Author Topic: How to rebalance a maxed out TFSA?  (Read 8467 times)

moustacheverte

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How to rebalance a maxed out TFSA?
« on: September 15, 2015, 04:52:42 AM »
Hi,

My TFSA is maxed out but I realized I would pay slightly less taxes if I held bonds in my TFSA and stocks out of it because bonds are taxed higher than stocks. I would keep my overall allocation the same.

How can I transfer some of my stocks to bonds inside my TFSA without going over? Also, I am holding TD eSeries index funds. They have a fee if you sell them after holding them less than a month. I buy some every month, how do they sell when you order to sell part? Do they sell the oldest and you avoid the fee or do they sell the most recent shares and hit you with a fee?

Thanks,

Retire-Canada

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Re: How to rebalance a maxed out TFSA?
« Reply #1 on: September 15, 2015, 06:59:13 AM »
Hi,

My TFSA is maxed out but I realized I would pay slightly less taxes if I held bonds in my TFSA and stocks out of it because bonds are taxed higher than stocks. I would keep my overall allocation the same.

Your TFSA account is maxed in the sense you can't contribute any more this year. You can still do whatever you like inside the account. If you want to sell some stocks do it. That will end up with some cash in your TFSA which you will use to buy bonds or other stocks as you wish. As long as you don't take the money out of the TFSA account there is no problem.

On the tax side of things keep in mind that you will never pay tax on your TFSA investments. So while bonds would give you a smaller tax bill today if your stocks grow a lot which you hope they will over time you won't have to pay tax on that capital gains unlike if you hold stocks in your RRSP or taxable accounts. Your TFSA withdrawals also do not count towards income tested benefits in retirement. So I'm not sure you are further ahead to switch to bonds in your TFSA.

Personally I keep my bonds in my RRSP since all $$ from that account get taxed as income and my TFSA is all equities.

There is also a bond ETF [forgot the code] that does not return any dividends and only appreciates in price so you are taxed on the capital gains only when you sell at a later date. That's good option for holding bonds in a taxable account.

I'm no tax expert so take my thoughts with a grain of salt.
« Last Edit: September 15, 2015, 07:10:02 AM by Vikb »

Le Barbu

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Re: How to rebalance a maxed out TFSA?
« Reply #2 on: September 15, 2015, 07:36:14 AM »
I think Vikb may think about BXF wich is a decent option for bonds outside tax sheltered accounts (read Canadian Couch Potato on this topic)

Tax advantages are often incitatives to take risk where you would not (counter-intuitive). Everyone would like to have their short term and easy to acces investings with "safe" things while taking risk with long term (and often more complicated to acces) ones. That's my view tough...

Do you really need bonds at all? Is all of your tax shelter maxed out (RRSP, RESP, TFSA)? I diched my bonds 3 years ago and never looked back**. No more "rebalancing" etc. I even get my A.A. over multiple accounts to get less holdings: my RRSP holds US and international stocks, DW RRSP's holds Canadian, US and International stocks, RESP and TFSAs hold Canadian stocks only. Total of 8 positions over 4 accounts. About 4-7 transaction/year, never sell or rebalance.

**my plan is to re-introduce short-term bonds for 10-15% when total investments will be over 1M$, probably held in RRSP, bought with dividends and new contributions.

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Re: How to rebalance a maxed out TFSA?
« Reply #3 on: September 15, 2015, 06:49:13 PM »
I also, use the e-series.  In your Easyweb, in the investment tabs, go to switch funds, fill out the form and voila!  No tax implications as no money is leaving the TFSA 'vehicle'. 

I believe the OP is looking to switch to mostly bonds inside the TFSA as in Canada, bond income is tax at 100% your marginal rate. Canadian Dividends are only taxed at half your marginal rate (Given approx 25% dividend tax credit, depending on province).  Bear in mind that Canada and USA have no tax treaty involving the TFSA, so any US equities (including US Mutual Funds) will have their dividends subject to a withholding tax (15% I believe).

