Author Topic: Critique our potential family asset allocation?  (Read 3079 times)

FrugalFan

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Critique our potential family asset allocation?
« on: June 09, 2015, 02:06:57 PM »
I've attached a potential allocation table (I wish I could make this visible in the post but can't figure out how to do that). The top row shows how much money is in each registered account plus the amount we can add to max out our contribution room (we have enough to max everything out currently sitting in savings). Does this plan make sense in terms of tax efficiency, and minimizing the number of accounts? I could achieve this with 7 accounts, which I figure will make rebalancing easier. We will have about 3 k per month to contribute, and we could contribute monthly or every few months with larger lump sums.

Currently, all of this money minus the cash is invested with an adviser. I plan on moving to index ETF's through Questrade. I haven't yet sorted out which indexes specifically. Things to note: we have an employer pension plan that uses up most of our RRSP contribution room, so our RRSP room is limited to less than 3K per year each. So I anticipate our taxable account having to hold more of our assets each year. What kind of problems will this cause with rebalancing? This also means that we could probably go more aggressive with these investments since our pension plan is pretty secure.

We both have good-paying secure jobs and hope to be FI in 10-15 years, though we may keep working part time at least until we are 55 to start receiving income from our pension plan (I'm 38 and he's 41).

We also have a family RESP and I am trying to figure out whether to do Questrade with four additional accounts for this or something a bit simpler like TD e-series with automatic withdrawals and yearly or so rebalancing.

I would appreciate any advice or input!
« Last Edit: June 09, 2015, 02:15:49 PM by Travelling Biologist »

FrugalFan

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Re: Critique our potential family asset allocation?
« Reply #1 on: June 09, 2015, 02:35:43 PM »
Hmmm, everything I've read suggests keeping fixed income in RRSP since it is taxed at the highest rate, but I've just read this article which makes sense to me:

http://business.financialpost.com/news/rethinking-asset-allocation

In this current interest environment, fixed income assets are only expected to yield 1-2% gains, whereas equities can gain more. So why should I let these low-yield assets use up all my precious tax-sheltered account space? Thoughts?

RichMoose

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Re: Critique our potential family asset allocation?
« Reply #2 on: June 09, 2015, 02:45:50 PM »
I would not put the bond allocation in a TFSA. It should be divided among the RRSP accounts, or if you want to use your taxable account you can go with HBB.TO, a highly tax efficient bond index that uses a swap contract with National Bank.

I can't remember how much you are saving per year, but with the new higher TFSA you may want to put both REIT and Canadian stocks in these accounts.

Kaspian

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Re: Critique our potential family asset allocation?
« Reply #3 on: June 09, 2015, 03:02:27 PM »
IMO it looks pretty damn perfect.  ...Like you've taken the advice of CCP and Garth Turner and melded them together.  I'd leave it alone.  Tinkering is something all of us interested in this sort of thing have to battle internally.

FrugalFan

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Re: Critique our potential family asset allocation?
« Reply #4 on: June 09, 2015, 05:56:49 PM »
IMO it looks pretty damn perfect.  ...Like you've taken the advice of CCP and Garth Turner and melded them together.  I'd leave it alone.  Tinkering is something all of us interested in this sort of thing have to battle internally.

Thanks! It was my first try so I figured there must be something that could be improved.

FrugalFan

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Re: Critique our potential family asset allocation?
« Reply #5 on: June 09, 2015, 06:03:29 PM »
I would not put the bond allocation in a TFSA. It should be divided among the RRSP accounts, or if you want to use your taxable account you can go with HBB.TO, a highly tax efficient bond index that uses a swap contract with National Bank.

I can't remember how much you are saving per year, but with the new higher TFSA you may want to put both REIT and Canadian stocks in these accounts.

