Q: How do I use the Couch Potato strategy across multiple accounts? We have a taxable investment account, my RRSP, a spousal RRSP and two TFSAs (one for me, and one for my spouse). Should we hold all of the ETFs in each account—which seems cumbersome—or treat them all as one large portfolio? — B.H.
In most cases, you should think of your assets as one large portfolio, and it often doesn’t make sense to simply hold all of your ETFs in each of your individual accounts. This just increases trading costs and complexity. However, it is often impossible to avoid at least some overlap when you’re investing across multiple accounts. Here are the important factors you need to consider as you figure out the right plan for your household assets.
The purpose of the accounts. This is the most important consideration: you should only treat your accounts as a single portfolio if they are intended for the same purpose. If you have a group RRSP through your employer and a self-directed RRSP with a discount brokerage, these are both clearly designed to fund your retirement. So you might hold all the fixed income in one account and all the equities in another, for example. If you plan to use your TFSAs to fund your retirement as well, you should include these in the mix, too.
However, it you plan to use your TFSAs for short- or medium-term savings unrelated to retirement, then you need to think of these separately from your RRSPs. Because they have a different time horizon, they will likely require a different asset allocation.
Differing amounts of contribution room. Tax-sheltered accounts have contribution limits that can vary widely. Everyone gets the same $5,000 of contribution room in their TFSA every year, but RRSP contribution room is based on your earned income. Moreover, in most cases TFSAs can’t be much larger than $20,000, whereas many people have hundreds of thousands of available contribution room in their RRSPs. (Unregistered accounts, of course, have no contribution limits.)
If you’re investing in both tax-sheltered and fully taxable accounts, you clearly want to hold the least tax-efficient asset classes (such as bonds and REITs) in your RRSP or TFSA. And if you need to keep some of your investments in non-registered accounts, it’s wise to make these the most lightly taxed asset classes (usually Canadian stocks). However, you may not have enough contribution room in your tax-sheltered accounts to divvy things up this neatly.
Limited ability to rebalance across accounts. If you’re holding part of your portfolio in a taxable account and part of it in an RRSP, rebalancing becomes problematic. You may want to sell some bonds and use the proceeds to buy more equities, but you can’t take money out of your RRSP to do this (not without tax consequences, anyway).
Likewise, if you and your spouse are approximately the same age and planning to retire together, you might think of your combined RRSP assets as a single portfolio. But rebalancing is a problem here, too, since you can’t transfer money from your RRSP to your spouse’s.
The bottom line, then, is that you should start by thinking of your assets as a single portfolio and keep your number of individual holdings to a minimum. But you will need to spend some time considering the practical obstacles you’ll face as manage your portfolio across multiple accounts.
Later this week, I’ll be offering a useful spreadsheet that readers can download to help them with this important but confusing task.