From what I can gather, the ideal situation for Canadians would be to hold income bearing holdings in a TFSA, US and international Equities in an RRSP and Canadian equities in a taxable account.  Always try to use up tax advantaged accounts before non registered however.

tyir

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Re: How to rebalance a maxed out TFSA?
« Reply #4 on: September 15, 2015, 07:14:18 PM »

johnny847

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Re: How to rebalance a maxed out TFSA?
« Reply #5 on: September 15, 2015, 07:27:30 PM »
I also, use the e-series.  In your Easyweb, in the investment tabs, go to switch funds, fill out the form and voila!  No tax implications as no money is leaving the TFSA 'vehicle'. 

I believe the OP is looking to switch to mostly bonds inside the TFSA as in Canada, bond income is tax at 100% your marginal rate. Canadian Dividends are only taxed at half your marginal rate (Given approx 25% dividend tax credit, depending on province).  Bear in mind that Canada and USA have no tax treaty involving the TFSA, so any US equities (including US Mutual Funds) will have their dividends subject to a withholding tax (15% I believe).

From what I can gather, the ideal situation for Canadians would be to hold income bearing holdings in a TFSA, US and international Equities in an RRSP and Canadian equities in a taxable account.  Always try to use up tax advantaged accounts before non registered however.

I assume both tfsa and rrsp are tax advantaged - one is Roth like and one is traditional like .

In that case there is no need to favor bonds in tfsa over rrsp .
Seehttp://www.bogleheads.org/wiki/Tax-adjusted_asset_allocation

nobodyspecial

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Re: How to rebalance a maxed out TFSA?
« Reply #6 on: September 15, 2015, 10:19:15 PM »
I assume both tfsa and rrsp are tax advantaged - one is Roth like and one is traditional like .
TFSA is tax free on any profits, but you put in after-tax money.
RRSP is profits are taxed as income, but contributions are tax-refunded.

Retire-Canada

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Re: How to rebalance a maxed out TFSA?
« Reply #7 on: September 16, 2015, 07:06:23 AM »
I also, use the e-series.  In your Easyweb, in the investment tabs, go to switch funds, fill out the form and voila!  No tax implications as no money is leaving the TFSA 'vehicle'. 

I believe the OP is looking to switch to mostly bonds inside the TFSA as in Canada, bond income is tax at 100% your marginal rate. Canadian Dividends are only taxed at half your marginal rate (Given approx 25% dividend tax credit, depending on province).  Bear in mind that Canada and USA have no tax treaty involving the TFSA, so any US equities (including US Mutual Funds) will have their dividends subject to a withholding tax (15% I believe).

From what I can gather, the ideal situation for Canadians would be to hold income bearing holdings in a TFSA, US and international Equities in an RRSP and Canadian equities in a taxable account.  Always try to use up tax advantaged accounts before non registered however.

Aside from the tax rate you also have to consider the actual value of the taxes owed. Equities should grow strongly and by putting them in your RRSP you'll pay for your capital gains and dividends as deferred income at your full marginal tax rate. Putting them in your TFSA you never pay taxes on the growth or the dividends.

Keep in mind the tax treaty benefits only is accrued if you hold US investments directly in a US vehicle. If you hold VTI in USD you see a small benefit holding it in your RRSP, but you have to convert to USD each contribution. If you hold the equivalent investments in CDN through VUN it doesn't benefit you to hold them in your RRSP there is no tax treaty advantage.

Each person has to wargame their own tax situation to understand the best options for them. I just wouldn't overlook the opportunity cost of not using the TFSA for your highest growth investments.

Retire-Canada

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K-ice

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Re: How to rebalance a maxed out TFSA?
« Reply #9 on: September 16, 2015, 07:40:13 AM »
I have asked a similar question before and found this to help.

http://www.moneysense.ca/taxes/making-smarter-asset-location-decisions

http://canadiancouchpotato.com/2010/03/05/put-your-assets-in-their-place/

general, if you need to hold investments in non-registered accounts, Canadian equities are the best choice, followed by US equities, and then international equities.

it is usually best to keep the low-growth assets (bonds) in the RRSP and the high-growth assets (equities) in the TFSA

To answer your specific question as long as you keep your investments "over the TFSA wall" you can buy & sell whatever you want. You could even be a day trader inside your TFSA, but watch out for fees.

