Author Topic: New to investment (Canada)  (Read 5816 times)

Kexxis

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New to investment (Canada)
« on: January 23, 2015, 10:31:48 AM »
I am fairly fresh out of school making a 60k salary in Nova Scotia, Canada. I am just now getting into RRSPs, TFSAs, and thinking about things such as a mortgage. I understand the basics and differences between the two main investment vehicles in Canada, but I am lost in who I should use to set those accounts up and then partly where to put the money within those accounts.

After the remainder of my debt is paid off my plan is to put 1500/month into investments. I currently have all my savings accounts at RBC (is this good/bad?). I understand I will only be able to put $10800 (18% of 60k) into my RRSPs per year. In the first few years that cap might be higher because of amounts that have carried over, so should I completely max the RRSP out first, or split between that and TFSA?

Trinitysmom

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Re: New to investment (Canada)
« Reply #1 on: January 23, 2015, 10:57:15 AM »
if you are saving $18000 a year you will be able to do both $5500 to TFSA and then $12500 to your RRSP until you have used up the carrier over. Do you have a timeline for buying a house? Is part of the $1500 marked for saving for a down payment on a house? I am still learning about investing myself but Vanguard and the TD e series seems to be popular. the Canadian couch potato investor is worth having a look at. I'm sure you will get lots of great advice from more senior investors. I think the biggest thing is just to get started even if you need to make changes later.

Kexxis

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Re: New to investment (Canada)
« Reply #2 on: January 23, 2015, 11:02:11 AM »
Thank you for the reply. I am in no rush to purchase a house as my current living situation is fairly cheap. Part of the $1500 would be marked for saving for a down payment if I decided to go that route right now.

Kexxis

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Re: New to investment (Canada)
« Reply #3 on: January 23, 2015, 11:45:54 AM »
If I were to go open an TD e series account, is that used for both my RRSP and TFSA? And would I use the same split that one of the Couch Potato Model recommend for both of those? I guess one of my main confusions is how things like index funds relate to the RRSP and TFSA.

Katdog

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Re: New to investment (Canada)
« Reply #4 on: January 23, 2015, 12:17:45 PM »
Think of a RRSP or TFSA as buckets within which you can hold investments of (almost) any kind. If these same investments were outside the bucket, you'd have to pay tax on any profits made from them, but inside they are tax free.

TD eSeries is an excellent option and yes you can open a RRSP and a TFSA there. These would just be accounts, the same as if you had multiple bank accounts. You can deposit money into these accounts and then purchase your desired index funds. Read through the couch potato site for more info on what index funds are, but basically you have the stock market which has many different stocks, which is a partial ownership in a company. An index fund just owns many different stocks. So by purchasing an index fund you are essentially buying many different stocks in a simplified way.

Stasher

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Re: New to investment (Canada)
« Reply #5 on: January 23, 2015, 12:18:27 PM »
You would basically open up your online brokerage account and then on that account you need a separate rrsp account and then a tfsa account. I might suggest looking at what point do your contributions to an rrsp drop you down to the next tax bracket. Once you hit that next lower level than look at filling your tfsa to the max. Don't forget you aren't loosing the benefit of the rrsp as that limit carries forward and you can use that larger limit when you expect your income to be much higher.

Kexxis

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Re: New to investment (Canada)
« Reply #6 on: January 23, 2015, 12:42:29 PM »
Think of a RRSP or TFSA as buckets within which you can hold investments of (almost) any kind. If these same investments were outside the bucket, you'd have to pay tax on any profits made from them, but inside they are tax free.

TD eSeries is an excellent option and yes you can open a RRSP and a TFSA there. These would just be accounts, the same as if you had multiple bank accounts. You can deposit money into these accounts and then purchase your desired index funds. Read through the couch potato site for more info on what index funds are, but basically you have the stock market which has many different stocks, which is a partial ownership in a company. An index fund just owns many different stocks. So by purchasing an index fund you are essentially buying many different stocks in a simplified way.

Thank you Katdog, that cleared up a lot for me. Is the purchasing of the index funds automatic once you have picked a ratio of how you want to split your money you deposit into those accounts?

