Tax-Efficient Asset Allocations: RRSP vs TFSA

[AJDZee]

Any help from Canadian readers familar with withholding taxes would be greatly appreciated!

With it being year-end I'm in the process of moving investments from my TFSA into my RRSP account. My TFSA contribution is maxed out, so I transfer foreign dividend paying stocks I've bought throughout the year. I get to recoup that contribution room starting in January, plus get a slightly higher RRSP contribution from whatever gains I had throughout the year from those investments (extra $900 this year!)

The easy ones to transfer are US dividend stocks, the withholding tax is not taken off in RRSPs as it is in TFSA.
But this year it's getting a bit more complicated.... Canadian-listed ETFs (with canadian stocks), Canadian-listed ETFs (with US stocks), US-listed ETFs (with US stocks)

My 'googling' keeps bringing me back to the same articles in Globe and Mail, which for some reason don't put it in a way that I feel confident with my decision (canadian-listed ETFs with US stocks, are both taxed the same in TFSA vs RRSP)

Perhaps I'm over thinking it...? If someone knows and can bestow this knowledge to this simpleton, that would be great.

Thanks!

[Thespoof]

I keep all of my foreign investments in my RRSP, a Canadian total market ETF in a taxable account and I have an ETF that covers all the REITs in Canada in my TFSA.

[RichMoose]

Any help from Canadian readers familar with withholding taxes would be greatly appreciated!

With it being year-end I'm in the process of moving investments from my TFSA into my RRSP account. My TFSA contribution is maxed out, so I transfer foreign dividend paying stocks I've bought throughout the year. I get to recoup that contribution room starting in January, plus get a slightly higher RRSP contribution from whatever gains I had throughout the year from those investments (extra $900 this year!)

The easy ones to transfer are US dividend stocks, the withholding tax is not taken off in RRSPs as it is in TFSA.
But this year it's getting a bit more complicated.... Canadian-listed ETFs (with canadian stocks), Canadian-listed ETFs (with US stocks), US-listed ETFs (with US stocks)

My 'googling' keeps bringing me back to the same articles in Globe and Mail, which for some reason don't put it in a way that I feel confident with my decision (canadian-listed ETFs with US stocks, are both taxed the same in TFSA vs RRSP)

Perhaps I'm over thinking it...? If someone knows and can bestow this knowledge to this simpleton, that would be great.

Thanks!

I'd be interested to know why you wouldn't just find a balance between TFSA vs. RRSP and just stick to that. In many cases, the TFSA has at least as much benefit as the RRSP. Would you consider posting a bit of a case study or maybe some more details on this thread? Current income, current spending, current taxes, province, predicted retirement spending, and any special circumstances (eg disability).

Specific to your question regarding withholding taxes... The only time you are exempted from withholding taxes is when you directly invest in a security (stock or ETF) listed on the U.S. stock exchanges with U.S. currency. So you would need an RRSP account and your holdings must be U.S. domiciled holdings. This only works for RRSP accounts, or non-registered accounts if you fill out a form to claim it back on your income taxes. Doesn't apply to TFSA because the tax treaty that makes this all possible doesn't recognize the TFSA as a registered account at this point, but I'm willing to bet this will change at some point in the future.

[Kaspian]

According to a few articles I've read on Canadian Couch Potato, it makes very little difference where you store what if you're only using tax-sheltered accounts.  There is something about US funds having agreements with Canada for less tax on RRSP accounts but not for TFSA.  Unless you're talking mad amounts of money, any difference in tax advantage is so slight, you'd hardly notice.

Dave August 16, 2014 at 2:19 pm # 
 
What would the ideal asset location be if I don’t need to use an unregistered account?

My asset allocation is 25% bonds, 25% Canadian, 25% US and 25% International.

I have 104K – 30k in TFSA and 74k in RRSP. I’m 33 and saving for retirement.


Canadian Couch Potato August 16, 2014 at 8:19 pm # 

 @Dave: If your portfolio is all in RRSPs and TFSAs and you’re using Canadian mutual funds or ETFs then asset location is really not a significant concern.

http://canadiancouchpotato.com/2013/10/30/making-smarter-asset-location-decisions/

[daverobev]

Use VTI in an RRSP. There is no withholding tax in an RRSP.

