Author Topic: TFSA - Canada building $1m  (Read 6016 times)

kfire20

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TFSA - Canada building $1m
« on: April 18, 2016, 10:24:50 AM »
Interested in thoughts on this article's strategy on building a million.

http://www.theglobeandmail.com/globe-investor/retirement/retire-taxes-and-portfolios/how-to-build-a-1-million-tfsa/article29655504/

Suggested strategy:

The ETF strategy

Here’s the mix of ETFs Mr. Bender and Mr. Barolotti suggest can lead you to $1-million:

25 per cent Vanguard Canadian Aggregate Bond Index ETF (VAB)
25 per cent Vanguard FTSE Canada All Cap Index ETF (VCN)
50 per cent iShares Core MSCI All Country World ex Canada Index ETF (XAW

Heckler

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Re: TFSA - Canada building $1m
« Reply #1 on: April 18, 2016, 01:51:05 PM »
My plan has two TFSAs topping out around $120k each in 8 years. All VCN except for $21k VSB big emergency fund.

RichMoose

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Re: TFSA - Canada building $1m
« Reply #2 on: April 20, 2016, 08:33:21 AM »
This is simply an article reminding people about the power of compounding interest with a safe, smart asset allocation. My goal is to have our TFSA accounts be valued around $150,000 each in 10 years when we pull the plug from full-time work.

The portfolio that Bender suggests is a basic Canadian Couch Potato portfolio that we recommend here on MMM forums all the time. You should be able to count on 6% real return over the long run.

Posthumane

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Re: TFSA - Canada building $1m
« Reply #3 on: April 20, 2016, 08:49:09 AM »
That portfolio is basically the "assertive" canadian couch potato portfolio, only using XAW instead of VXC. When we set up my wife's TFSA, we went with the "balanced" mix of pretty much the same funds (40% VAB, 40% VXC, 20% VCN). It's a nice, simple portfolio.
http://canadiancouchpotato.com/wp-content/uploads/2016/01/CCP-Model-Portfolios-Vanguard-2015.pdf

Mmm_Donuts

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Re: TFSA - Canada building $1m
« Reply #4 on: April 20, 2016, 08:54:23 AM »
Bender and Bortolotti who are quoted in the article are Canadian Couch Potato. At least, Dan Bortolotti is the main author, and they work together at PWL Capital. Justin Bender does a lot of the white papers for CCP.

This is a great article to remind people how to use TFSAs to their best advantage. Sadly most people treat it like a savings account. I probably won't be able to get mine to 1MM, as I'm in my 40s, but it would be great to see 500k in there eventually.

Retire-Canada

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Re: TFSA - Canada building $1m
« Reply #5 on: April 20, 2016, 09:17:26 AM »
I plan to max my TFSA every year including in many years of FIRE to get it as high as possible while tax optimizing my RRSP withdrawals by starting early and ensuring my mandatory withdrawals are not an issue.

I wish I was younger so I had more time to invest and grow my TFSA.

GuitarStv

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Re: TFSA - Canada building $1m
« Reply #6 on: April 20, 2016, 09:31:47 AM »
I plan to max my TFSA every year including in many years of FIRE to get it as high as possible while tax optimizing my RRSP withdrawals by starting early and ensuring my mandatory withdrawals are not an issue.

I wish I was younger so I had more time to invest and grow my TFSA.

+1

. . . on all counts

nobodyspecial

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Re: TFSA - Canada building $1m
« Reply #7 on: April 20, 2016, 10:17:28 PM »
I plan to max my TFSA every year including in many years of FIRE to get it as high as possible while tax optimizing my RRSP withdrawals by starting early and ensuring my mandatory withdrawals are not an issue.
Hadn't thought of it like that, but it does make sense to empty the RRSP first to fill the TFSA once you stop earning income.

Retire-Canada

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Re: TFSA - Canada building $1m
« Reply #8 on: April 21, 2016, 07:00:05 AM »
Hadn't thought of it like that, but it does make sense to empty the RRSP first to fill the TFSA once you stop earning income.

On top of the straightforward tax issues of big mandatory RRSP withdrawals during the later part of FIRE you may also lose out on some income tested benefits which are not affected by TFSA withdrawals or [I believe] dividend/cap gains from a Non-Reg account. That essentially amounts to another layer of tax/cost to leaving RRSPs to grow.

What I will do is figure out an average income level I can reasonably sustain through FIRE. Say it's $40K and if the next significant tax bracket jump is at $50K I'll shoot to take out $10K/extra per year from my RRSP to top up to that tax bracket. The extra money goes into my TFSA and my Non-Reg accounts.

