Author Topic: Am I rebalancing correctly (Canada)?  (Read 3864 times)

PharmaStache

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Am I rebalancing correctly (Canada)?
« on: June 27, 2016, 09:44:27 AM »
I am in the process of moving our investments from Tangerine to Questrade (VAB 25%, VXC 50%, VCN 25%).  We have a relatively small amount in our RRSPs as most of our room is eaten up by pension adjustments.  We could add around 2k each per year to our RRSPs, along with regular TFSA contributions (5.5k each a year, plus extra because we are catching up on our contributions). RRSPs will contain VAB and VXC, and TFSA will contain VXC and VCN. 


My plan is to rebalance VXC and VCN as I buy for our TFSAs throughout the year.  Since I donít want to buy VAB in the TFSA, my only opportunity to buy it is the once yearly RRSP contribution of around 2k for each of us.  I assume this will not be enough, and will leave me with less than 25% bonds for most of the year. 


Would it be correct to just let my bond allocation be off for most of the year, and then just sell VXC and buy VAB in our RRSPs once a year to rebalance to the proper allocations?  Is yearly sufficient, or should it be done more often?  I suppose if it really got out of whack (like10% off) I could fix the allocation more often.

Glad I donít have any non-registered investments yet, or this could get even more complicated!

Kaspian

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Re: Am I rebalancing correctly (Canada)?
« Reply #1 on: June 27, 2016, 11:11:22 AM »
My plan is to rebalance VXC and VCN as I buy for our TFSAs throughout the year.

I wouldn't bother doing that.  I understand the temptation, but set it on auto amounts/percentages and forget about it unless things get extremely out of whack.

Since I don’t want to buy VAB in the TFSA...

Why not?  As per CCP, if you're only using your RRSPs and TFSAs at the moment, it doesn't really matter too much where you put anything.  Any taxes that happen within those accounts are basically negligible.  (Especially compared with the cost of tinkering too much.)


Would it be correct to just let my bond allocation be off for most of the year, and then just sell VXC and buy VAB in our RRSPs once a year to rebalance to the proper allocations?

Nope, I wouldn't do that.  Very often you could find yourself in a situation where you had to sell your equities low in order to buy bonds high.  You're supposed to be using the over-performer's profits to support the under one and there's too big a chance it would work in reverse for you.

  Is yearly sufficient, or should it be done more often?  I suppose if it really got out of whack (like10% off) I could fix the allocation more often.

Yearly's good.  But set a specific date to do it annually and don't just choose arbitrarily because it looks like a good time to do it at the moment--use the same date every year.

Glad I don’t have any non-registered investments yet, or this could get even more complicated!

It does.  And unfortunately a lot of people screw up their portfolio too much trying to dodge taxes (on income or capital gains) whereas they'd be better off if they set it up as close as possible, left it alone, didn't sweat the fine details, and realized that sometimes you have to pay the government piper if you want to make money.

Retire-Canada

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Re: Am I rebalancing correctly (Canada)?
« Reply #2 on: June 27, 2016, 11:44:07 AM »
Why not?  As per CCP, if you're only using your RRSPs and TFSAs at the moment, it doesn't really matter too much where you put anything.  Any taxes that happen within those accounts are basically negligible.  (Especially compared with the cost of tinkering too much.)

RRSP accounts are only tax deferred not tax free so the implications of what investments you hold in those accounts may not be a problem today, but at some point when you have to withdraw your money and pay taxes on them it will matter whether you held bonds vs. equities in that account vs. your TFSA.

In terms of re-balancing dealing with it once a year is fine.

Kaspian

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Re: Am I rebalancing correctly (Canada)?
« Reply #3 on: June 28, 2016, 12:05:50 AM »
RRSP accounts are only tax deferred not tax free so the implications of what investments you hold in those accounts may not be a problem today, but at some point when you have to withdraw your money and pay taxes on them it will matter whether you held bonds vs. equities in that account vs. your TFSA.

How do you figure that?  Yes, of course you pay tax on whatever you take out an RRSP, taxed at your marginal rate, but all the gains made from trades/reblancing/dividends over the years become part of the whole pile.   It doesn't matter what type of money/investment you take out of an RRSP, it all gets taxed the same.  Are you saying you want to put the equities in the TFSA so that acccount has the better chance of growth? 

Retire-Canada

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Re: Am I rebalancing correctly (Canada)?
« Reply #4 on: June 28, 2016, 09:03:02 AM »
Are you saying you want to put the equities in the TFSA so that acccount has the better chance of growth?

Definitely. Not only is the money withdrawn from the TFSA tax free, but it doesn't count towards any income tested Gov't benefits. If you lose benefits you could have had that's essentially another layer of taxation.