In a TFSA, use VUN if you don't want to bother exchanging currency. If you can deal with Norbert's Gambit, you may as well still use VTI. The 15% withholding tax to the US is lost, but only while the stuff is in the TFSA - if you transfer to the RRSP, no more withholding - IF you hold VTI. If you hold VUN, you will STILL lose the withholding as VUN is basically a wrapper around VTI.

It is the domicile that is important. US domicile - 15% withholding tax UNLESS in an RRSP. Canadian domicile - 15% withholding tax and it is not recoverable in a registered account.

Unreg, I'd go VUN assuming you don't have more than $100k of foreign assets already; if you do, may as well go VTI, but look into US estate nonsense if you're really wealthy.

Definitive CCP article, IMHO: http://canadiancouchpotato.com/2014/02/20/the-true-cost-of-foreign-withholding-taxes/

(Also explains that VXUS is better than anything else for 'foreign' - apparently the US has better tax treaties than Canada).

[AJDZee]

I'd be interested to know why you wouldn't just find a balance between TFSA vs. RRSP and just stick to that. In many cases, the TFSA has at least as much benefit as the RRSP. Would you consider posting a bit of a case study or maybe some more details on this thread? Current income, current spending, current taxes, province, predicted retirement spending, and any special circumstances (eg disability).

Sure, I don't mind posting details - I appreciate a second pair of eyes if someone is willing to offer advice!

Income: ~$85k, live in Ontario, so my tax rate is is 35-40%
Current spend about $3,200/month
No special tax circumstances for me, I'm 31 not married, no dependents, no disability

Retirement spending will probably be close to what it is now (less mortgage payments, more hobbies and travel)

I know with my salary being over $60k (or whatever the tipping point is), mathematically it makes sense to focus on RRSPs, but I've decided I'm going to max out my TFSA contributions first. Reason being I don't like the rules that go with RRSPs... forced minimum withdrawals in retirement... clawbacks, etc...

Obviously maxing out my TFSA contribution every year still doesn't give me enough to retire on - not even close - so there will always be a good portion of my savings directed to RRSP accounts. But the more I have in my TFSA the less taxable income I will have in my retirement years.

So I contribute to my TFSA throughout the year until I run out of room, then switch to RRSP. At the end of the year I look at what I have in my TFSA that would be better suited in an RRSP. Regain the TFSA contribution. Enjoy a bigger tax return.

And the way I see it, if this strategy no longer works for me in the future, no biggie, I can just transfer everything to my RRSPs... but not vice versa.

The investments I'm holding in my TFSA that I'm unsure to transfer to RRSP are VSP.TO, VDY.TO, UL

[RichMoose]

First, let's round up and assume that you live off of $40,000 p/a. Your annual RRSP contribution increases by about $15,000 (18% of gross), less any pension adjustment. Some quick math and here's what I end up with:

- RRSP: $15,000
- Tax bill: $15,000
- Net: $55,000

You should still (theoretically) have lots of money to contribute to your TFSA and not rob yourself of the biggest benefit of the TFSA, the compounding interest that you'll never pay taxes on again.

I don't know if you have already, but if you earn a steady income (every two weeks) and get your taxes withheld throughout the year like most employees, you should fill out a T1213 every year. Simply mark that you will be contributing $575 per cheque to your RRSP. Mail it in, it will be approved by CRA, bring it to your employer and they will not withhold tax off that $575, so in reality it will cost you more like $400. You won't get a big tax return every April, but it's better to get it right away anyhow.

Second, the whole minimum withdrawals thing with RRSP doesn't happen until you convert your RRSP to a RRIF which can happen as late as the year you turn 71. Up until that time, you can withdraw as much or as little as you want and it would taxed as regular income. Let's say your FI# is $1m and you reach that at 50 years old. You have $700,000 in your RRSP and $300,000 in your TFSA. You could withdraw all your spending needs out of your RRSP and pay very little tax and let your TFSA grow tax free until later. This would mean your withdrawal rate is 6%, well over the recommended 4%, but it would nicely drop the value of your RRSP before you turn 71 and roll into RRIF. During this 20 years, your TFSA grows from $300,000 to over $1m at a 7% return.

