF's if you use Questrade. Questrade is fantastic for new investors because the big advantage for TD-e at one time was that you don't pay trading commissions for small purchases. Now with Questrade you don't pay commissions for purchases either so from a cost perspective Questrade and ETF's is the way to go, but don't expect TD level support. You don't pay commissions on dividend income, you only pay if you sell the actual ETF units. If you plan to live off dividends only you don't need to worry about this. In fact, even if you do plan on funding your retirement by selling a certain amount of ETF units it's still not a problem so long as you don't make trades often. If you want to retire with a 90/10 split, you may only need to top up your bonds/savings account twice a year. The commissions on that are negligible considering its less than $10 per trade. Rebalancing costs shouldn't be an issue either. If stocks are going up much faster than bonds, just buy bonds only with your contributions. If you can't match the pace of stock growth, rebalance once a year. That means one or two trades where you pay commission (selling) and one or two trades where you don't because you're buying.

I would open accounts with Questrade: a self-directed TFSA and a self-directed RRSP and maybe a self-directed trading account. Just be careful not to open accounts that you won't immediately use and contribute to because they charge fees for low account balances or account inactivity (<$5000 or 1 trade/quarter) once you turn 25. It depends on your province's tax rates, but generally if you earn under ~$40,000 (gross taxable) per year, I would invest in TFSA & taxable accounts only. If you earn over $40,000, contribute to your RRSP only to get you down to that next tax bracket and then stick with TFSA's and taxable for the rest. Million Dollar Journey goes into detail about this, but RRSP can actually hurt your "real" tax rates in retirement if you get dinged on OAS, GIS, and medical benefits because of high RRSP withdrawal income.

As a rule for Canada: Put domestic dividend paying stocks in your taxable account first (ZCN counts, but if you invest a lot in your taxable account XDV is probably a better choice). Do not put bonds or foreign stocks in your taxable account, all your tax advantages disappear quickly. Next, put bonds in your TFSA before your RRSP. Last, put foreign in your RRSP, especially if you intend to invest heavily in the U.S. If that's the case, open a US dollar RRSP instead and invest in U.S. ETF's directly so you benefit from tax treaties between the U.S. and Canada regarding withholding taxes.

Since Vanguard ETF's came to Canada, BMO, Horizons ETF, and iShares have really stepped up their game and dropped their fees substantially. In most cases they are actually more competitive that Vanguard. Personally I wouldn't worry too much about whether or not to go with All-Cap or Cap Comp etc. I would just make sure you don't go with S&P/TSX 60 because the diversification is a little lacking. Also don't go too heavy in Canadian small caps because that means your portfolio will depend too much on metals and oil. My personal favorite for Canadian index with ZCN (BMO's ETF for TSX Capped Composite Index). It has the lowest fees you can find and its reasonably well diversified considering the Canadian market with ~250 stocks.

If you include specific information about your province, expected gross taxable income for this year, desired asset allocation, and desired foreign exposure, I can try offer some more detailed advice.

OfMoneyandModesty

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Re: Beginning Investing in Canada
« Reply #2 on: September 20, 2014, 09:00:48 AM »
Thank you! No student debt, actually. I just own a lot of clothes and traveled a lot. I'm the person MMM was talking about when he says "useless consumerism". Hahah. All solved now though and living very mustachian, no worries!

So if I sign up for Questrade now and put in 5k, then I wont get charged fees? Especially because I'm under 25? Also with Questrade, it's offering me an Individual Margin and TFSA linked with "Margin Power". I'm assuming thats what I want? I can't set up my RRSP yet because I've got two months left on the probation at my new job that does matches. Or should I just set that up now anyway while I'm at it?

I am in lower Ontario. The $3500 is a rough estimate per month as it does fluctuate but evens out, and it is cash. I'm not quite sure what I'll do come tax season because I've never had the combined income before and it was never this high. I figured I'd just stash away about 12k a year in a savings account, pay whatever taxes with that then continue investing the rest. I know that's a really vague plan for right now but this is all quite a bit at once for me to learn about and sort out. I'm also assuming I don't get the cash back from taxes paid from the lower-income, office job. Ha.

