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.
“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.”
If you are young and plan to use your TFSA for retirement, why not hold the highest growth potential ETF’s in your TFSA accounts so in the future your tax free income will be higher?
@Ryan: That’s a good point, and a great strategy in many situations. However, young investors are often able to save all of their money in tax-advantaged accounts, and they’re not often faced with the tax issues of older, wealthier investors. People who have maxed out their RRSPs and TFSAs need to keep their non-registered accounts as tax-efficient as possible.
Thanks for the interesting post, Dan. This is an issue that I have struggled with for the last few years — I try to keep my Canadian equity in my wife and my non-reg account, and my bonds in our RRSPs, and all else (international/US equity) in our TFSAs.
The biggest problem I face is the fact that the amount of contribution room in our RRSPs and TFSAs is quite limited (due to our employer’s pension plan reducing our RRSP room). This causes us to buy things in our non-reg account, which can be quite expensive in terms of currency exchange costs. My brokerage (Questrade) gives us a preferential rate for currency exchanges for our RRSPs and TFSAs, but not for non-reg accounts.
If only Vanguard would get their act together and offer some non-hedged international ETFs on the TSX… then all these currency exchange hassles would go away. Oh well. One can hope, right?
@Raman: Have you tried Norbert’s gambit to do your currency conversion?
No, I haven’t… I’ve considered it, but it hasn’t seemed worthwhile to me yet (at least for my registered accounts). I think I’m hit with a 0.5% currency exchange fee in those accounts with Questrade. When I did the calculations for bringing in $10,000 with Norbert’s gambit, the cost turned out to be 3 transactions (about $30 total) + the loss on the bid/ask spread of DLR (about 2 cents, i.e. about 0.2% for a DLR cost of about $10). The total cost is about $50, or 0.5%.
When buying directly, the cost is only about $10 (the transaction cost) + the 0.5% exchange free, or $60 (0.6%). The difference of $10 didn’t seem to be worth the worry of going through Questrade’s customer service lines for the phone call. I decided that the 15 min on the phone wasn’t worth the $10.
However, in a non-reg account I believe the exchange fee is something like 1.5% — and so I hold no US-listed ETFs there, just some iShares hedged ETFs I’ve held for ages.
I hope that all this currency exchange business will be finished soon. I’ve been buying VEE (Vanguard’s EM ETF on the TSX, which is unhedged), and I hope that they bring in other unhedged ETFs soon.
With bonds yielding 2%, I’m wondering how critical it is to keep them in registered accounts. A dividend paying stock paying 4% yield is more advantageously held in a TFSA than a 2% coupon bond, without even accounting for capital gains.
@Andrew: In some cases you may well be right. But keep in mind that bonds are taxed according to their coupon payments, not their effective yield, and these can easily by 4% or more. When bonds are purchased at a premium they are also extremely tax inefficient.
http://www.theglobeandmail.com/globe-investor/investment-ideas/dan-hallett/should-you-hold-bonds-in-taxable-accounts/article2295941/email/
https://www.pwlcapital.com/Advisor/Toronto/Kathleen-Clough—Justin-Bender/Justin-s-Blog/Blog—Justin-Bender/February-2012/Can-You-Earn-a-Negative-After-Tax-Return-on-a-Bond
If my registred account are full when I try to track youre complete Coach Patato porfolio should I switch for those ETF that are more than more tax efficient than your suggestion outside the registred account? If yes which ETF do you suggest for those you are in the highest tax rate and for those in the middle tax rate?
Thanks for this excellent and again, timely post. I was currently looking at how to manage my portfolio if I want to both save for retirement and for that downpayment on a house in a few years from now. I’m 28.
My RRSP total contribution room (I haven’t contributed yet) is a meager 3000$ so ETFs are out of the question, so I might go for ING Streetwise Funds for a while. What is your opinion on their latest Streetwise Equity Growth fund?
Great article. I have been wondering how to allocate to my different accounts between my TFSA and RSP. I think a long term investment is well suited to the TFSA but, shorter term riskier investments belong in a Investment Account. The reason is that if you put equities in your TFSA and they lose 50% of their value you cannot claim the capital loss against future capital gains. Also, if you borrowed to invest in the TFSA you cannot deduct the interest expense. I plan to keep Short-Intermediate term bonds and cash in an investment savings account paying 1.25% in my TFSA and keep everything else in the RSP. Another thing is that if your investments fall in value in your TFSA and you go ahead and sell them at a loss you lose the contribution room and don’t get it back! It does work the other way too though :)
@Jason
I suggest putting your money into a TFSA and investing in GIC’s. They don’t pay you a whole lot right now but, you could earn up to 3% annually for a 5 year term and your principal amount and interest are then guaranteed! If you have a less than 5 year investment horizon you should not invest in mutual funds because you are more at risk of losing money with a short time horizon. If your investing for more than 5 years a nice 50% mix of stocks and 50% bonds would be what I would do. If you don’t have $30,000 to invest in ETF’s you can use index mutual funds that don’t cost anything to buy or sell and cost 1/2 what the Street Wise funds do. Being a new investor though with a > 5 year horizon it would not be a bad idea to buy a simple conservative mutual fund if you feel like gambling a little. I say the GIC’s in a TFSA are the way to go.