If you want to get the stocks out of the TFSA and some other investment into the TFSA you may look at an "in kind" transfer. Your bank may help you make an inkind transfer out of the TFSA in late December. You can then inkind transfer bonds  (from a non registered account) into your TFSA in early January.
From a fees point of view this may be better than buying and selling. Having to wait a few days to fill your TFSA back up is a pain.

However, after reading those articles, and the tips from everyone above, you may chose to do nothing.




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Re: How to rebalance a maxed out TFSA?
« Reply #10 on: September 16, 2015, 07:51:23 AM »
it is usually best to keep the low-growth assets (bonds) in the RRSP and the high-growth assets (equities) in the TFSA

This is a fallacy. Unless you pay zero in taxes on all of your withdrawals from the RRSP and the TFSA, all you're doing by moving assets around like that is overweighting your stocks and underweighting your bonds after taking into account taxes.

http://www.bogleheads.org/wiki/Tax-adjusted_asset_allocation

Retire-Canada

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Re: How to rebalance a maxed out TFSA?
« Reply #11 on: September 16, 2015, 08:47:04 AM »
This is a fallacy. Unless you pay zero in taxes on all of your withdrawals from the RRSP and the TFSA, all you're doing by moving assets around like that is overweighting your stocks and underweighting your bonds after taking into account taxes.

http://www.bogleheads.org/wiki/Tax-adjusted_asset_allocation

You are confusing optimizing taxes with asset allocation planning. Even if you kept all your bonds in RRSP as K-Ice suggests you can still weight your bond % of your AA to achieve the correct after-tax asset allocation. That the BH link talks about.

The TFSA is speical in that you are never taxed on funds in that account, there are no mandatory withdrawals and withdrawals do not affect income tested benefits when you retire so I'd agree with K-Ice that high growth investments make a lot of sense in the TFSA.

johnny847

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Re: How to rebalance a maxed out TFSA?
« Reply #12 on: September 16, 2015, 08:50:12 AM »
This is a fallacy. Unless you pay zero in taxes on all of your withdrawals from the RRSP and the TFSA, all you're doing by moving assets around like that is overweighting your stocks and underweighting your bonds after taking into account taxes.

http://www.bogleheads.org/wiki/Tax-adjusted_asset_allocation

You are confusing optimizing taxes with asset allocation planning. Even if you kept all your bonds in RRSP as K-Ice suggests you can still weight your bond % of your AA to achieve the correct after-tax asset allocation. That the BH link talks about.

The TFSA is speical in that you are never taxed on funds in that account, there are no mandatory withdrawals and withdrawals do not affect income tested benefits when you retire so I'd agree with K-Ice that high growth investments make a lot of sense in the TFSA.

No. You still don't understand what tax adjusted asset allocation is. Any time you're favoring one tax advantaged bucket over another for a specific asset class, you're not getting the risk in your after tax portfolio that you intended. Go read the link again. Or go read my recent post on this.

Retire-Canada

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Re: How to rebalance a maxed out TFSA?
« Reply #13 on: September 16, 2015, 09:33:02 AM »

No. You still don't understand what tax adjusted asset allocation is. Any time you're favoring one tax advantaged bucket over another for a specific asset class, you're not getting the risk in your after tax portfolio that you intended. Go read the link again. Or go read my recent post on this.

No I understand.

- You can model the tax effects on your AA and adjust for them based on what you expect to pay upon withdrawal.

- You can duplicated your AA precisely in every account that has a different tax treatment.

- You can ignore these effects because you don't care about them or you think they are small enough they don't matter.

You are just focusing on the AA risk and ignoring the value of taxes paid.

If you want to hold bonds only in your tax deferred account [RRSP] and equities only in your tax free account [TFSA] you can do that and simply adjust your AA to reflect your estimation of your after tax value for each asset class.

johnny847

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Re: How to rebalance a maxed out TFSA?
« Reply #14 on: September 16, 2015, 10:19:39 AM »

No. You still don't understand what tax adjusted asset allocation is. Any time you're favoring one tax advantaged bucket over another for a specific asset class, you're not getting the risk in your after tax portfolio that you intended. Go read the link again. Or go read my recent post on this.