RichMoose

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Re: Beginning Investing in Canada
« Reply #3 on: September 20, 2014, 06:21:31 PM »
Taxes can be a big hit if you're earning cash right now. If it continues, CRA will try force you to pay in installments. I would recommend using a tax calculator, I personally like this one: http://www.taxtips.ca/calculators/canadian-tax/canadian-tax-calculator.htm Figure out what you need to put away every month. Put it in your Tangerine / PC Financial account and earn that bit of interest. That way you know for sure you got it come April.

You're right, Questrade will not charge inactivity fees on accounts if the account holder is 25 or younger. I wouldn't open margin accounts. Just open a plain jane self-directed TFSA and self-directed RRSP. Open both now.

If my math is right, you will be earning about $62k gross per year. This means you can contribute ~$11k (18%) to your RRSP each year going forward, plus any accumulated room you already have which will be on your Notice of Assessment. For Ontario, your lowest tax bracket starts at $43,953 for 2014. Basically that means that you will want to make sure that you don't contribute more than $18k in any year to your RRSP if your income stays the same ($62k - $44k = $18k). If you have more to save, dump it in your TFSA first.

This means that once you've caught up on all your excess RRSP room, you can put away about $16,500 per year between the RRSP and TFSA. If you are saving more than this, I would open a taxable investment account. Put all your savings in this account in a Canadian dividend ETF to maximize the tax advantages.
« Last Edit: September 21, 2014, 09:23:28 AM by TuxedoEagle »

OfMoneyandModesty

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Re: Beginning Investing in Canada
« Reply #4 on: September 22, 2014, 05:48:57 AM »
Wont my RRSP money be stuck in there until I'm 59.5 though? Or can I touch the returns from the investments?

plainjane

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Re: Beginning Investing in Canada
« Reply #5 on: September 22, 2014, 06:49:47 AM »
Wont my RRSP money be stuck in there until I'm 59.5 though? Or can I touch the returns from the investments?

You can pull out your RRSP money at any time.  You just will need to pay taxes on it as if it were regular income.  RRSPs are not tax exempt, they're just tax deferred.  The premise is that you make more money when you're earning money, and so are in a higher tax bracket than when you are retired.  So if you pull a bunch of money out in a year when you're making a good salary you might get dinged at 43%.

E.g. see:
http://www.theglobeandmail.com/globe-investor/personal-finance/retirement-rrsps/three-safe-ways-to-withdraw-funds-from-your-rrsp/article8929682/

One thing that leapt out at me was that you mention the majority of your second job is in cash.  I'm not sure if this cash is being reported or you're paying taxes on it.  If the money is being reported and the tax isn't being withheld, you are looking at a large tax bill in April.  If the money isn't being reported, then your RRSP contribution room will only be calculated based on Job 1.

2 - you don't need to wait until you've hit the point where your employer will match RRSPs to start your contributions.  Figure how much room you need to set aside for them (the amount they will match and the amount you need to put in to get that match), and then start your own RRSP to use up the rest of your room.  Most people have RRSPs separate from their employers as well.

3 - you're probably going to use up your RRSP room for this year really quickly.  (Not sure how much you are carrying over.)  But this doesn't matter, because you should be maxing out your TFSA and using up the space you've accumulated there.

4 - If you are filling up old RRSP room this year, remember that you can carry over the tax back claim, you don't need to use it all at once.

sleepyguy

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OfMoneyandModesty

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Re: Beginning Investing in Canada
« Reply #7 on: September 25, 2014, 07:46:42 AM »
Thanks sleepyguy! I hadn't seen that one yet. :D

Kaspian

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Re: Beginning Investing in Canada
« Reply #8 on: September 25, 2014, 02:49:34 PM »
You said you were going to see the TD guy.  Do you already have accounts there?

If so, it's incredibly easy to setup or convert to e-Series accounts there.  You don't even have to talk to anybody.  Just fill in the forms at:

http://www.tdcanadatrust.com/products-services/investing/mutual-funds/td-eseries-funds.jsp?tab=what-does-td-offer#what-does-td-offer

Send 'em in and away you go!  (After giving them about 2 weeks to set it up.)

I use the Global Couch Potato (Option# 2) with TD for my RRSP, TFSA, and non-registered account. 
http://canadiancouchpotato.com/model-portfolios/