RichMoose

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Re: TFSA - Canada building $1m
« Reply #9 on: April 21, 2016, 08:55:45 AM »
On top of the straightforward tax issues of big mandatory RRSP withdrawals during the later part of FIRE you may also lose out on some income tested benefits which are not affected by TFSA withdrawals or [I believe] dividend/cap gains from a Non-Reg account. That essentially amounts to another layer of tax/cost to leaving RRSPs to grow.

What I will do is figure out an average income level I can reasonably sustain through FIRE. Say it's $40K and if the next significant tax bracket jump is at $50K I'll shoot to take out $10K/extra per year from my RRSP to top up to that tax bracket. The extra money goes into my TFSA and my Non-Reg accounts.

Be careful with dividends. If they are Canadian eligible dividends the amount used for OAS purposes is actually the grossed-up amount. Capital gains on the other hand are rarely an issue because only 50% of the gain is taxable. Of course ~$73000 per person is a lot of a money for a mustachian, but something to keep in mind for dividend fanatics anyways.

meghan88

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Re: TFSA - Canada building $1m
« Reply #10 on: April 21, 2016, 08:56:14 AM »
I plan to max my TFSA every year including in many years of FIRE to get it as high as possible while tax optimizing my RRSP withdrawals by starting early and ensuring my mandatory withdrawals are not an issue.

I wish I was younger so I had more time to invest and grow my TFSA.

Oh ya.

Would you (or any other Canadian Mustachian) be able to point to a good resource for tax optimizing my RRSP?  I keep maxing it out my contributions every year and now it's starting to worry me that I won't be getting it out in a tax-efficient way.

RichMoose

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Re: TFSA - Canada building $1m
« Reply #11 on: April 21, 2016, 09:06:08 AM »
Oh ya.

Would you (or any other Canadian Mustachian) be able to point to a good resource for tax optimizing my RRSP?  I keep maxing it out my contributions every year and now it's starting to worry me that I won't be getting it out in a tax-efficient way.

There are no hard fast rules to this. It depends on these factors: 1) value of RRSP at retirement, 2) age at retirement, 3) number of years before you turn 71, 4) value of assets in other locations, 5) whether you are single or a couple and if the RRSPs are individual accounts or spousal accounts, 6) where you live in retirement. If you could answer these I could help you out with some considerations.

Retire-Canada

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Re: TFSA - Canada building $1m
« Reply #12 on: April 21, 2016, 01:40:55 PM »
  I keep maxing it out my contributions every year and now it's starting to worry me that I won't be getting it out in a tax-efficient way.

For contributing some simple ideas:

- estimate what you need for retirement income
- any year your RRSP-adjusted income is less than this it's not a good idea to contribute
- if you are making substantially more now than than your expected retirement income it makes sense to contribute
- if you are making close to what your retirement income is going to be it's hard to say if you'll come out and ahead or behind
- if you expect some big $$ years ahead keep in mind saving your contribution room now means you can level out a big spike in income later
- you are basically trying to decide if you'll pay more taxes on that contribution amount now or in retirement

For optimizing withdrawals:

- project your RRSP value to 71 based on the best assumptions you can make
- use the most current mandatory withdrawal rate info you have and see what that would mean in annual income [including any other sources of income you have]
- if the result is too high you want to contribute less and/or withdraw more sooner
- keep in mind there is no penalty for early withdrawals
- understand where the major marginal tax rate changes occur for you [ie. if you want $40K/yr in FIRE and the next jump in tax rates is $55K]
- if your RRSP projections show you'll have too much mandatory withdrawal $$/yr at 71 you know that if your income in an earlier year is $45K you'll want to take an extra $10K out of your RRSP to hit ~$55K
- that reduces your mandatory withdrawal down the road and means you'll pay less tax now [assuming no tax law changes] than if you waited until 71 and had to take say $80K/yr income from your RRSP

You'll need to re-evaluate each year as things change.

- you want to even out big income spikes
- avoid large mandatory withdrawals starting at 71
- if you have low earning years take the opportunity to withdraw RRSP $$ at that point
- RRSP withdrawals can be immediately reinvested in Non-Registered accounts or TFSA accounts [if you have room].

http://retirehappy.ca/developing-rrsp-withdrawal-strategies/

A detailed spreadsheet will be your friend and let you wargame various possible scenarios. Keep in mind there is a lot of uncertainty in this sort of planning. So you want to avoid big tax hits and capture big tax savings. Once that's done don't get too wrapped up in trying to optimize down to +/-1%. It's probably a waste of time.
« Last Edit: April 21, 2016, 01:46:29 PM by Retire-Canada »