No I understand.

- You can model the tax effects on your AA and adjust for them based on what you expect to pay upon withdrawal.

- You can duplicated your AA precisely in every account that has a different tax treatment.

- You can ignore these effects because you don't care about them or you think they are small enough they don't matter.

You are just focusing on the AA risk and ignoring the value of taxes paid.

If you want to hold bonds only in your tax deferred account [RRSP] and equities only in your tax free account [TFSA] you can do that and simply adjust your AA to reflect your estimation of your after tax value for each asset class.


I agree. But what I'm saying is there is no reason to favor bonds in your RRSP and stocks in your TFSA. It doesn't matter which of the two in which you hold your bonds and stocks. You can just tax adjust appropriately.

K-ice

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Re: How to rebalance a maxed out TFSA?
« Reply #15 on: September 16, 2015, 12:54:20 PM »
I still think you are better to hold bonds in the RRSP and stocks in the TFSA.  One will need to overflow into the other depending on your AA and contribution room in each.

I ran a small calculation I hope this helps.

Let's say you have 40K TFSA room and 80K RRSP
You want an asset allocation of 50:50
Assume stocks make 7%
Assume bonds make 3%
Invest for 20y, no additions, no fees, no rebalancing (lots of assumptions but I want to keep it simple)
Assume RRSP pays 35% tax when withdrawn all at once after 20y
There is ZERO tax on the TFSA withdrawls. (Yes this can always change with legislature.)


Case 1 even 50:50 in each
20K stocks in TFSA
20K bonds in TFSA
40K stocks in RRSP
40K bonds in RRSP

TFSA grows to $113515
RRSP grows to $208544
RRSP after tax $135553

Total after tax  $249069

Case 2  max stocks in TFSA
40K stocks in TFSA
 0K bonds in TFSA
20K stocks in RRSP
60K bonds in RRSP

TFSA grows to $154787
RRSP grows to $158028
RRSP after tax $102718

Total after tax $257506


Case 3  max bonds in TFSA
 0K stocks in TFSA
40K bonds in TFSA
60K stocks in RRSP
20K bonds in RRSP

TFSA grows to $72244
RRSP grows to $259059
RRSP after tax $168388

Total after tax  $240633

So I think using this scenario and my assumptions the Case 2 is the winner over an even spread or max bonds in the TFSA.  The difference is about $17K.

Future growth is hard to predict and plays a large role in the calculations. But I think 3% and 7% is reasonable.  If  stocks gain 10% and bonds 3% the spread is of course greater at $56K.

Note that this ignores any dividends, or dividend tax credit you may get from stocks in an unregistered account. It also ignores that US taxes that are exempt on US stocks in an RRPS.


From johnny847  "The point is by doing so you're overweighting stocks and underweighting bonds on a tax adjusted basis, and thereby taking more risk than you intended."

I agree with this.  Lets check... My Case 2 that started out 50:50 with only stocks in the RRSP and All bonds and some stocks in the RRSP. It grew to have an AA of stocks to bonds of 75:25 before tax and 80:20 after tax. 

Doing a similar check on Case 1 and 3 the AA after tax was still out of whack 75:25.

So some rebalancing is necessary and it looks like this needs to be done by converting all of the RRSP to bonds over time and even converting some of the TFSA stocks into bonds.


Is 35% tax reasonable?  Increasing the tax rate makes the AA even worse but it makes the income generated from Case 2 even better.


So I still think you should hold as much of your higher "potential" income investments in the TFSA.
(At least until someone is elected and changes the ZERO tax.)



johnny847

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Re: How to rebalance a maxed out TFSA?
« Reply #16 on: September 16, 2015, 01:00:27 PM »
I still think you are better to hold bonds in the RRSP and stocks in the TFSA.  One will need to overflow into the other depending on your AA and contribution room in each.

I ran a small calculation I hope this helps.