Oops meant to say bonds in TFSA or RSP not the IA
@Jason: I think the Streetwise Equity Fund is likely to be a good choice for small amounts, especially for investors who like the ease of using ING Direct (no brokerage account, no annual fee, one fund with no rebalancing). The 1% fee is higher than the e-Series funds, but as I stressed in my post last week, 50 basis points is not a big deal at this point. It’s $15 a year on $3,000. For the down payment, though, you really have little choice: it has to be high-interest savings or a GIC, otherwise you risk losing significant capital.
@John and CCP: Thanks for the wise words. I guess I’ll be looking at a much more conservative asset allocation than what I originally thought of.
@Jason: Some posts that may be helpful:
https://canadiancouchpotato.com/2010/11/10/ready-willing-and-able-to-take-risk/
https://canadiancouchpotato.com/2011/08/09/do-you-have-the-right-asset-allocation/
Jason and John, there’s no need to lock yourself in to a 5 year GIC to get a 3% return in a TFSA. Both Peoples Trust and Canadian Direct Financial offer 3% high interest savings accounts within TFSAs. Both are CDIC insured. The rate could fluctuate but it hasn’t since TFSAs were introduced in 2009.
Looking forward to the spreadsheet; you come up with such great ideas, thanks!
Dan, what do you think of this idea for a solution? Make all your purchases in the taxable investment account and then make free position transfers to your other registered accounts.
@Que: That can be very effective when buying US-listed ETFs, but remember there are some potential consequences: a quick run-up in process before the transfer goes through can leave you with a taxable capital gain that you could have avoided by purchasing the securities directly in the registered account:
https://canadiancouchpotato.com/2012/02/27/a-new-way-to-sidestep-currency-conversion-costs/
Did I catch the following correctly, the maximum contribution level to place into a tfsa will be no more than $20,000? Has the government placed a $20,000 ceiling?
Thank you
@Superior John: Sorry if that wasn’t clear. All I meant is that the current contribution limit for TFSAs is $20,000 ($5,000 per year since 2009). If your TFSA investments were very successful, you could have a lot more than $20K in there now, but anyone opening their first TFSA today could not contribute more than $20K.
Thanks a million Dan!
My wife and I have employed this strategy with 5 accounts (2 TFSA, 2 RRSP, and 1 non-reg) for some time now. We are finding that right now our account value is still low enough that when it comes to re-balancing we are just buying. We realize that as the account value grows we will have to be selling as well as buying in order to properly balance the portfolio, and I know that this will make things a little bit more complicated.
I did make up a spreadsheet that I have been using. I am interested to see your spreadsheet Dan, as Im sure its much less complicated than the one I created on Excel!
Thanks for a good post.
Dave
When it comes to rebalancing, I usually forcast an overall portfolio amount so that I don’t have to sell any but just buy in the appropriate locations. It is simpler and kind of give a goal to aim for. Nothing wrong with a little challenge.
Hi Dan
Thanks for another great post.
Just wanted to thank you for your detailed and practical work.
I started the couch potato approach 1.5 years ago after coming across your site. Lets say I lost confidence in my financial advisor after he kept changing me out of funds that did poorly and recommended my best retirement plan was to purchase an annunity from his company in the future (I have a good defined benefit pension plan).
The hardest thing for me was working out how 3 RRSP accounts and 1 TFSA were going to be combined. All have different amount and different contribution amounts.
Developing spread sheets was the key as well as working out which ETF and mutual funds went well together.
I have found it helpful to have the bulk of the money in ETF and a smaller amount in mutual funds. The mutual funds make it easy to add small amounts every month and to rebalance by just doing a mutual fund switch. The bulk in ETF keeps the overall mer low.
Thanks
Del
@Dave and Del: Thanks for the comments. I think you will like the spreadsheet.
Cheers,
Dan
Hi Dan,
Thanks for this timely and relevant information.