Third, on the clawbacks thing, I'm almost positive that by the time we retire and are eligible for old age benefits, they will include TFSA as income (although not taxed) and it will affect your eligibility for OAS and GIS. All it would take is a slight change in the tax code, it makes logical sense and would be an easy sell to the public, especially in our era where responsible people who actually save like they're supposed to are viewed as rich and special.

[AJDZee]

Thanks for the feedback - some really great points.

I am regularly employed, so I could fill out the T1213, I looked into it before but never did it since I didn't set up a set regular contribution. Would do it if going to the max RRSP route.

I haven't looked in more detail to those critical transition years when you switch to a RRIF, all I hear from most folks is they find it a pain in the ass and restrictive. (Poor planning/education is a huge part of it)

I agree with you about the possibility of changing the tax code... It's a long ways away, anything could happen! Not sure if TFSA would be 'subtly' rewritten to be included as taxable income... That would take the 'tax free' out of the TFSA. So effectively you're saying they would abolish the TFSA..? (Again, could be a possibility. Fed took a huge hit by implementing the TFSA)

But all I know, and all I can plan for, is what's currently in place, so until it changes I value the fact TFSA is non-taxable income.

This last point might make our discussion a moot point, but this year I changed employers, which has a DB pension program I'm not crazy about. The pension adjustment formula is something like ($ they set aside for me) x 9 !!!  So it pretty much eats up all my RRSP contribution limit. I hate it. (I think. Still doing the math)

[daverobev]

Means testing is more likely. If you live in an expensive house, no GIS. If you have half a mil in a TFSA, no GIS. Fair enough, IMHO.

[RichMoose]

This last point might make our discussion a moot point, but this year I changed employers, which has a DB pension program I'm not crazy about. The pension adjustment formula is something like ($ they set aside for me) x 9 !!!  So it pretty much eats up all my RRSP contribution limit. I hate it. (I think. Still doing the math)

DB pensions are generally pretty good (I'm in one myself), the only trouble being they are not designed for early retirement. Generally at the end of the day, your options are 1) get a payout and risk a hefty tax bill 2) keep that money in the plan and take it when you can, usually 55 or 60 years old. It really isn't too shabby because it works out that your RRSP savings really just form a financial "bridge" to take care of your expenses until you can collect your pension.

Your Pension Adjustment should be the exact dollar amount that you contribute to your pension in one year. For example, I get about $17,000 of new RRSP room each year, my pension contributions are right around $10,000 per year right now, so I only get $7,000 of new RRSP room each year after my PA.

If you are in a DB pension and planning to stay in the plan until retirement, I would definitely prioritize your TFSA over your RRSP. From a financial perspective, your order of priority should look like this:

1. TFSA
2. RRSP
3. Non-registered
4. Mortgage

If you have any inkling of leaving your plan before you actually retire, many would suggest not contributing any more to your RRSP at all. Reason being if you take a lump-sum payout it will go partly into a LIRA/LRRSP, but the excess portion would be taxable income unless you have enough RRSP room to put it in. If you are already earning $80,000 a year, the last thing you want is another $40,000 payout bringing your taxable income up to $120,000. At that point, you may as well go under the knife and give Harper/Wynne your duplicate organs (lungs or kidneys anyone?).

[Spudd]

The part I don't really understand is why the switch from TFSA to RRSP. I totally get wanting to max your TFSA, but I don't get the advantage that switching some holdings from TFSA to RRSP at year-end gets you. There were a lot of "get"s in that sentence, sorry about that.

Why don't you just contribute to the TFSA till you've maxed it, then whatever additional money you have left over goes to the RRSP? Why do you do the 2-step shuffle?

Anyway, to answer your question:
VSP.TO - Canada-based US index - no difference between TFSA or RRSP
VDY.TO - Canada-based Canadian dividend stocks- no difference between TFSA or RRSP
UL - I believe this is a UK-based stock which means that there should be no withholding taxes, however this is the one I feel the least sure about. Based on this blog post it seems like there aren't: http://dividendengineering.com/2013/03/22/3-dividend-friendly-foreign-countries/

[AJDZee]

I'm on my company's pension website right now, and the formula they specify for the pension adjust is...

