Canada: Asset Allocation WWYD

[PharmaStache]

I'm a fairly new investor, and although I've read pretty much everything on CCP about asset allocation, I'm still a bit confused!  Hoping I can get some input into how to best divide up our savings.

Current:

TD e-series (25% each bonds, cnd, US, int equity)
RRSP 1: 35k
TFSA 1: 30k
Tangerine balanced growth(25% each bonds, cnd, US, int equity)
RRSP 2: 25k
TFSA 2: 40k

Total RRSP: 60k
Total TFSA: 70k
Total investments: 130k
 
Annual additions:
6k/yr rrsp 2 (we each have a defined benefit pension plan, RRSP 1 has no room left over)
10k each/year into TFSA

I would like to keep things as simple as possible and keep our asset allocations the same as we currently have, but move to vanguard:
VAB 25% (32.5k)
VCN 25% (32.5k)
VXC 50% (65k)

My first plan:
RRSP 1:  7.5k VAB, 27.5k VXC
RRSP 2: 25k VAB
TFSA 1: 30k VXC
TFSA 2: 32.5k VCN, 7.5k VXC

Maybe I should have VAB/VXC in both RRSPs, and VXC/VCN in both TFSAs?  Not sure if that will help rebalancing or not.

My understanding is that bonds should be kept in our RRSPs.  I see that US equity is also good to place in an RRSP, but how does that work with VXC, which is US and international?  Also, since we can contribute so little to our RRSPs compared to our TFSAs, will our RRSPs eventually become 100% bonds, and is this a problem? 

Let me know if you need me to include any other information.  Thanks!

[RichMoose]

There's a few things you need to consider when making this decision.
-Probably the most important is your expected retirement spending needs. If your spending needs are going to be on the high end (over $30,000 per person lets say), then you will want to make sure you do not have an overly large RRSP because you will be taxed as regular income.
-You also need to think about whether or not it's worthwhile for you to change your RRSP into a US$ RRSP, now or in the future. If you are considering a US$ RRSP, then you will want to hold both US and international holdings in your RRSP because there are some tax advantages there with regards to withholding taxes on dividend payouts.
-You should consider whether or not your will be holding any Canadian REITs or other forms of income funds. These should be in your TFSA generally speaking because of tax reasons. Income trusts make payments that consist of dividends, return of capital, and shares of capital gains which can make tax calculations a bit of a head ache, particularly if your DRIP.
-Finally you should think about whether or not you will ever be investing in a regular investment account (taxable). This account "should" have Canadian stocks only because of tax advantages regarding dividends.

For almost everyone their bond allocation should be completely inside your RRSP accounts. This is because bonds tend to provide lower returns than stocks over the long term. That being said, you should probably think of your DB pension plan as a type of bond because it acts like a superbond: you put money in, you get guaranteed return on the way out. It's like investing in GICs with much higher rates of return. Personally I take our pension values into account with asset allocation over my portfolio which means I invest in 100% stocks in the accounts I have control over (TFSA, RRSP, etc).

I'm guessing your accounts are for you and the SO. I would split your desired bond allocation evenly between the two accounts so you don't end up with one account worth substantially more than the other in retirement. To keep your options open regarding US$ RRSPs and such I would probably start with the following:

RRSP 1: VAB $20k, VXC $15k
RRSP 2: VAB $12.5k, VXC $12.5k
TFSA 1: VCN $15k, VXC $15k
TFSA 2: VCN $17k, VXC $23K

And then just rebalance with your additional contributions from there.

[PharmaStache]

Thank you Tuxedo, you have made many excellent points!  Saving your post for future reference.

[Heckler]

WWID?

I'd maximize holdings to ensure DRIP values are high enough to reinvest without trading fees.  You didn't mention your intended ETF broker and if a trade will cost you $9.95 or not.

See attached - I've used my rebalance with your numbers, and included what I've learned so far as guiding principles.  I run this table with 10 accounts - yikes!  The -- show holdings I would not purchase.  The 0$ are future holdings for rebalancing purposes, although I would keep as few as possible (unlike my 10 accounts).



Disclaimer - 100% at your own risk.  I'm just learning about investing since Aug 2014.  Most of this is based on CCP and Bogleheads principles.

[PharmaStache]

WWID?

I'd maximize holdings to ensure DRIP values are high enough to reinvest without trading fees.  You didn't mention your intended ETF broker and if a trade will cost you $9.95 or not.

See attached - I've used my rebalance with your numbers, and included what I've learned so far as guiding principles.  I run this table with 10 accounts - yikes!  The -- show holdings I would not purchase.  The 0$ are future holdings for rebalancing purposes, although I would keep as few as possible (unlike my 10 accounts).



Disclaimer - 100% at your own risk.  I'm just learning about investing since Aug 2014.  Most of this is based on CCP and Bogleheads principles.

Wow, my own spreadsheet!  Thanks.  I appreciate your input.

[daverobev]

It basically doesn't matter as you'll lose withholding on Canadian domiciled, US holding (and other foreign) in both shelters.

