Author Topic: Still confused about TFSA hygiene  (Read 4517 times)

moustacheverte

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Still confused about TFSA hygiene
« on: February 16, 2016, 06:58:46 AM »
So I have invested in index funds. My TFSA is almost full and I have the rest in an unreg account. I don't have an RRSP yet because the money I earned in the previous years is less than I expect to make over the next years.

Now when it comes to rebalancing or adding money to the investments, should I sell those that are over my ratio and buy those that are under or should I buy more of those that are under and not sell those that are over, bringing the ratios back on target in both cases?

If I sell outside a TFSA, I will incur taxes as it will be a gain, correct? Even if that money is reinvested right away.

Does it make sense to wait for a higher income-year to invest in a RRSP? I also have 19k in unused tuition fees credits so I don't think I'll be paying taxes for the next year or two.

Thanks for the advice,

Retire-Canada

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Re: Still confused about TFSA hygiene
« Reply #1 on: February 16, 2016, 07:29:41 AM »
I rebalance as much as I can each month when I add money. At the end of the year I'll rebalance by selling stuff if I am not able to get where I need to with my monthly additions.

I don't see any need to track my AA perfectly so I am not going to incur transaction fees to rebalance more than once a year [buying ETFs is free at QT] unless something really unusual happens and my assets diverge significantly.

If you sell investments outside your TFSA/RRSP you will have to deal with capital gains or losses. Just depends where the investments are at relative to the purchase price.

If you know you are going to have much higher earning years ahead of you saving your RRSP space can make sense. As long as you keep investing in your TFSA and Non-Reg accounts.

moustacheverte

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Re: Still confused about TFSA hygiene
« Reply #2 on: February 16, 2016, 07:35:24 AM »

Posthumane

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Re: Still confused about TFSA hygiene
« Reply #3 on: February 16, 2016, 08:24:07 AM »
I think he meant Asset Allocation. Basically, if your actual asset allocation is close enough to your desired asset allocation then there's no need to incur extra costs to get it perfect. So if your ideal is 25% divided between four asset classes and you're actually at 23.8/25.2/26/25 then there is probably no need to sell to rebalance. Next time you add money to your account just buy a little more of the lowest assets to get closer to your ideal.

I have a portfolio that's split between TFSA, RRSP, and taxable, and I've never had to sell anything to rebalance. This may change as the portfolio gets larger. Right now I'm just over $100k so even a 5% imbalance is within the TFSA contribution limit.

I think it makes sense to hold off on RRSP contributions until you're well into the 22% federal tax bracket. If you anticipate going into the 26% federal bracket or higher then you can wait longer as well, although for me 22% is enough.

moustacheverte

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Re: Still confused about TFSA hygiene
« Reply #4 on: February 16, 2016, 08:32:37 AM »
Thanks for the clarifications. I'm using the e-series so I have no fees to buy or sell. I think the mistake I did was to sell in the unreg account and transfer the proceedings to the TFSA. I thought it would shield the gains from taxes but now I realize it might not have since I sold in the unreg account.

If I understand correctly, your trades within the TFSA don't affect your limit? So if my TFSA is maxed out and I sell an over-performing fund and reinvest the proceeds to buy an under-performing fund, all within the TFSA, I'm good?

Kaspian

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Re: Still confused about TFSA hygiene
« Reply #5 on: February 16, 2016, 09:15:31 AM »
Thanks for the clarifications. I'm using the e-series so I have no fees to buy or sell. I think the mistake I did was to sell in the unreg account and transfer the proceedings to the TFSA. I thought it would shield the gains from taxes but now I realize it might not have since I sold in the unreg account.

Don't worry too much about this.  I sold in my non-registered account to stash into my TFSA two years in a row.  Taxes on capital gains is treated much better than reinvested dividends, so whatever you need to do to get the money in your shelters (TFSA or RRSP) is a smart move in the long-run.  You will occasionally pay taxes for capital gains from selling in your non-registered account anyway, it's the nature of the beast and completely normal.   Err...  Unless you're always selling underperformers, which isn't the path to rebalancing anyway.   It's been my experience that people fret so much about paying taxes they end up doing stupid things in their portfolio for the long-run (e.g., Keeping things in the non-reg when they have space elsewhere, holding onto a fund which pays huge dividends which should be in the TFSA/RRSP, etc.) 