Let's say you have 40K TFSA room and 80K RRSP
You want an asset allocation of 50:50
Assume stocks make 7%
Assume bonds make 3%
Invest for 20y, no additions, no fees, no rebalancing (lots of assumptions but I want to keep it simple)
Assume RRSP pays 35% tax when withdrawn all at once after 20y
There is ZERO tax on the TFSA withdrawls. (Yes this can always change with legislature.)


Case 1 even 50:50 in each
20K stocks in TFSA
20K bonds in TFSA
40K stocks in RRSP
40K bonds in RRSP

TFSA grows to $113515
RRSP grows to $208544
RRSP after tax $135553

Total after tax  $249069

Case 2  max stocks in TFSA
40K stocks in TFSA
 0K bonds in TFSA
20K stocks in RRSP
60K bonds in RRSP

TFSA grows to $154787
RRSP grows to $158028
RRSP after tax $102718

Total after tax $257506


Case 3  max bonds in TFSA
 0K stocks in TFSA
40K bonds in TFSA
60K stocks in RRSP
20K bonds in RRSP

TFSA grows to $72244
RRSP grows to $259059
RRSP after tax $168388

Total after tax  $240633

So I think using this scenario and my assumptions the Case 2 is the winner over an even spread or max bonds in the TFSA.  The difference is about $17K.

Future growth is hard to predict and plays a large role in the calculations. But I think 3% and 7% is reasonable.  If  stocks gain 10% and bonds 3% the spread is of course greater at $56K.

Note that this ignores any dividends, or dividend tax credit you may get from stocks in an unregistered account. It also ignores that US taxes that are exempt on US stocks in an RRPS.


From johnny847  "The point is by doing so you're overweighting stocks and underweighting bonds on a tax adjusted basis, and thereby taking more risk than you intended."

I agree with this.  Lets check... My Case 2 that started out 50:50 with only stocks in the RRSP and All bonds and some stocks in the RRSP. It grew to have an AA of stocks to bonds of 75:25 before tax and 80:20 after tax. 

Doing a similar check on Case 1 and 3 the AA after tax was still out of whack 75:25.

So some rebalancing is necessary and it looks like this needs to be done by converting all of the RRSP to bonds over time and even converting some of the TFSA stocks into bonds.


Is 35% tax reasonable?  Increasing the tax rate makes the AA even worse but it makes the income generated from Case 2 even better.


So I still think you should hold as much of your higher "potential" income investments in the TFSA.
(At least until someone is elected and changes the ZERO tax.)

Seattlecyclone helped me see that you do want to favor stocks in one and bonds in the other, because your tax rate is not a constant. It's dependent on the composition of your portfolio - how much is in the RRSP and how much is in the TFSA. If you have a lot of money in the TFSA, you can withdraw all of that tax free, thereby lowering your overall tax rate in retirement.

But yeah we both agree, you end up with more risk when you don't tax adjust.

Kaspian

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Re: How to rebalance a maxed out TFSA?
« Reply #17 on: September 16, 2015, 02:21:12 PM »
I also, use the e-series.  In your Easyweb, in the investment tabs, go to switch funds, fill out the form and voila!  No tax implications as no money is leaving the TFSA 'vehicle'. 

^^ What he said.  Just use the "Switch Mutual Funds" option.  I've never incurred a fee when I rebalanced if something was recently bought on the auto "Pre-Authorized Purchase Plan".  And yes, the dividends from bonds are fully taxable outside the shelters.

As per Canadian Couch Potato:

RRSP:  International Indexes, then bonds  (if room left), then American (if room left)
TFSA: Bonds
Non-Registered:  Canadian, American

His chart is easy:  http://canadiancouchpotato.com/2013/10/30/making-smarter-asset-location-decisions/
« Last Edit: September 16, 2015, 02:24:19 PM by Kaspian »

Retire-Canada

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Re: How to rebalance a maxed out TFSA?
« Reply #18 on: September 16, 2015, 02:47:45 PM »
I also, use the e-series.  In your Easyweb, in the investment tabs, go to switch funds, fill out the form and voila!  No tax implications as no money is leaving the TFSA 'vehicle'. 

^^ What he said.  Just use the "Switch Mutual Funds" option.  I've never incurred a fee when I rebalanced if something was recently bought on the auto "Pre-Authorized Purchase Plan".  And yes, the dividends from bonds are fully taxable outside the shelters.

