Managing Asset Allocation Across Accounts (Canada)

[Fortuna]

As I am getting closer to potentially FIRE (6-18 months max) I am looking to simplify my investments as much as possible and see how I can manage my cash flow.  Married so we have 2 RRSPs, 2 TFSAs, 1 NoReg Investment account.  My general target for asset allocation is 20% US/20% INT/ 20% CND/40% Fixed Income with the fixed containing some REITs.

Withdrawal plan is to use up the RRSP first till 71 as that is the larger part of the overall assets and then figure it out from there letting the TFSA grow and spend the dividends out of the taxable account. Plus at 65 government benefits will kick in - I am 50 years old now.

So the one thing I am struggling with is do I treat accounts somewhat separate and manage my RRSP to that allocation and manage my TFSA/NonReg separately?  I know that is not the most tax efficient but it is simpler to manage allocation across accounts especially considering that TFSA room will grow and as we stop work RRSP will remain static.

Or do I treat it as one account, put the FI, INT and US in RRSP, CND in the Taxable and use the TFSA for the spill over of US or CND allocation that does not fit.  This is the most efficient from a tax perspective but most difficult to maintain as I am spending the RRSP down first.

Would love to hear from people what they are doing and why - especially from someone Canadian who has been FIRE'd a few years and seen first hand how this works.  Part of me is thinking that I am letting the tax tail wag the investing dog and making it too hard.

[RichMoose]

I understand that your question is more specifically related to AA, but what you really need to do is formulate a comprehensive retirement plan that is easy to manage and tax efficient from 50 till death. It's hard to give some detailed guidance without numbers, so if you're willing to share that would be helpful.

In general though, I would not be deadset on depleting RRSPs to $0 by 71. It is important to draw them down to a reasonable level. At 71, you're required to withdraw about 5.28% of account value which really isn't a whole lot at this point. If your RRSPs are worth $500,000 at 71, that's only $26,400 taxable income. Split between two people means it is more or less tax-free after the basic deductions (not factoring in OAS/CPP).

Instead of focusing on RRSP depletion, focus on RRSP reduction and don't forget the importance of tax liabilities along the way. I would say that it is reasonable to get RRSP values down to $200,000 per person by age 65 (when OAS kicks in) and if you're healthy you can always benefit from deferring CPP so you can work on reducing RRSPs more between 65-71.

I would still manage your portfolio as one. Fixed income into RRSP first (will also help with drawing down relative to other accounts), growth stuff in TFSA first, and Canadian stocks in non-reg so you can benefit from dividend credits (can help offset RRSP income tax liabilities in some provinces).

To maintain diversification, you can always shift fixed income and international allocations to your non-reg account as the RRSPs get depleted. For fixed income, HBB.TO and ZDB.TO are great options which are more tax efficient. For US & international, HXS.TO and HXX.TO are very tax efficient.

I'm probably 5 years away from FI and not really sure if I want to RE, but I've given this a lot of thought myself as I am seriously thinking about moving to low-income employment, consulting, part-time employment, or volunteerism after I am FI. Although my wife is likely to continue working, we may have to supplement our income with portfolio withdrawals. However, like I said, it is at least 5 years down to the road. I've decided that I'm going to hit the RRSP and non-reg accounts for income first and let the TFSA grow untouched for as long as possible while continuing to make new contributions there.

[Fortuna]

I understand that your question is more specifically related to AA, but what you really need to do is formulate a comprehensive retirement plan that is easy to manage and tax efficient from 50 till death. It's hard to give some detailed guidance without numbers, so if you're willing to share that would be helpful.