I personally would go VTI for US, within the RRSP, because then there is no tax withheld by the US. Plus it's cheaper (lower MER). You want roughly $35k (CAD) in US, right? Do a one time Norbert's Gambit (depending on brokerage - CIBC IE you don't need to bother) to USD and put all that as VTI. That's RRSP1

TFSA1 - I'd go all XEF or ZEA. Better than Vanguard's offering, IMHO.

RRSP2 all VAB if you want that much; arguably, sheltering tax on 2.5% or whatever bonds yield is not worth it, and that space should be used for stocks.

Now, you have to also remember $1 in an RRSP is 'worth less' than a dollar in a TFSA because you will probably pay tax on it. Even if you'll only pay 10% or so (ie, some is withdrawn as part of your personal allowance). You need to guesstimate that. So if you want a strict 25% *4 you need to factor that in to your alloc...

[morning owl]

It basically doesn't matter as you'll lose withholding on Canadian domiciled, US holding (and other foreign) in both shelters.

I personally would go VTI for US, within the RRSP, because then there is no tax withheld by the US. Plus it's cheaper (lower MER). You want roughly $35k (CAD) in US, right? Do a one time Norbert's Gambit (depending on brokerage - CIBC IE you don't need to bother) to USD and put all that as VTI. That's RRSP1

TFSA1 - I'd go all XEF or ZEA. Better than Vanguard's offering, IMHO.

RRSP2 all VAB if you want that much; arguably, sheltering tax on 2.5% or whatever bonds yield is not worth it, and that space should be used for stocks.

Now, you have to also remember $1 in an RRSP is 'worth less' than a dollar in a TFSA because you will probably pay tax on it. Even if you'll only pay 10% or so (ie, some is withdrawn as part of your personal allowance). You need to guesstimate that. So if you want a strict 25% *4 you need to factor that in to your alloc...

Can I ask why these ETFs are better than vanguard's? I was just about to get some VDU and VEE for my TFSA...

[daverobev]

ZEA and XEF are in the process of converting to holding the underlying stocks directly, rather than wrapping a US ETF. Which means one layer of taxation less.

[Heckler]

ZEA and XEF are in the process of converting to holding the underlying stocks directly, rather than wrapping a US ETF. Which means one layer of taxation less.

Where would I find evidence of this for XEF?  Link?

[daverobev]

ZEA and XEF are in the process of converting to holding the underlying stocks directly, rather than wrapping a US ETF. Which means one layer of taxation less.

Where would I find evidence of this for XEF?  Link?

http://www.blackrock.com/ca/individual/en/products/251421/

Look at holdings, then compare to XEC

http://www.blackrock.com/ca/individual/en/products/251423/ - holds 99.99% IEMG

[FI40]

ZEA and XEF are in the process of converting to holding the underlying stocks directly, rather than wrapping a US ETF. Which means one layer of taxation less.

This isn't necessarily true - check out CCP's writeup on that.

http://canadiancouchpotato.com/2014/09/12/foreign-withholding-taxes-in-international-equity-etfs/

[daverobev]

ZEA and XEF are in the process of converting to holding the underlying stocks directly, rather than wrapping a US ETF. Which means one layer of taxation less.

This isn't necessarily true - check out CCP's writeup on that.

http://canadiancouchpotato.com/2014/09/12/foreign-withholding-taxes-in-international-equity-etfs/

I think what the article says and what I said are the same. There is one layer less. If you hold XEF or ZEA, the US gets nothing - which IMHO is the correct amount for the US to get!

What percentage difference does it make? Well, again, the article says other governments than the US withhold LESS than the US' 15%. Even better - cut out the country that takes the largest chunk and has nothing to do with the wealth creation in the first place.

[FI40]

ZEA and XEF are in the process of converting to holding the underlying stocks directly, rather than wrapping a US ETF. Which means one layer of taxation less.

This isn't necessarily true - check out CCP's writeup on that.

http://canadiancouchpotato.com/2014/09/12/foreign-withholding-taxes-in-international-equity-etfs/

I think what the article says and what I said are the same. There is one layer less. If you hold XEF or ZEA, the US gets nothing - which IMHO is the correct amount for the US to get!

What percentage difference does it make? Well, again, the article says other governments than the US withhold LESS than the US' 15%. Even better - cut out the country that takes the largest chunk and has nothing to do with the wealth creation in the first place.

You are right. And rereading CCP's article, I don't understand his point about how it's not double taxation - it's worse than double taxation assuming the foreign country taxes less than 15%.

However the other point he makes (or vanguard makes it I guess) is a good one: it's unclear these tax advantages are worthwhile given the efficiency of holding the US version of the fund, which has lower management expenses due to economies of scale. Time will tell after we can compare these two funds side by side over a period of a year or two.

I'm actually in XEF myself, but it was only for tax-loss harvesting reasons - I was in VDU before. I got hit with the big reinvested cap gain distribution (didn't know it was coming) and pretty much undid my tax-loss harvest, bit of a fail there.