Am I understanding the following correctly:
• If I want a low-cost, yet managed, account in mutual funds, I could go with TD Online Brokerage.
Yes, the TD e-series are by far the cheapest MER mutual funds in Canada. I like them because they’re convenient and I already have an account with TD. You need an Online Brokerage account because they won’t let you invest in the e-series if you just have a regular bank account with them. Note that the e-series are index funds, not actively managed. So they’ll track the Toronto Stock Exchange, S&P 500, European & Asian markets, Canadian bond market, but are less managed than many other mutual funds (hence the low cost).
• If I want EFTs with low transaction fees on each purchase, I can go with Questrade, etc, but that would be a separate company and account from anything I do with TD Online Brokerage.
• If I want REITs, I can do that through my account with Questrade (or whichever one I choose).
Yes, the Questrade and TD account would be separate and you’d have to deal with two companies. REIT ETFs, Stock ETFs and Bond ETFs, etc. can all be purchased through a brokerage whether it’s TD, Questrade, Scotia iTrade, QTrade, or any other. If you want to consolidate everything with one brokerage so that you don’t have deal with two companies then you should decide how you plan to invest:
- If you want to buy REIT ETFs twice per year, for example, that would cost you $10 per trade ($20/year) with TD, but you’d also be able to invest in the TD e-series with no transaction costs. By the way, you’d need more than $50,000 household assets invested with TD to get $10 transactions. Below $50k it’s $30 per trade.
- If you’re planning to buy REIT ETFs with regular monthly contributions then TD would cost you $120 in transaction fees, since it’s $10 each time. In that case, you’d be better off putting your money into Questrade where they give you free ETF purchases, but you’d pay a transaction cost when you sell them. You need to have at least $5,000 in Questrade to get the best rates.
- If you’ve never bought or sold an ETF before, they’re just like buying & selling individual stocks. You look at the price and decide how many you’d like to buy. Then you place your order and the brokerage executes the trade for you when a seller(s) are found that match your price/qunatity. Otherwise, ETFs are like mutual funds in that they’re bundles of various stocks, bonds, real estate, etc. ETFs have way lower fees, though, that’s why it’s worth the effort to open the brokerage account, especially since you have six figures to invest.
• In my low tax bracket, dividends would be taxed at a very low rate, so dividends are an option.
If I’m correct that you live in BC, then dividends are even better for you.
http://www.taxtips.ca/taxrates/bc.htmThe link above shows the marginal tax rates in British Columbia. Notice that in your province the marginal dividend rate for incomes below $37,606 is -6.84%. Yes, negative. That means that you can collect dividend income and not only will you not pay taxes on them, you’ll actually get a tax reduction. The BC government won’t send you a cheque but you can use dividend credits to reduce the other income tax you pay.
Even if you lived in a different province, dividends have virtually no cost. The key advantage, is that once you’ve filled up your RESP and TFSA limits, your extra money is invested in a taxable account. By collecting dividends you’re building your net worth without paying any taxes. However, if the money accumulates in a growth stock, then you’ll pay capital gains.
As a comparison, let’s say you invest $50,000 in a growth stock that grows 6% per year and then you sell it 12 years from now for $100,000. Your capital gains are $50,000 but the government only requires you to report half of your capital gains. So you’d report $25,000 income in the year 2026.
As an alternative investment, let’s say you invest $50,000 in a stock that grows 3% in value but also pays you 3% in dividends. Assuming you re-invest your dividends, this fund also grows at 6% per year but you’d be reporting your dividend income each tax year (in your case, paying essentially no tax). At the end of 12 years this fund is also worth $100,000 but since half of the earnings came from previously reported dividends, then you’ve only got $25,000 of capital gains. In 2026 you’d only have to report $12,500 of income.
Dividends also give you a cash flow for future RESP and TFSA contributions. In 2015 you’ll have another $5,500 of TFSA contribution room. If you like to invest with monthly contributions, that works out to $458.33 per month. Regular dividend flows from a taxable account that get re-invested into a TFSA is a nice way to always have money for TFSA contributions while minimizing taxable gains.
Questions:
If I don't need them to live on, what is the advantage of my receiving dividends vs increased growth?
I currently bank at VanCity and would be inclined to set up my TFSA there. I also love my banker there. On the other hand, moving my business account to RBC would create additional income in that PayPal would stop charging me that weird, extra conversion fee (RBC is the only exception to this oddity). Finally, I like to make everything as simple and one-stop as possible. Are all the investment options available through one place, such as TD?
For your TFSA, all income is tax-free so it doesn’t matter whether it’s capital gains or dividend payments, all growth is treated the same. But the money invested outside of a TFSA is taxable. So in your situation it’s best to collect your dividends in a taxable account (where you’re not paying taxes on your dividends anyway). Then put bonds and stocks inside your RESP or TFSA where they’ll grow tax-free. If you have bonds or GICs outside of a tax-free account then all the interest income is taxable income.
If you use PayPal a lot and want to bank with RBC to save money, then RBC has some Index funds that have a 0.72% MER. They’re basically the same as the TD e-series but with MERs about 0.3% higher. However, the 2 advantages are that they’re very simple (a regular bank account is enough, you don’t need an Online Brokerage account) and also you’d be saving on PayPal costs. If you think the PayPal savings are worth more than 0.3%, then consider investing with RBC.
I don’t know anything about Van City but if you want to invest with them, ask if they have an online brokerage, or whether you have access to low-MER mutual funds. If you’re investing $150,000 then saving 1% on your MERs will save you $1,500 per year and that savings will grow as your investment portfolio grows. So always make sure that your investments have low MER and make sure you're investing with a company that meets your investment needs.
Revelation:
I didn't realize/know that a TFSA can hold investments. I thought it was just a savings account in which the interest from the bank wasn't taxed. I couldn't see how that would be worth even the effort of opening it, because "how much interest do banks give us"? Maybe this is why so many other Canadians haven't opened one either!
A lot of people think that, probably because of the “Savings Account” part of the name. Banks also advertise TFSA GICs a lot, and that reinforces the belief. RRSPs, RESPs and TFSAs can invest in stocks, bonds, mutual funds, REITs, GICs, etc.
Because of the unlimited potential for tax-free growth, TFSAs should actually have your most aggressive investments. That’s my philosophy: anything in an emergency savings account is taxable (since there’s so little taxable income being produced on low interest rates) and I use the TD e-series funds for my TFSA. I like aggressive investing so I’ve only got 15% bonds, 85% Canadian, US & International Equity. For my RRSPs I invest in U.S. ETFs.
And, lastly, if you still don't feel confident about any aspect of investing, there are financial advisors that can help you out.