9 x (annual pension accrued) - 600

My company pays up until the YMPE, so I don't make any contribution up until $52,500.
(Looking at their example calculation looks like the pension contribution is only 1.4% of $52,500)

I have the option to 'Top-Up' over the YMPE, which would be me actually putting in my own money to the tune of 5.5% over YMPE. The pension adjustment would be 9 x (annual salary - YMPE) x 2%, plus the PA from the first $52,500. In my case my PA would be around $12,000

Thanks for the advice on what to do within a DB specifically... I do have an inkling I won't be staying here until I retire. Only been here 3 months and not overly happy lol

[AJDZee]

The part I don't really understand is why the switch from TFSA to RRSP. I totally get wanting to max your TFSA, but I don't get the advantage that switching some holdings from TFSA to RRSP at year-end gets you. There were a lot of "get"s in that sentence, sorry about that.

Why don't you just contribute to the TFSA till you've maxed it, then whatever additional money you have left over goes to the RRSP? Why do you do the 2-step shuffle?

Anyway, to answer your question:
VSP.TO - Canada-based US index - no difference between TFSA or RRSP
VDY.TO - Canada-based Canadian dividend stocks- no difference between TFSA or RRSP
UL - I believe this is a UK-based stock which means that there should be no withholding taxes, however this is the one I feel the least sure about. Based on this blog post it seems like there aren't: http://dividendengineering.com/2013/03/22/3-dividend-friendly-foreign-countries/

I guess the simple answer is as I'm contributing to my TFSA in the first half of the year I'm buying investments as I feel they are of good value, regardless if it's CAN or US or other. If I were to split as you mentioned then there wouldn't be as much flexibility to invest. (I'd be buying 'growth stocks' first 6 months, Div stocks last 6 months, or whatever.)

I guess the alternative would be to work out what I 'plan' to save over the year, subtract TFSA room, and then make regular RRSP contributions of the difference. That works too.

Thanks for the answers to the specific securities!

[daverobev]

The part I don't really understand is why the switch from TFSA to RRSP. I totally get wanting to max your TFSA, but I don't get the advantage that switching some holdings from TFSA to RRSP at year-end gets you. There were a lot of "get"s in that sentence, sorry about that.

Why don't you just contribute to the TFSA till you've maxed it, then whatever additional money you have left over goes to the RRSP? Why do you do the 2-step shuffle?

Anyway, to answer your question:
VSP.TO - Canada-based US index - no difference between TFSA or RRSP
VDY.TO - Canada-based Canadian dividend stocks- no difference between TFSA or RRSP
UL - I believe this is a UK-based stock which means that there should be no withholding taxes, however this is the one I feel the least sure about. Based on this blog post it seems like there aren't: http://dividendengineering.com/2013/03/22/3-dividend-friendly-foreign-countries/

You get the contribution room growth in the TFSA and the tax break from the RRSP. You give up some growth in the RRSP, so in that sense it's a wash.

UL, BP etc are UK ADRs. Listed on a US exchange. Good way, if you buy good blue chip ones, to get diversification to multinationals with no withholding tax in a TFSA. UL, VOD, etc.. well, go and have a look at the FTSE 100, find solid companies, and see if they have US ADRs.

[gonkman]

This last point might make our discussion a moot point, but this year I changed employers, which has a DB pension program I'm not crazy about. The pension adjustment formula is something like ($ they set aside for me) x 9 !!!  So it pretty much eats up all my RRSP contribution limit. I hate it. (I think. Still doing the math)

DB pensions are generally pretty good (I'm in one myself), the only trouble being they are not designed for early retirement. Generally at the end of the day, your options are 1) get a payout and risk a hefty tax bill 2) keep that money in the plan and take it when you can, usually 55 or 60 years old. It really isn't too shabby because it works out that your RRSP savings really just form a financial "bridge" to take care of your expenses until you can collect your pension.