Just a question that I’ve never seen addressed. You’ve indicated the least tax efficient asset classes (bonds and REITs) are best held in an RRSP or TFSA, and Canadian equities are best held in a non-registered account. But what about US and International equities? If one have limited RRSP room…. after Canadian equities, which is the next best asset class (from a tax perspective) to hold in a cash account?
Thanks!
@Jane: Thanks for the comment. This post should answer your question:
https://canadiancouchpotato.com/2010/03/05/put-your-assets-in-their-place/
Here is one way to think about it.
Bucket 4 asset classes according to short term cash flow needs, long term savings plans and tolerance for losses and what you already have. This is your broad asset allocation:
Cash and cash like instruments: HISAs, other savings accounts, CDs, short GICs
Non Equity Correlated: Bonds, GICs and alternative uncorrelated strategies
Equity Correlated: Equities, REITs, Commodities
Absolute Return: Indexed Pensions (even CPP – it has an actuarial value in the present and is a kind of super bond which is part of asset allocation), Real Return Bonds, Rate Reset Preferreds
Make a table of any accounts you have and the savings goals for each account (how much you expect to add annually): Open accounts (taxable), RSP, TFSA, RESP
Allocate to the table so that your asset allocation is met with several things in the back of your mind:
Does this deploy capital optimally from a tax perspective? Is this tax efficient?
How will the yield from the account be taxed? (is the yield tax optimal)
Is there a way to do this that would have a lower MER as a whole?
Is anything unnecessarily duplicated?
Will the future amounts in this account change my tax position?
Is this easy and inexpensive to rebalance?
Is this as simple as possible? Do I understand this structure?
If you are using an advisor I would raise some of these issues because it is surprising how many advisors do not consider things like tax efficiency carefully enough.
Tax efficiency is still a topic I need to look into more. In my RSP I hold the core 4 including XIC, XBB, and US listed VTI and VEA. I don’t have to worry about the US withholding taxes in this account. I hold the same funds in my taxable account and that bonds are taxed the most and US equities are subject to the withholding taxes. I could replace (or part of) VTI with HXS and XBB with CAB for better tax efficiency but I’m not sure about the additional costs of these funds and potential tracking errors. For now I plan to leave my stuff as it is because I took out an investment loan for my taxable account and if the funds I’m in can’t produce interest or dividends I can’t claim the interest on the loan according to the CRA.
(4th bullet point)
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/221/menu-eng.html
When I need to invest in my non-registered portfolio, what I worry about is that I have to keep track of the ACB’s (costs of buying) every single time, and also when dividends are reinvested. This is because I contribute regularly, like every 2-3 weeks. So it would a real hassle.
When I am about to run out of all my registered accounts’ contribution rooms, I will have no choice but to buy indexes in the non-registered account. On top of that, US and international index funds’ dividends will be treated as regular income. Sigh, taxes… here and there, I am so tempted to just buy some individual stocks in the registered portfolio.
My understanding is that it is a bad idea to put US equities in your TFSA. This is because of the relative age of this account type and its lack of handling of taxation (non-witholding tax) to this point. Can anyone provide comment?
@Habs Stan: US equities held in a TFSA are subject only to the 15% withholding tax on dividends. Assuming a yield of 2% on US stocks, that works out to a drag of just 0.3% (that is, 15% of 2%). And there are no capital gains taxes payable on US stocks in a TFSA, so I don’t think there’s a particularly good no reason to avoid them in this type of account.
@AndrewF: Thanks for pointing out my error (now deleted) in saying that you can claim the foreign tax credit in TFSA. This link may be helpful:
http://blog.taxresource.ca/tfsa-non-resident-withholding-taxes/
What’s this about claiming foreign tax credit for investments in a TFSA?
@John: “Another thing is that if your investments fall in value in your TFSA and you go ahead and sell them at a loss you lose the contribution room and don’t get it back!”
That’s only true if you withdraw the funds from the TFSA. You can sell your losers and keep the cash in the TFSA, and you don’t lose any contribution room.
@Patrick: To correct myself: you only lose TFSA contribution room when you contribute. How your investments do has no bearing on your contribution room. You can actually gain contribution room by withdrawing. If your investments drop and you withdraw them, you will gain less contribution room than you would have had they not dropped. But make no mistake: you lost the contribution room the moment you contributed in the first place.
@Patrick
Yes you can change your contribution room. Let’s say you invested $20,000 in Equities and they increased by 50% that year. Your contribution room will have grown to $30,000 and then you sold everything and withdraw the funds. The next year you would be able to contribute $35,000. Neat Eh :)
I have TFSA accounts for myself and wife. On December 31 I had the maximum $15,000 in each one. In the 2 accounts I had a total of 2 ETFs (XRE and FIE) and 2 REITs (CWT and REI). At that time the accounts were up 44.7%. No GICs or Bonds for me in any portfolio.