You would basically open up your online brokerage account and then on that account you need a separate rrsp account and then a tfsa account. I might suggest looking at what point do your contributions to an rrsp drop you down to the next tax bracket. Once you hit that next lower level than look at filling your tfsa to the max. Don't forget you aren't loosing the benefit of the rrsp as that limit carries forward and you can use that larger limit when you expect your income to be much higher.

I have just barely entered into a new tax bracket, the ranges for applicable ones are:
14.95%   $29,590 - $59,180
16.67%   $59,180 - $93,000

Is it beneficial for me to always try and get to the lower tax brackets? I am not sure the mechanics of how that works exactly.

Kaspian

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Re: New to investment (Canada)
« Reply #7 on: January 23, 2015, 01:05:17 PM »
Here are some screenshots which might help.  All e-Series accounts begin with "2378".

(Note:  There isn't much in my RRSP because I have a pension at work.)

The first shot is how they show up in your regular online banking page and the second is the "pre-authorized purchase plans" you can set up.  (So easy!)  I don't have one for my RRSP at the moment because I hit its cap in December.

It's all very simple.  I did each of the three accounts with the printable form TD provides on their site.  (You only need the RRSP and TFSA until you've filled them up--don't worry about a non-registered account yet.)
 
Dan explains where to best hold the individual index funds here:  http://canadiancouchpotato.com/2013/10/30/making-smarter-asset-location-decisions/ .  But he also notes that until you've filled up both your RRSP and TFSA, you shouldn't even consider worrying about allocation.

« Last Edit: January 23, 2015, 01:54:05 PM by Kaspian »

Kaspian

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Re: New to investment (Canada)
« Reply #8 on: January 23, 2015, 01:10:52 PM »
...And here's what it would look like if you clicked the 'Mutual Funds' link in my first image.  It's all very super-simple!  Don't be intimidated at all.
« Last Edit: January 23, 2015, 01:53:32 PM by Kaspian »

Kexxis

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Re: New to investment (Canada)
« Reply #9 on: January 23, 2015, 02:35:30 PM »
Here are some screenshots which might help.  All e-Series accounts begin with "2378".

(Note:  There isn't much in my RRSP because I have a pension at work.)

The first shot is how they show up in your regular online banking page and the second is the "pre-authorized purchase plans" you can set up.  (So easy!)  I don't have one for my RRSP at the moment because I hit its cap in December.

It's all very simple.  I did each of the three accounts with the printable form TD provides on their site.  (You only need the RRSP and TFSA until you've filled them up--don't worry about a non-registered account yet.)
 
Dan explains where to best hold the individual index funds here:  http://canadiancouchpotato.com/2013/10/30/making-smarter-asset-location-decisions/ .  But he also notes that until you've filled up both your RRSP and TFSA, you shouldn't even consider worrying about allocation.

Thank you that is very helpful! If I went the route of TD would it be wise to switch all of my banking to there as well?  Or if I went for Vanguard as an alternative should I switch my banking out of RBC regardless?

KMMK

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Re: New to investment (Canada)
« Reply #10 on: January 23, 2015, 04:32:52 PM »
Here are some screenshots which might help.  All e-Series accounts begin with "2378".

(Note:  There isn't much in my RRSP because I have a pension at work.)

The first shot is how they show up in your regular online banking page and the second is the "pre-authorized purchase plans" you can set up.  (So easy!)  I don't have one for my RRSP at the moment because I hit its cap in December.

It's all very simple.  I did each of the three accounts with the printable form TD provides on their site.  (You only need the RRSP and TFSA until you've filled them up--don't worry about a non-registered account yet.)
 
Dan explains where to best hold the individual index funds here:  http://canadiancouchpotato.com/2013/10/30/making-smarter-asset-location-decisions/ .  But he also notes that until you've filled up both your RRSP and TFSA, you shouldn't even consider worrying about allocation.

Thank you that is very helpful! If I went the route of TD would it be wise to switch all of my banking to there as well?  Or if I went for Vanguard as an alternative should I switch my banking out of RBC regardless?