Thanks and totally willing to share numbers.  You make great points.  I did not explain the RRSP well, I don't plan to draw it to zero, just use those accounts first.  In fact our two situations and plans have a lot in common.  Here is more detail:

Target Income: $64k before tax (could be less in down years this is high estimate)
RRSP Accounts: $690k
TFSA Accounts: $120k
Taxable Accounts: $245k

Wife is roughly my age, will retire in 2022 when her pension is available and will get $33K/yr till 65 then that drops to $22k (in today's dollars, currently indexed but that could change).  So we have 3 phases of retirement:

2018 to 2022 - Her salary about $34k/yr net plus investment income/withdrawals
2022 to 65 yrs old - Her pension plus investment income/withdrawals
65 yrs old plus - CPP/OAS for both of us (if OAS still exists) plus investment income/withdrawals

The RRSP is about $500k for me and $190k for her with all the taxable accounts in my name.  So my plan is to use my RRSP first to level them out. The taxble investments are in my name since she has the DB Pension.  So as far as my plan is somewhat baked.  The gaps are balancing my investments between the accounts and taking income from the accounts in the phases above.  I would love to set it up so that all of my income is from dividends and interest. I should get about $22-25k/year from that so close but not quite enough.

Strange thing is I think we are close or there for me to RE now but I don't "feel" like I am and part of that is needing a clearer plan on managing the accounts and investments with cash flow.

[dreadmoose]

Sorry I don't have much to input here as I've only just started researching how I'm going to do the same.

From really preliminary thoughts I thought the following (according to your AA):

1. Fixed income portion in RRSP's (FI and REIT)
2. High Growth investments in TFSA's (100% Equity)
3. Non-reg in as tax-advantaged ETF's as possible (the rest)

Then I'd planned on drawing down 1, then 2, then 3.

Though as mentioned... I would take what I have planned with a huge cube of dead sea salt.

Excited to hear this conversation through.

[Fortuna]

Thanks @dreadmoose.  One of the thoughts I had is that for US ETFs there is the withholding tax in TFSA or Taxable accounts.  So I trying to balance that as part of the overall plan.  And where you can save tax do it but with all the other considerations I think this is one of the areas that is not worth the effort when you consider the benefits vs the complexity and hassles.

I am hoping others who are further down the road will reply here in time to share some thoughts.

[RichMoose]

Thanks and totally willing to share numbers.  You make great points.  I did not explain the RRSP well, I don't plan to draw it to zero, just use those accounts first.  In fact our two situations and plans have a lot in common.  Here is more detail:

Target Income: $64k before tax (could be less in down years this is high estimate)
RRSP Accounts: $690k
TFSA Accounts: $120k
Taxable Accounts: $245k

Wife is roughly my age, will retire in 2022 when her pension is available and will get $33K/yr till 65 then that drops to $22k (in today's dollars, currently indexed but that could change).  So we have 3 phases of retirement:

2018 to 2022 - Her salary about $34k/yr net plus investment income/withdrawals
2022 to 65 yrs old - Her pension plus investment income/withdrawals
65 yrs old plus - CPP/OAS for both of us (if OAS still exists) plus investment income/withdrawals

The RRSP is about $500k for me and $190k for her with all the taxable accounts in my name.  So my plan is to use my RRSP first to level them out. The taxble investments are in my name since she has the DB Pension.  So as far as my plan is somewhat baked.  The gaps are balancing my investments between the accounts and taking income from the accounts in the phases above.  I would love to set it up so that all of my income is from dividends and interest. I should get about $22-25k/year from that so close but not quite enough.

Strange thing is I think we are close or there for me to RE now but I don't "feel" like I am and part of that is needing a clearer plan on managing the accounts and investments with cash flow.

That equals a total portfolio of approx. $1.1 million when you retire. For your desired portfolio mix, you would have $440,000 in bonds and $220,000 each in everything else. The bonds will nicely fit into your RRSPs and Canadian stocks on your non-reg accounts. I would then plug REITs into non-reg and then TFSA. Internationals can go in TFSA first then balance in RRSP. US can go in RRSP.

You will need around $40,000 a year in portfolio withdrawals to safely account for taxes and your TFSA contribution. With a $550,000 (yours only) RRSP when you retire, you can withdraw the entire $40,000 from your RRSP and it will last you nearly 20 years. However, you will pay full tax rates on it.