If I understand correctly, your trades within the TFSA don't affect your limit? So if my TFSA is maxed out and I sell an over-performing fund and reinvest the proceeds to buy an under-performing fund, all within the TFSA, I'm good?

That is correct--transfers to rebalance within your TFSA can be done whenever you want, don't affect your limit, and don't have capital gains tax.

moustacheverte

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Re: Still confused about TFSA hygiene
« Reply #6 on: February 16, 2016, 12:26:32 PM »
It is best to sell over-performers and buy under-performers when rebalancing though as opposed to not touching the over-performers and buying more of the under-performers to keep the ratios on target, right? Something about capturing your gains.

I think I read something about it somewhere a while ago but can't find it nor can I remember...

Kaspian

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Re: Still confused about TFSA hygiene
« Reply #7 on: February 16, 2016, 12:53:48 PM »
It is best to sell over-performers and buy under-performers when rebalancing though as opposed to not touching the over-performers and buying more of the under-performers to keep the ratios on target, right? Something about capturing your gains.

I think I read something about it somewhere a while ago but can't find it nor can I remember...

Yep, that's the way its done.  So, you're always selling high/buying low.  That means most often the gains will be moving from equities to bonds.  Which, though also move up/down, aren't quite as volatile as equities.  This year, however, it looks like the majority of my new money (when I get my tax return) and when I rebalance in July, will be going toward upping the Canadian Index Fund portion of my portfolio.  (Unless we have a fairly massive bounceback between now and then--and I doubt it.) Our index is down so much, it's a pretty much ripe opportunity at the moment.  If it simply goes back to where it was a year-and-half ago it will be a 25% gain.

...But make sure you have a written plan for when to rebalance--like annually, semi-annually, or if one allocation gets off my 10% or something.  Otherwise, don't touch it.  Rebalancing too often is called "not letting the dogs run".   
« Last Edit: February 16, 2016, 01:04:45 PM by Kaspian »

moustacheverte

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Re: Still confused about TFSA hygiene
« Reply #8 on: February 16, 2016, 01:08:13 PM »
...But make sure you have a written plan for when to rebalance--like annually, semi-annually, or if one allocation gets off my 10% or something.  Otherwise, don't touch it.  Rebalancing too often is called "not letting the dogs run".   

Ha. I was rebalancing whenever I had time because I thought that the more often I do it the more value I will capture by selling over-performing assets and buying the discounted ones. Why is that bad then? If an asset is up 10%, donc you want to take that money and use it to buy another asset? If you wait, it might go back down and you "lost" the 10% profit, no?

Kaspian

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Re: Still confused about TFSA hygiene
« Reply #9 on: February 16, 2016, 01:46:49 PM »
...But make sure you have a written plan for when to rebalance--like annually, semi-annually, or if one allocation gets off my 10% or something.  Otherwise, don't touch it.  Rebalancing too often is called "not letting the dogs run".   

Ha. I was rebalancing whenever I had time because I thought that the more often I do it the more value I will capture by selling over-performing assets and buying the discounted ones. Why is that bad then? If an asset is up 10%, donc you want to take that money and use it to buy another asset? If you wait, it might go back down and you "lost" the 10% profit, no?

10% might be a significant enough growth to trigger a rebalance if that's the way you planned it in (advance in) your personal policy statement.  But people who rebalance too often miss gains by reaping a bunch of small gains instead of a bigger one.  When something goes up just a little bit, you sell some of it off, then it suddenly goes up more, you're making less than you would have if you just left it alone because you now have less shares.  You've sort of rebalanced too early--grabbing at a small gain instead of reaping the longer trend of the class.  It's more like market timing or day-trading than rebalancing if you're going to do it all the time.

So--you want to reap a whole trend rather than a small market fluctuation.

moustacheverte

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Re: Still confused about TFSA hygiene
« Reply #10 on: February 16, 2016, 02:08:07 PM »
It makes sense, thanks. So you define your rebalancing trigger either in terms of percentage points difference or time of the year?