Not really necessary. I do TD e-series and am very happy with them but don't do anything else with TD. I have a chequing account with BMO and I set up the TD account as a bill payee with electronic banking and just transfer money in that way.

Stasher

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Re: New to investment (Canada)
« Reply #11 on: January 23, 2015, 04:54:05 PM »
I have just barely entered into a new tax bracket, the ranges for applicable ones are:
14.95%   $29,590 - $59,180
16.67%   $59,180 - $93,000

Is it beneficial for me to always try and get to the lower tax brackets? I am not sure the mechanics of how that works exactly.

Basically any RRSP contributions create a reduction in your Pre-tax income and determine your taxation level, that's how its a tax break. The bigger advantage is when that RRSP drops you into a lower tax bracket.

As example:
Income $62,000 - RRSP $5000 =Taxable Income of $57,000
So you  just saved 16.67- 14.95 = 1.72% of earnings for taxation.

Thus I would suggest maybe just sock away $5k into your rrsp in a year and hammer away at getting your TFSA to the absolute maximum contribution level as past yearly limits are retroactive.

Once  you start making higher salaries look at the tax advantages of using an RRSP to get yourself into better tax brackets but at your earnings right now you have better options I think personally.

Kexxis

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Re: New to investment (Canada)
« Reply #12 on: January 23, 2015, 05:47:47 PM »
I have just barely entered into a new tax bracket, the ranges for applicable ones are:
14.95%   $29,590 - $59,180
16.67%   $59,180 - $93,000

Is it beneficial for me to always try and get to the lower tax brackets? I am not sure the mechanics of how that works exactly.

Basically any RRSP contributions create a reduction in your Pre-tax income and determine your taxation level, that's how its a tax break. The bigger advantage is when that RRSP drops you into a lower tax bracket.

This is the same mistake that Americans make all the time. There is no significance to "getting to a lower tax bracket". If you can lower your income enough to qualify for certain benefits like the GST credit, that actually makes sense, but aside from that, there is no significance to "getting into" a particular bracket.

Can you explain? I have heard mixed answers about the tax bracket thing now. From my understanding if you reach a lower tax bracket via RRSP you effectively earn the difference in tax back between the two bracket as Stasher has stated?

Heckler

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Re: New to investment (Canada)
« Reply #13 on: January 23, 2015, 08:43:47 PM »
That's awesome that you're starting so young!  Congrats! 

I would investigate what the self directed costs are with your current bank before switching.  Then consider how often you will contribute and what percentage you'll lose to trading fees. 

My TFSA I am contributing small amounts to a higher cost bank mutual fund, for no transaction fee, but a higher annual MER fee.  Then, once I've saved up enough, I'll transfer it to my self directed account and buy Vanguard index funds for the $10 fee when it makes sense.

Read every article on couch potato. He makes good sense!   


Whatever you do, don't get into high MER or FEL or DSC mutual funds.   Look it up - unnecessary sales commissions from the financial industry.

Heckler

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Re: New to investment (Canada)
« Reply #14 on: January 23, 2015, 08:48:34 PM »
If you can get your employer to contribute to RRSP before they take income tax, that's the best as you won't have to wait a year till tax time to see the benefit of reduced taxation on your income going into you RRSP.

Just don't get sucked into a high fee plan like a BMO Nesbit Burns. That was a ripoff that held me back 5 years.

Aloysius_Poutine

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Re: New to investment (Canada)
« Reply #15 on: January 23, 2015, 11:41:40 PM »
Good replies in this thread, but one thing nobody has explicitly mentioned is that tax rates in canada are marginal. Not sure if that's clear to you. Apologies if this is old news.
Here is an explanation of current federal personal tax rates from CRA:
Quote
15% on the first $44,701 of taxable income, +
22% on the next $44,700 of taxable income (on the portion of taxable income over $44,701 up to $89,401), +
26% on the next $49,185 of taxable income (on the portion of taxable income over $89,401 up to $138,586), +
29% of taxable income over $138,586.

So you don't pay a 29% tax rate on your entire income of $139k... you pay 15% on the first 44k, 22% every penny between 44k and 89k, etc. etc...