As per Canadian Couch Potato:

RRSP:  International Indexes, then bonds  (if room left), then American (if room left)
TFSA: Bonds
Non-Registered:  Canadian, American

His chart is easy:  http://canadiancouchpotato.com/2013/10/30/making-smarter-asset-location-decisions/

If you read further into the comments of that link:

Quote
Ed February 21, 2015 at 1:09 pm #
I’m curious why you have bonds in the TFSA and all the Cdn equities in the RRSP. If equities are expected to provide a greater return over the long haul, would it not makes sense to place them in the TFSA where the growth won’t be taxed and keep the more conservative bond investment in the RRSP?

Thanks,
-Ed


Quote
Canadian Couch Potato February 21, 2015 at 2:34 pm #
@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. But in this example (and in many investors’ portfolios) that TFSA room gets filled up pretty quickly.

My point here was simply to show that asset location can be dynamic: it often makes sense to sell an asset class in one account and buy it back in another as a portfolio grows.

Kaspian

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Re: How to rebalance a maxed out TFSA?
« Reply #19 on: September 18, 2015, 11:34:12 AM »
Quote
Canadian Couch Potato February 21, 2015 at 2:34 pm #
@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. But in this example (and in many investors’ portfolios) that TFSA room gets filled up pretty quickly.

My point here was simply to show that asset location can be dynamic: it often makes sense to sell an asset class in one account and buy it back in another as a portfolio grows.

In a year where equities did 15%, sure--it'd be a good place to have them, but recency isn't the norm.  I think Dan was just bowing to what's been going on lately.  Dividends from bonds are fully taxable while dividends/trading from Canadian equities are only taxable at half the marginal rate (I believe.)  As bonds compound like crazy over time (the eSeries pay out monthly), and their returns have almost nowhere to go but up with rates, having them in any sort of taxable account could become a huge issue.  At this point, I'd rather take the small hit for rebalancing equities in my non-registered over paying full taxes on my bond allocation.  ...Been there two years ago, done that, and it ain't pretty.  But yeah, I agree with your point.  I guess it depends on the size of your portfolio and how well markets did in a given year.  If equities continue to flop around the way they have this year (i.e., the growth is mostly negligible) I'll probably just do the rebalancing in my TFSA rather than selling in the non-registered and buying in the TFSA.

Stasher

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Re: How to rebalance a maxed out TFSA?
« Reply #20 on: September 18, 2015, 03:33:42 PM »
Stick with simple....
I'm pretty sure Canadian Couch Potato had a rebalancing spreadsheets you could download.
Set your % and enter what you have already have for balances and what cash you will have available from selling existing funds.

I personally keep exactly the same in my RRSP and TFSA (both are maxed)
I balance at 25% VAB 25% VCN 50% VXC all within my Scotia iTrade
I rebalance once a year
I use above percentages when depositing new funds (lets hope we get 10k for TFSA again next year)

You decide on your risk tolerance.
http://canadiancouchpotato.com/wp-content/uploads/2015/01/CCP-Model-Portfolios-Vanguard.pdf

K-ice

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Re: How to rebalance a maxed out TFSA?
« Reply #21 on: September 18, 2015, 09:11:06 PM »

I personally keep exactly the same in my RRSP and TFSA (both are maxed)
I balance at 25% VAB 25% VCN 50% VXC all within my Scotia iTrade
I rebalance once a year

http://canadiancouchpotato.com/wp-content/uploads/2015/01/CCP-Model-Portfolios-Vanguard.pdf

So do both your TFSA and RRSP have the same ratios?

Assuming you have 40K in each I think I would want:
RRSP 20K VAB bonds
RRSP 20K VXC
TFSA 20K VXC
TFSA 20K VCN
You could put the 20K VCN and 40K VXC wherever but I think rebalancing is easier splitting up the VXC. 