About holding REITs in a tax advantaged account, I’m not so sure about that. IIRC, approximately 40% of REIT returns are return of capital. And in the case of REITs, the return of capital is “good” return of capital. The return of capital is the result of the tax code allowing building depreciation, when in reality, no depreciation may occur. You’re getting paid money now that you’ll be taxed on at the time of sale; it’s a form of tax deferral. So you’ll lose the tax deferral in a tax advantaged account.
@Pak: Good point. Unfortunately, the percentage of ROC vs. other income changes from year to year — looking at iShares XRE, for example, it was very low in 2011, but much higher in earlier years. So you’re right that ROC (and even capital gains) are quite tax-efficient, but it’s hard to know how the distributions will be characterized from year to year.
I am a complete neophyte to investing and I am having trouble understanding the tax implications of my investments. I have currently maxed out my RRSP and TFSA contributions (they are being professionally managed currently, though I intend to change that). I plan to make a significant investment in one of the model portfolios recommended on this site (probably through TD e-series). Is there an accessible resource that will explain how the earnings on these investments will be treated for income tax purposes? Are there any obious pitfalls I should look to avoid?
Many thanks for putting together such a great site!
@Mike2: Taxes are pretty complicated, but here’s a good place to start:
https://canadiancouchpotato.com/2010/03/05/put-your-assets-in-their-place/
Many thanks!
It seems that the best general advice is to carry much of your bonds in tax free accounts (TFSA and RRSP) and use your taxable accounts for stock indexes.
Hi
Are Bond ETF’s considered equity for tax purposes or as bonds?
Thanks
Mac
@Mac: No, interest from bond ETFs is treated like interest from individual bonds.
Thanks for your great blog! I am going to invest using the eSeries Global Couch Potato model soon but I have a question. I have never made any contribution to my RRSP or TFSA so I have $25500 contribution room in my TFSA and more in my RRSP (I don’t know how much). I am planning on investing $10,000 to begin with and then contribute $1000 every month. Should I initially put all the funds (US equity, Canadian equity+bonds, International equity) in the TFSA until I max out my TFSA and then start putting money into my RRSP? OR should I put the Canadian bonds in TFSA and the rest in RRSP (so I can recover the US withholding tax)? If both are wrong, please let me know where (RRSP/TFSA/non registered) I should put each fund.
@Bob: Welcome aboard. For now your RRSP-versus-TFSA decision should have little to do with specific asset classes. You’ll first need to determine which vehicle is right for your tax situation. Would you get a greater benefit from reducing your income taxes today with an RRSP, or in the future with a TFSA? That depends on your current income level, your expected income in retirement, etc. You can find a lot of info on this question with a simple “RRSP versus TFSA” Google search.
The other decisions about asset location and withholding taxes are very small compared to this much larger issue.
Thanks for the fast reply! I am a recent college grad with an income in the mid 40Ks working my first job. Are there any guides for new college grads to follow? Please write a blog post for new grads in the future if you can (where/how to invest , etc) I think it will help a lot of people. Since my marginal tax rate is low now, which asset location strategy do you suggest?
@Bob: As a general rule, people in a low tax bracket are likely to be better off using a TFSA now and deferring their RRSP contributions until later in their career when their income is higher and they’re in a marginal tax rate. This topic has been well covered elsewhere and I’m not sure I have any insight to add:
http://www.theglobeandmail.com/globe-investor/personal-finance/rrsp-vs-tfsa-tim-cestnick-on-where-to-put-spare-dollars/article1360378/
One thing I have always tried to stress to young investors is the value of simplicity. Get that $10K invested now, and set up a plan to invest another $1,000 a month as you’ve planned. Don’t be distracted by the details of withholding taxes and the “perfect” fund choices. That can come later once you’ve looked after the most important things:
https://canadiancouchpotato.com/2012/03/05/some-advice-for-new-potatoes/
Group RRSP – Hi CCP
I have group RRSP account (Industrial Alliance) through my employer with DPSP. I am only contributing so much to get the max benefit of employer’s contribution. How can I build a couch potato portfolio when there is only 1 index fund in each category? Mer for each fund is between $1.5 and $1.55
TD Emerald Canadian Bond Index
TD Canadian Equity Index
Global equity index ACWI (Blackrock)
International equity index(Blackrock)
US equity Index (Blackrock)
Sorry, if I posted this question in the wrong place.
Thank you