It would be better to check your distribution income first. The Canadian stocks and REITs in your non-reg will pay around $7,000 in distribution income. This reduces RRSP withdrawals to $33,000 and offsets some of those taxes.

This would get your RRSP down under $300,000 by age 65. After that you can drop RRSP withdrawals to $20,000 with OAS/CPP making up for the rest.

RRSP will be under $250,000 by 71, so your required withdrawal will be around $13,000 (you'll be taking about $20,000). Basically you won't have to worry about RRIF withdrawal rules this way as it's well under your requirements.

Or you could keep RRSP withdrawals a little higher and defer your CPP until age 70. Tax-wise there's not much difference, but your RRSPs would be depleted lower by 71.

In the meantime, your TFSA would grow to $400,000 by age 71 and your non-reg will grow to over $400,000 after stripping out the dividends.

At this point, you may be wise to take the minimum RRIF withdrawal, your CPP & OAS, plus dividends and start supplementing with capital gains income from your non-reg account to keep your taxes even lower.

Throughout retirement, your tax rates will be under 15% in most provinces. You can get them still lower by using a HELOC or other borrow to invest strategy, but it's probably not worth the risk and hassle in exchange for a few grand tops.

[GreatLaker]

My thoughts align closely with Mr Rich Moose.

I retired this year. My asset allocation is very similar to yours. I have my 40% fixed income split about evenly between VAB and 5-year GIC ladders. VAB gives me flexibility in spending and the possibility of capital gains. GICs give absolute certainty of funding no matter how bad the economy or markets get (absent any truly catastrophic event of course). My international is split about 3/4 international developed (XEF) and 1/4 emerging (XEC).

I try to allocate tax efficiently across my accounts. I have non-reg, TFSA, RRSP and 2 LIRAs. My non-reg and TFSA are 100% equities. Most of my Cdn equities are in non-reg to take advantage of the dividend tax credit. My small LIRA is all fixed income. My RRSP and large LIRA have a combination of equities and fixed income since all my equities won't fit in non-reg and TFSA. I find this easier than having the same allocation in all accounts. This explains the details: http://www.finiki.org/wiki/Tax-efficient_investing

For funding my expenses, each year I will take enough out for all my budgeted expenses and move it to a High Interest Savings Account. Then monthly I will "pay" myself from the HISA by transferring to chequing. This imposes discipline on spending and lessens the risk of having to withdraw during a market crash. This Bogleheads post discusses Withdrawal Methods: https://www.bogleheads.org/wiki/Withdrawal_methods. I plan to use the VPW method.

A couple of areas I differ with some people:
1) I plan to defer CPP to 70. I have no pension so CPP/OAS are my only sources of guaranteed, inflation indexed income. Deferring to 70 gives me more than double the guaranteed indexed income vs. taking it at 60. The benefit for deferring OAS to 70 is not as large as for CPP, so I have not decided on that yet. This is less important for people that have a solidly funded indexed DB pension.

2) I believe it is more tax-efficient to withdraw from non-registered account, so will only withdraw a minimal amount from RRSP each year (enough to minimize or eliminate OAS clawback) until I have to make minimum RRIF withdrawals. If I withdraw from RRSP it will be taxed as income at my full marginal rate.If I withdraw from non-registered I only get taxed on the capital gains only, and the inclusion rate on CG is 50%. So withdrawing from non-registered enables more tax-free compounding in RRSP. There are reasons for withdrawing some funds from RRSP before 71, but for me anyway and maybe for most people I think trying to deplete an RRSP before age 71 will result in paying more tax, not less. Here is an article that discusses it: http://www.rgafinancial.com/articles/What-Account-Should-I-Draw-From-First-In-Retirement.pdf

If you want to bare your soul on a Canadian forum to get portfolio recommendations give this one a try:
http://www.financialwisdomforum.org/forum/viewtopic.php?f=29&t=116284