In a perfect world if everything could be maxed out, and the allocation as desired, I think I would be best to hold:

Most of my VXC in my TFSA (because I think this should have more growth than VAB)
Most of my VAB in my RRSP (because I need to pay tax eventually, so less growth =less tax)
Most of my VCN in my unregistered (for the Canadian dividend tax credit)

Of course, you should hold VCN in your registered until they are maxed then it overflows into unregistered.

I would appreciate for other couch potato Canadians to share there Vanguard asset location plans.

tyir

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Re: How to rebalance a maxed out TFSA?
« Reply #22 on: September 19, 2015, 12:26:27 AM »
johnny847 is actually correct that (tax-adjusted) there's no need to favour RRSP over TFSA for bonds. What K-ice was missing in their calculation was he wasn't adjusting for taxes.

Let's make a couple simple assumptions to make it most clear. Let us assume the tax rate at contribution time and withdraw are the same. If that is so, RRSP and TFSA are equivalent in terms of growth.

Now, when you contribute to RRSP, you get a tax return. Think of it this way - this is a loan that the government gives you for contributing, but you need to pay it back.

So let us say you get 120$ of pre-tax money to invest. Let's say after tax that is 100$

So you can put in 120$ in an RRSP, or 100$ in the TFSA - these are equivalent.
Note you don't have more or less value either way - the 120$ RRSP should be thought of 100$ of your own money and a 20$ government loan.

So if you want to be super careful about it, if you are doing cross taxable/RRSP/TFSA asset calculations, you should take into account the government loan.

Most people don't take that into account, which is why the intuition is that TFSA is better for higher growth assets like equities, since you feel like it's all your money. But it is a very easy to fall into fallacy, you put as much of "your" money in the RRSP, you just need to account for the loan.

In the K-Ice examples, with all bonds in RRSP
40K stocks in TFSA
 0K bonds in TFSA
20K stocks in RRSP
60K bonds in RRSP

This is *not* a tax-adjusted 50:50 split.
You own
40K stocks in TFSA
20K * (1/1.2) = 16.6K stocks in RRSP
60 * (1/1.2) = 50K bonds in RRSP
giving a split of 50K bonds : 56.6K stocks

You see with bonds in RRSP, if you ignore the government loan, then your true asset allocation is a higher stock to bond ratio. That's why the math works out so bonds in RRSP look smarter.


If we include the government loan, it would look more like this:
40K TFSA
80/1.2 = 66.6K "true" RRSP value
so we have 106.6K /2 = 53.3K of stocks/bonds each

so it would be
40K stocks in TFSA
13.3K "true" stocks in RRSP = 16K stocks
the rest (80-16) = 64K Bonds (checking our work 64/1.2 = 53 so I didn't screw this up).

This gives a tax-adjusted 50:50 split. And should give the same return if you do the full calculation.

I hope that was clear.
All that being said, this is very academic. Trying to figure out a reasonable estimate of your RRSP tax rate can be a bit crazy if you are young - who knows what will happen. So I actually *don't* bother with this, I just kind of assume my final tax rate will be pretty low and don't worry too much.

There's nothing wrong with putting bonds in RRSP, but if you do so because you're assuming your tax rate on RRSP will be higher, you should be adjusting your RRSP asset allocation as I described.


 



 

Sarnia Saver

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Re: How to rebalance a maxed out TFSA?
« Reply #23 on: September 19, 2015, 04:45:47 AM »
All some great info, requiring a firm understanding of tax rules, asset allocation and assumptions on tax rates and growth.

I only gave my very basic advice due to a few things. 
  • Canadian dividends give a tax credit when held in a non registered.
  • U.S. has a tax treaty for dividend payouts within RRSP, but not within TFSA.
  • Fixed income (bonds, GICs, etc) should be held within a tax advantaged account if you have room, not a non registered and this income or interest is taxed least favourably.
If all your tax favoured accounts are overfilling, capital gains taxes and taxes on income earned through investments is a first world problem, but I know when I get to that point I will do transfers in kind to reduce my total tax bill as much as possible while still maintaining asset allocation. 

Important point was made to understand that money inside RRSP, and DC pension plans still have to be taxed, count on the government taking 25-30%. 