Retire-Canada

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Re: Still confused about TFSA hygiene
« Reply #11 on: February 16, 2016, 02:31:30 PM »
It is best to sell over-performers and buy under-performers when rebalancing though as opposed to not touching the over-performers and buying more of the under-performers to keep the ratios on target, right? Something about capturing your gains.

I think I read something about it somewhere a while ago but can't find it nor can I remember...

Inside your RRSP/TFSA there is no difference [if you pay no transaction fees] between selling/buying ETFs to rebalance vs. buying with new money to rebalance if you were adding the new money in any case. If you end up with 50%/20%/30% of 3 ETFs it's irrelevant how you got there in these accounts.

In your Non-Reg account if you sell high and buy low to rebalance you will constantly be triggering capital gains tax events. So it makes sense to rebalance through new additions in this account.

Keep in mind you only have to rebalance your asset allocation across all of your accounts so if you need to sell to rebalance you can just do that inside your TFSA or RRSP and leave the Non-Reg account alone unless you are adding to it.

Mmm_Donuts

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Re: Still confused about TFSA hygiene
« Reply #12 on: February 16, 2016, 07:52:07 PM »
You mention that you don't want to start an rrsp until your income is higher. Just wanted to point out that you do not have to claim the deduction in the same year you make your rrsp contribution. If I were you I would hold off on investing in a taxable account, and open up an rrsp (after maxing out the TFSA.) You can wait until your income is in a higher tax bracket to claim the deduction.

moustacheverte

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Re: Still confused about TFSA hygiene
« Reply #13 on: February 17, 2016, 05:44:57 AM »
You mention that you don't want to start an rrsp until your income is higher. Just wanted to point out that you do not have to claim the deduction in the same year you make your rrsp contribution. If I were you I would hold off on investing in a taxable account, and open up an rrsp (after maxing out the TFSA.) You can wait until your income is in a higher tax bracket to claim the deduction.

Interesting. How long can you defer after you invested?

Retire-Canada

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Re: Still confused about TFSA hygiene
« Reply #14 on: February 17, 2016, 06:12:08 AM »
You mention that you don't want to start an rrsp until your income is higher. Just wanted to point out that you do not have to claim the deduction in the same year you make your rrsp contribution.

Good point!:) I've never done that so it always slips my mind.

There is no time limit on when you take that deduction.

http://wheredoesallmymoneygo.com/deferring-your-rrsp-deductions-to-higher-income-years/

moustacheverte

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Re: Still confused about TFSA hygiene
« Reply #15 on: February 17, 2016, 08:24:34 AM »
THanks, I'll use that RRSP room right away then

Heckler

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Re: Still confused about TFSA hygiene
« Reply #16 on: February 17, 2016, 08:40:06 AM »
Yeah, I can't imagine picking a taxable account over tax deferred.

Mind you, from 22 - 40, I contributed 10 % to RRSP (5+5 match).  Now at 42 & mortgage free, I've got 100k room + 18%/year new RRSP space. Now my 10 year fuck it plan has me maxing out all tax deferred account in 8-9 years from now, at 50 yo.   I guess I unknowingly did the same as the moustache vert was planning.

Kaspian

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Re: Still confused about TFSA hygiene
« Reply #17 on: February 17, 2016, 10:13:54 AM »
It makes sense, thanks. So you define your rebalancing trigger either in terms of percentage points difference or time of the year?

Yes, pick one.  I define mine as January 1st (well, that's a holiday--so the 2nd, really)  and June 30th.  Semi-annually is probably too often to be honest, but I'm not going to go messing around with my original plan.  (Nothing but regret can come from that!)  Other people choose when one of their funds gets out of line by a fixed percentage--7-10% usually, I think?

There was a poster here in the MMM forums who wrote about 5 paragraphs on their rebalancing strategy--giving themselves lots of clauses, exceptions, addendums, percentages, dates, and footnotes.  Pretty much giving themselves free reign to tinker whenever they wanted and be an active investor.  I told them that it was no good and unless they could define their rebalancing strategy in one sentence, it wasn't worth the paper I was written on 'cause they could screw around too much.  ...Happily, they changed it.  :)