Re: first attacking TFSAs or RRSPs, if I were you, I'd fill the TFSAs first. A couple reasons why:
-at 60k income, any RRSP contributions you make won't give you an enormous tax benefit. At least not compared to when your income goes up to 100k and you drop $50k into RRSPs and walk away with a massive tax refund!
-TFSAs are a truly beautiful thing. Max it out every year, and leave it alone until you need the money. Time is an investor's best friend. Milk this sweet sweet investment vehicle by letting it compound for as many years as you can. (RRSP income is taxed when you take it out).
-Max book value on a TFSA are like... $35k or something (can't be bothered to look it up). It's such a low amount, why wouldn't you max it out right away? Then you can stop spending mental energy worrying about stuff like this and just plan to add $5500/yr to your already-topped-up-TFSA.

The only reason I'd consider contributing to an RRSP (as a young person) while my TFSA is not maxed out, is if I needed to offset some income in order to get a good tax return.

Also, yes, TD e series is a good way to go. They will not allocate your portfolio for you, you have to do it yourself based on what investments you buy. I had to go into a branch to get an E-series mutual fund TFSA and RRSP account set up. The people in the branch had no idea what it was, and they didn;t know how to set it up. They tried to sell me higher cost mutual funds, I had to explain what their own products were. Once it's set up (it took several weeks actually!), you go online thru TD online banking and transfer money from a normal TD chequing account to the e-series mutual fund account. Then you buy mutual funds (minimum order is $100). It takes a couple business days for the transaction to go through. 

RBC is a good bank to own shares of, but they are known as one of the banks with higher fees. PC financial is the best no-fee way to go, but I prefer TD for their service and branch hours.
« Last Edit: January 23, 2015, 11:46:28 PM by Aloysius_Poutine »

Kaspian

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Re: New to investment (Canada)
« Reply #16 on: January 24, 2015, 11:30:45 AM »
Thank you that is very helpful! If I went the route of TD would it be wise to switch all of my banking to there as well?  Or if I went for Vanguard as an alternative should I switch my banking out of RBC regardless?

I probably would switch, eventually.  But I wouldn't worry about it too much (now) when you initially get it set up.  It took me years to get everything transferred and aligned properly.  You can get your E-series or Vanguard account setup now, and then at your leisure have things transferred over.  Don't let perfection be the enemy of the good.

danzabar

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Re: New to investment (Canada)
« Reply #17 on: January 24, 2015, 11:42:13 AM »
Welcome! Fellow east coaster here. Lots of good advice so far. Have a read through mr frugal toques posts they are very helpful. Secondly, td e series was a nightmare for me to setup, took about four weeks but I enjoy how easy it is to buy e series funds. I've used the couch potato portfolio with a higher percent in canadian and U.S. funds rather than bonds. If I had to setup a new account I would open questrade since you can buy etfs with no fee now. The new three fund portfolio is great and simple, also I setup an account with them almost instantly. I also recommend ditching rbc as fast as possible and joining pc financial . They also have some nice promotions on at the momeng

RichMoose

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Re: New to investment (Canada)
« Reply #18 on: January 24, 2015, 06:53:14 PM »
A little late to this conversation, but here's some things to consider:

1. Is it reasonable to expect your salary to increase significantly in the next few years? If the answer is yes, I would focus first on maxing your TFSA so that your RRSP contributions can be made when you are earning more. This will help you take advantage of higher tax deductions in future years. Also, TFSA growth is tax free, so its nice to have that compounding over a longer period of time.

2. The e-series funds are good, but not great. If you are starting young and willing to learn a bit about ETFs and how to purchase ETF units on a trading platform, it would probably be better in the long run to open self-directed brokerage accounts for TFSA and RRSP and purchase ETFs instead. Their management fees can't be beat.

3. If you decide purchasing ETFs is something you're interested in, consider the size of your regular purchasing. If you purchase in small amounts, you're pretty much restricted to Questrade or Virtual Brokers as they offer commission free ETF purchasing. If you purchase in larger amounts (couple thousand bucks at a time), then a big bank discount broker (RBC Direct, CIBC Investor Edge, BMO Investorline) is OK too, just know the annual fees for low balances.