Assume you have two asset classes in your portfolio. One gets an average of 7% after inflation and one gets 2% after inflation. You put in $5000 into both asset classes and you hold them 20yrs. At the end of that time you have $19,348 and $9,030 respectively. Which asset class would you prefer to pay no tax on and which would you prefer to pay deferred taxes as income at your marginal tax rate?

The true benefit of the RRSP is the difference in marginal tax rates between the time you put the money in and take the money out. Keep in mind that you pay for all RRSP withdrawals as income even if they would have been treated with lower tax rates if they were held elsewhere [qualified CDN dividends and capital gains in a non-reg account for example] so putting slow growing bonds whose returns would have been taxed as income anyways in your RRSP makes sense.
« Last Edit: June 28, 2016, 09:07:45 AM by Retire-Canada »

Kaspian

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Re: Am I rebalancing correctly (Canada)?
« Reply #5 on: June 28, 2016, 09:27:34 AM »
CCP still advocates bonds in the TFSA and International equities/bonds in the RRSP.  I understand holding all equities in your TFSA for growth (as Garth Turner advocates), but I'm going to stick with Dan Bortolotti on this one (at least for awhile):

http://canadiancouchpotato.com/2013/10/30/making-smarter-asset-location-decisions/

From the comments section of the above article:

" Canadian Couch Potato August 16, 2014 at 8:19 pm #
@Dave: If your portfolio is all in RRSPs and TFSAs and youíre using Canadian mutual funds or ETFs then asset location is really not a significant concern."


Depending on the size of the OP's portfolio, all of this might be semantics and might not matter very much at this point.  You can always do sells/buys at later dates within your two accounts in order to adjust where your assets are located.

Retire-Canada

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Re: Am I rebalancing correctly (Canada)?
« Reply #6 on: June 28, 2016, 11:27:28 AM »
Quote
@Ed: There are no Canadian equities in the RRSP: they are in the non-registered account. But that said, yes, you can certainly make a good argument for keeping low-growth bonds in the RRSP and high-growth equities in a TFSA.

Just go a little deeper in the comments and you get this ^^^ comment from CCP.

Ultimately my point in this thread is that the OP's desire to put bonds in his RRSP makes sense and the assertion that holding different asset classes in the TFSA VS. a RRSP makes no difference is not true.

talltexan

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Re: Am I rebalancing correctly (Canada)?
« Reply #7 on: June 29, 2016, 08:27:23 AM »
Part of smart rebalancing is picking a date in advance rather than doing it when you think there's a nice spread. I've heard of people picking their birthdays.

daverobev

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Re: Am I rebalancing correctly (Canada)?
« Reply #8 on: June 29, 2016, 09:10:06 AM »
Quote
@Ed: There are no Canadian equities in the RRSP: they are in the non-registered account. But that said, yes, you can certainly make a good argument for keeping low-growth bonds in the RRSP and high-growth equities in a TFSA.

Just go a little deeper in the comments and you get this ^^^ comment from CCP.

Ultimately my point in this thread is that the OP's desire to put bonds in his RRSP makes sense and the assertion that holding different asset classes in the TFSA VS. a RRSP makes no difference is not true.

This is akin to stock picking. Will bonds to worse than equities over the next x years? If so, don't buy bonds. If bonds *might* do better, you should split between the vehicles.

PharmaStache

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Re: Am I rebalancing correctly (Canada)?
« Reply #9 on: June 30, 2016, 11:50:43 AM »
I like the idea of picking a date each year to rebalance (like my birthday).  Good suggestion! 

Retire-Canada

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Re: Am I rebalancing correctly (Canada)?
« Reply #10 on: June 30, 2016, 01:00:32 PM »
This is akin to stock picking. Will bonds to worse than equities over the next x years? If so, don't buy bonds. If bonds *might* do better, you should split between the vehicles.

The rationale for buying bonds isn't maximising return. If so your comment would make sense. The reason for buying bonds is diversification and non-correlation of returns to reduce volatility.

If you look at the CPP model portfolios the ratio of bonds to stocks changes with the shift of risk tolerance.

daverobev

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Re: Am I rebalancing correctly (Canada)?
« Reply #11 on: July 01, 2016, 11:14:28 AM »
This is akin to stock picking. Will bonds to worse than equities over the next x years? If so, don't buy bonds. If bonds *might* do better, you should split between the vehicles.

The rationale for buying bonds isn't maximising return. If so your comment would make sense. The reason for buying bonds is diversification and non-correlation of returns to reduce volatility.

If you look at the CPP model portfolios the ratio of bonds to stocks changes with the shift of risk tolerance.

You missed my point. Putting something you believe to be lower growth in a certain vehicle rather than splitting it across unregistered accounts is making a bet on what will grow more or less.