Your Pension Adjustment should be the exact dollar amount that you contribute to your pension in one year. For example, I get about $17,000 of new RRSP room each year, my pension contributions are right around $10,000 per year right now, so I only get $7,000 of new RRSP room each year after my PA.

If you are in a DB pension and planning to stay in the plan until retirement, I would definitely prioritize your TFSA over your RRSP. From a financial perspective, your order of priority should look like this:

1. TFSA
2. RRSP
3. Non-registered
4. Mortgage

If you have any inkling of leaving your plan before you actually retire, many would suggest not contributing any more to your RRSP at all. Reason being if you take a lump-sum payout it will go partly into a LIRA/LRRSP, but the excess portion would be taxable income unless you have enough RRSP room to put it in. If you are already earning $80,000 a year, the last thing you want is another $40,000 payout bringing your taxable income up to $120,000. At that point, you may as well go under the knife and give Harper/Wynne your duplicate organs (lungs or kidneys anyone?).

I am in a DB Pension as well.  I am only putting savings in TFSA as I will need the RRSP room when I will retire before I hit 50.   After 50 My pension is locked and I cant take a transfer value.   Wife will retire shortly after me with 100% funded pension.  I will take mine before age 50 as opposed to working 4 more years and taking a 40% Reduction.

I think I can invest it better than them anyway.  :)

I hope my RRSP Contribution room will be over 100K by the time I retire (Currently 86K).  That way I won't get hit with a big tax bill as I can transfer it to my RRSP without taxes.  Well at least a good portion.   

I already have over 100K in my RRSP as well which will also grow until I retire (8 Years).   I just don't plan on adding anything from here on in to it to keep the RRSP room.

I just hope they up the TFSA to 10K a year that rumor has been floating around.  That would allow me to save even more.   I am also paying off mortgage in 3 weeks! YAY!

Even more money to throw at TFSA to max it.   Once that it is maxed I will look at the Non Registered Index Funds.

So the order looks good to me for someone in a DB Plan.

1. TFSA
2. RRSP (Not for me I need the room in 8 years)
3. Non-Reg
4. Mortgage (Paid in 3 weeks)

[AJDZee]

Congrats on getting that mortgage paid off! I only have another 22 years or so ;p

I haven't heard thE rumor of TFSA jumping to $10k
I believe the plan is for it to go up by $500 increments every couple of years depending the CPI

[gonkman]

Well we were lucky and our interest rate went from 6.5% (First 3 years) to 4.5% (Next 5 years) and then I took a variable at Prime -0.5%.
Rate took a ride down to %0.75 percent and we kept our payments the same.  Took an easy 10K+ extra off the principle over those 5 years with that Mortgage Rate. 
We then signed for 2.79% for the last 3 years and I am paying it off a year and a half early.  So 15 Years total to pay it off.

Could of done it sooner but Kids cost money. :)

We also lucked out as we bought our hose in 1999 for $170K for a 3 Bedroom Single home which is now at $410,000 value.  I don't consider it worth that much and have NO plans on Moving. 

Here is a link to an article about the 10K TFSA increase.  It might not happen until the "balance" the budget but it is in the Cons Plans.
http://business.financialpost.com/2014/10/15/tfsa-limit-could-swell-to-10000-when-tories-balance-budget/?__lsa=eb64-216a

I hope it does happen as it would allow me to sock more money away tax free.

My RRSP Contribution and Wife's doesn't grow very much year despite our Income. Our DB Pension plans eat a lot of the RRSP Cont room.

I am bailing out of work at 49.7 Years to take the transfer value.   Pension Splitting with my wife's DB Pension we can adjust our Annual Incomes as my entire pension will be in RRSP/TFSA/LIRA accounts which I can direct how much I can take out a year.

I am just glad I got my "arse" in gear this year and learned everything I could about retirement and investing.

I unfortunately fell into the DSC Mutual funds trap and the wife and I have a good chunk of our RRSP's in DSC Funds.    I am moving 10% each year free into Index Funds over the next 3 years until I move it all out Fee Free.  At least the Funds we do have returned a 5%+ annually.

Now we only add to our TFSA/RRSP index funds going forward.