Retire-Canada

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Re: How to rebalance a maxed out TFSA?
« Reply #24 on: September 19, 2015, 10:11:04 AM »

I hope that was clear.
All that being said, this is very academic. Trying to figure out a reasonable estimate of your RRSP tax rate can be a bit crazy if you are young - who knows what will happen. So I actually *don't* bother with this, I just kind of assume my final tax rate will be pretty low and don't worry too much.

There's nothing wrong with putting bonds in RRSP, but if you do so because you're assuming your tax rate on RRSP will be higher, you should be adjusting your RRSP asset allocation as I described.

Your tax adjusted AA is dependant on what your estimate of your taxes is and as you note that's hard to predict. You can set it for your expected retirement income/tax rates, but if you need to take money out before that for unforeseen reasons your tax rates will likely be quite different.

The other issue is that your TFSA is a totally different type of account than RRSP beyond the simple tax accounting elements. You can take out every dollar if you needed them from the TFSA at any time with no taxes, no penalties and you can then redeposit the full amount in the next tax year. That makes it far more versatile than the RRSP and it would make sense to have the largest growth investments in this account so if you needed to access funds unexpectedly you could have the larger pot in your TFSA.

When you get older and start receiving gov't benefits your TFSA never faces a mandatory withdrawal requirement nor do withdrawals affect income tested benefits.

While you can adjust your AA to reflect the desired after-tax ratios that isn't the same thing as saying holding low growth vs. high growth investments in any account is equivalent. It's only equivalent in one respect.

I'd still rather have the largest TFSA possible and my bonds in my RRSP.

Retire-Canada

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Re: How to rebalance a maxed out TFSA?
« Reply #25 on: September 19, 2015, 10:38:22 AM »
Another thought I had based on the CPP article linked to above was that once your investments grow large enough...say 4 times your annual RE income needs just for an example...you can ignore this tax based AA consideration.

Since you have far more in your accounts than you need to live on or for a reasonable emergency you no longer have to consider the scenario where you need to liquidate your whole portfolio. You're only going to need a small portion of your portfolio at any one time and that portion gets smaller as the portfolio grows during your accumulation phase and even in your RE phase if the markets do well.

You can take this smaller portion from whichever account you feel best serves your needs and your overall portfolio is big enough that you aren't emptying out any one account.

So if you had a 50/50 AA :

- you had $200K of Bonds in your RRSP
- $200K of equities in your TFSA
- say your expected marginal tax hit on taking out $$ from the RRSP was 25%
- your BH tax adjusted AA would be 40% bonds and 60% stocks

However at any time you could sell stocks in your TFSA and buy bonds. Then same goes with your RRSP. There are no tax hits within these accounts for selling.  So that total $400K or whatever it grows/shrinks to is always swappable to any ratio of stocks/bonds.

Looking at it that way a larger portfolio in tax sheltered accounts is the risk/AA of the un-adjusted values of the investments in the sum of the accounts.

Taking that thought one step further if you took the trouble to tax adjust the AA above you might get:

- $200K bonds in RRSP = $160K tax adjusted
- $20K bonds in your TFSA = $20K tax adjusted
- $180K stocks TFSA = $180K tax adjusted

Given that you:

- will never need to liquidated these accounts in one shot due their size vs your needs
- you can swap stocks for bonds at anytime [and vice versa]
- you can pull your req'd $$ from whichever account(s) you want

You risk/AA is actually too heavy on bonds by going through the tax adjustment process. Your loss/gains will not reflect a 50/50 AA that you wanted.

The only way I see this rationale failing is small accounts where you might realistically need to liquidate them. In doing that would could not manage the tax effects and would be forced to just let the tax cards fall where they may.

I was thinking about this last night. Let me know if this makes sense to you or where I went wrong. :)

« Last Edit: September 19, 2015, 10:58:27 AM by Vikb »

Stasher

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Re: How to rebalance a maxed out TFSA?
« Reply #26 on: September 30, 2015, 08:43:37 AM »


So do both your TFSA and RRSP have the same ratios?



Yes, I am running the same ratios in both the rrsp and the tfsa. I am looking for both to grow while I am still working and funding these accounts and not overly concerned with withdrawal strategies or tax mitigation currently.