Thanks! Why shouldn't bonds be in a TFSA? I thought it was important for US equities to be in RRSP to avoid the 15% withholding tax, so that is why I allocated a bunch to that. I could flip flop it so that bonds are in our joint taxable and Canadian equities are in his TFSA. I know Canadian equities are pretty tax efficient, but I don't know how I would go about calculating whether that would make more sense or not. Thank you for recommending HBB, I'll look into it.

RichMoose

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Re: Critique our potential family asset allocation?
« Reply #6 on: June 09, 2015, 10:09:58 PM »
I would not put the bond allocation in a TFSA. It should be divided among the RRSP accounts, or if you want to use your taxable account you can go with HBB.TO, a highly tax efficient bond index that uses a swap contract with National Bank.

I can't remember how much you are saving per year, but with the new higher TFSA you may want to put both REIT and Canadian stocks in these accounts.

Thanks! Why shouldn't bonds be in a TFSA? I thought it was important for US equities to be in RRSP to avoid the 15% withholding tax, so that is why I allocated a bunch to that. I could flip flop it so that bonds are in our joint taxable and Canadian equities are in his TFSA. I know Canadian equities are pretty tax efficient, but I don't know how I would go about calculating whether that would make more sense or not. Thank you for recommending HBB, I'll look into it.

Well it's just that TFSAs are never taxed on growth again, so it's a fantastic account for higher growth investments. Bonds are likely to have low returns in medium term so by investing bonds in a TFSA you are not going to get much growth.

Canadian stocks are quite tax efficient in your cash account, but not as tax efficient as a TFSA. You are better off paying no tax than a small amount of tax.

HBB.TO could be the best choice for bonds in a cash account because all returns are taxed as capital gains only (you don't get distributions such as interest income). Capital gains tax is very efficient and will be negligible on a 3-4% rate of return.

I would say the easiest way to decide where to put your Canadian stocks depends on your future income level and whether or not you are indexing. If you are investing in dividend paying common stocks and your income is low enough so result in negative tax rates on dividends then invest in the cash account. If not, put it in TFSA and use HBB.TO in cash account/ other bond index in RRSP.

As for your US stocks, are you investing via a US dollar RRSP. The withholding tax is only saved if you buy ETFs that are listed on New York exchanges. So if you are buying one like VFV.TO or VUN.TO you will still be paying the withholding tax.

FrugalFan

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Re: Critique our potential family asset allocation?
« Reply #7 on: June 10, 2015, 05:30:20 AM »

I would say the easiest way to decide where to put your Canadian stocks depends on your future income level and whether or not you are indexing. If you are investing in dividend paying common stocks and your income is low enough so result in negative tax rates on dividends then invest in the cash account. If not, put it in TFSA and use HBB.TO in cash account/ other bond index in RRSP.

As for your US stocks, are you investing via a US dollar RRSP. The withholding tax is only saved if you buy ETFs that are listed on New York exchanges. So if you are buying one like VFV.TO or VUN.TO you will still be paying the withholding tax.

Thank you so much, again! Where did you learn all this stuff? I am planing on indexing, and do you mean income post-retirement? Our income now is high, and we are aiming for 6k per month post retirement, so still quite high.

Yes, I realize that about the withholding tax. I was hoping to buy the US funds on the US stock exchange (can do this in Questrade). Do you think there is a drawback to this?

RichMoose

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Re: Critique our potential family asset allocation?
« Reply #8 on: June 11, 2015, 07:38:57 AM »
Yes I was referring to post-retirement income. If you can split the dividend income between both of you to even out the income ($3k each), then you should get a negative (or very low) tax rate on the dividends.

There's no drawback to that at all. Just use the DLR/DLR.U trick to move your money to USD at a low cost.

FrugalFan

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Re: Critique our potential family asset allocation?
« Reply #9 on: June 11, 2015, 08:37:53 AM »
Thank you! That is super helpful, as always. I didn't realize that even that level of income would be taxed favourably. I notice that some people specifically focus on dividend investing. I was thinking of focusing instead on typical index funds.