Retire-Canada

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Re: Am I rebalancing correctly (Canada)?
« Reply #12 on: September 27, 2016, 04:07:04 PM »
You missed my point. Putting something you believe to be lower growth in a certain vehicle rather than splitting it across unregistered accounts is making a bet on what will grow more or less.

I got your point. I just disagree. I don't think there is any betting going when deciding which will grow more over the long-term between stocks and bonds. All the data points to stocks.

K-ice

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Re: Am I rebalancing correctly (Canada)?
« Reply #13 on: September 27, 2016, 11:05:35 PM »
All my VAB is in my RRSP.

Remember allocation is more important than Location.

So if you fill your RRSP with VAB & you still haven't reached your allocation % than you need to buy more somewhere else.


talltexan

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Re: Am I rebalancing correctly (Canada)?
« Reply #14 on: September 28, 2016, 09:21:19 AM »
as far as picking a date to rebalance, I'd pick your birthday. Unless your birthday is May 31, June 30, Sep 30, or Dec. 31. It's good not to be right at a quarter-end so you're zigging while the market is zagging.

Space Pickle

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Re: Am I rebalancing correctly (Canada)?
« Reply #15 on: September 28, 2016, 07:51:09 PM »
Why is it bad to put stocks in your RRSP? Because they might grow too valuable and bump up your tax rate upon withdrawl?

K-ice

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Re: Am I rebalancing correctly (Canada)?
« Reply #16 on: September 28, 2016, 09:25:35 PM »
^^^^

Basically yes. It's more likely the Stocks will grow more than the Bonds. So better to file them away in the best "location" possible.

Canadian divided stocks do get well treated in taxable accounts. 

My first picks are:

VAB in RRSP
VXC in TFSA
Canadian divided stocks & VDY in taxable once the others are full.

I have heard VTI in US dollars is good in an RRSP but for the moment I don't want to bother with the conversion.

My bond allocation was full & I still had room in my RRSP so I have some VXC in there too.


daverobev

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Re: Am I rebalancing correctly (Canada)?
« Reply #17 on: September 28, 2016, 09:45:45 PM »
You should put bonds unregistered. Canadian dividends sure, but you effectively pay no tax on dividends or capital gain in an rrsp. That is completely wasted on bonds that will only return a couple of percent.

You WANT the value of your registered accounts to grow, both rrsp and tfsa.

If you have anything unregistered, it should be bonds. If you have nothing unregistered, it's moot.

Retire-Canada

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Re: Am I rebalancing correctly (Canada)?
« Reply #18 on: September 29, 2016, 06:38:01 AM »
You should put bonds unregistered. Canadian dividends sure, but you effectively pay no tax on dividends or capital gain in an rrsp. That is completely wasted on bonds that will only return a couple of percent.

You only defer the taxes. You do pay them upon withdrawal. If you replaced RRSP above with TFSA you would be correct.

daverobev

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Re: Am I rebalancing correctly (Canada)?
« Reply #19 on: September 29, 2016, 01:21:06 PM »
You should put bonds unregistered. Canadian dividends sure, but you effectively pay no tax on dividends or capital gain in an rrsp. That is completely wasted on bonds that will only return a couple of percent.

You only defer the taxes. You do pay them upon withdrawal. If you replaced RRSP above with TFSA you would be correct.

You pay income tax. You don't pay cap gains/div tax.

Assuming your tax rate is the same going in and coming out, TFSA == RRSP.

Say 50% rate just for simplicity:

$100k earned;

RRSP = $100k
TFSA = $50k

cap gains and divis reinvested doubles your money over time

RRSP = $200k
TFSA = $100k

Take money out, taxed at 50%:

RRSP withdrawn available to you: $100k

TFSA $100k.

It's a tie.

dess1313

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Re: Am I rebalancing correctly (Canada)?
« Reply #20 on: October 04, 2016, 10:00:18 PM »
following!  fellow canadian here!

rocketpj

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Re: Am I rebalancing correctly (Canada)?
« Reply #21 on: October 05, 2016, 01:36:01 AM »
You should put bonds unregistered. Canadian dividends sure, but you effectively pay no tax on dividends or capital gain in an rrsp. That is completely wasted on bonds that will only return a couple of percent.

You only defer the taxes. You do pay them upon withdrawal. If you replaced RRSP above with TFSA you would be correct.

You pay income tax. You don't pay cap gains/div tax.

Assuming your tax rate is the same going in and coming out, TFSA == RRSP.

Say 50% rate just for simplicity:

$100k earned;

RRSP = $100k
TFSA = $50k

cap gains and divis reinvested doubles your money over time

RRSP = $200k
TFSA = $100k

Take money out, taxed at 50%:

RRSP withdrawn available to you: $100k

TFSA $100k.

It's a tie.

Not a great assumption, since most of us expect to have a lower income when we are spending our stashes, and thus a lower tax rate.