# Mutliple accounts makes re-balancing a nightmare!



## investordude (Dec 14, 2012)

Hi guys

I'm having a hard time adjusting my portfolio to my targeted allocations. Because i treat my margin, RRSP, TFSA, RRSP Spousal and my wife's TFSA as one portfolio, it's difficult to keep things balance. All of this accounts are meant for a long-term horizon.

For instance, let's say I'm up 10% on my Margin and down 10% on my TFSA, I can't just sell a portion of my margin and use this money to buy more in my TFSA, why? because there is a contribution limit that I must not go over.

I'm curious how everyone does it...or do you guys keep these accounts as separate portfolios? 

Thanks


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## Sampson (Apr 3, 2009)

At some point, registered accounts might fill up so I make new purchases in a non-registered account. The relative value of each account is meaningless to me, in other words, if the margin account is up 10%, TFSA down 10% and this redistributes my allocations outside the target, then I buy or sell (almost always buy) in a different account.

I think the tax considerations of keeping certain investments in specific accounts is much less important than maintaining a higher level portfolio asset allocation.


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## ChrisR (Jul 13, 2009)

Up to this point I have tried to manage all of my accounts (RSP, TFSA and non-registered) as one large portfolio, placing my fixed income and US stocks in the RSP, international stocks, emerging markets and REITs in the TFSA and Canadian stocks in the non-registered account. Like you, I'm limited for space in my TFSA and RSP and find maintaining the proper asset allocation to be a nightmare.

Unless I find a way to clearly manage my asset allocation I will probably re-organize the accounts as separate portfolios, each with it's own unique asset allocation (based on when the money will be needed, and what it is needed for).

One of the factors I'm having a tough time wrapping my head around is the difference in the value of a dollar held in each of these accounts. There is no question that a dollar held in the TFSA is worth more than a dollar held in an RSP (because the tax has already been paid on the dollar in the TFSA) or a dollar held in a non-registered account (because the dollar in the TFSA can earn income tax-free). Should this be considered when re-balancing?


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## Worm (Nov 18, 2012)

I had the same challenges, so basically ended up treating them separately. In my wife's and my TFSA I've been able to do a very minor amount of sharing and treating more like one account with 2 asset classes but that is it. I find with the differing contribution limits and sizes of accounts in our RRSP's it is impossible. 

I like the idea and how you could potentially reduce transaction costs, but found it less than practicale for me.


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## james4beach (Nov 15, 2012)

You may not like this idea, but I pad each of my accounts with cash. So for instance my RRSP and TFSA accounts both contain a high interest savings account (I use TDB8150 at TDW).

So when I need to rebalance, I can usually make use of that cash cushion to achieve my desired %s.


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## Jungle (Feb 17, 2010)

I had the same issues when I did couch potato and just decided it was easier making each account it's own allocation..SO much easier. I know this might cost a fraction more because of tax treatment, but I figured what was simple and easier was best, the difference in tax savings somewhat trivial.


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## KrissyFair (Jul 8, 2013)

Definite pain. Especially when you're just starting out and small and/or uneven amounts in each type of account so maybe you're not even able to hold things in a way that's tax-optimal.



james4beach said:


> I pad each of my accounts with cash.


I try to do that but I'm having serious issues with Itchy Trigger Finger Syndrome.


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## investordude (Dec 14, 2012)

Thanks Guys...

After reviewing this, I might have to treat each account as separate accounts. I want to keep things simple and looks like that's the best way forward.


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## Sampson (Apr 3, 2009)

That's the approach most have taken, but why is it hard to allocate as a whole? I don't get it.

How many holdings do you plan to have?

To rebalance or set the target allocation a simple spreadsheet will do. Just add up the tally for your family (in terms of number of units held), then rebalance into/out of the most tax-optimal account.

By treating each account separately, you will likely incur much higher transaction fees since you will be performing the same trade in each account (say selling equities and buying bonds, here 2 transactions multiplied by number of accounts), vs. 2 trades if all assets are considered a single portfolio.


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## andrewf (Mar 1, 2010)

I'm guessing the problem is holding the same security in multiple accounts? Is avoiding this what makes treating all accounts as one portfolio difficult?


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## CanadianCapitalist (Mar 31, 2009)

I really don't understand why rebalancing across accounts has to be painful either. I just consider all accounts as one giant pot with portfolio components located where they are tax efficient. In portfolios where regular savings are added, rebalancing by selling some asset class and buying another should be relatively infrequent anyway. 

Couple of observations:

1. Tax savings is a free lunch. Why would investors sacrifice it? The difference in tax savings are not trivial. If you hold US stocks or ETFs in a TFSA instead of a RRSP, you are incurring a cost of 0.30%. Why pay a cost you don't have to? The tax hit might be even larger when you hold foreign stocks in a taxable account when you could have held it in a RRSP. Here's an example. Assume investor has $50K in Canadian stocks and $50K in foreign stocks. RRSP room is $50K and investor has a 50-50 Canadian-foreign allocation. 

Case 1: Investor keeps foreign stocks in RRSP and Canadian stocks paying 3 percent dividend in Taxable. On $1,500 worth of dividends, investor has a tax liability of $375 (25 percent tax rate on eligible dividends).

Case 2: Investor has a 50-50 allocation. Let's assume foreign stocks pay a dividend of 2.5 percent and Canadian stocks 3 percent. On $1,375 worth of dividends investor has a tax liability of $456 (25 percent tax rate on eligible dividends and 43 percent tax rate on foreign dividends).

2. It's true that RRSPs have future tax liabilities. That can be easily managed at the time of withdrawals by rebalancing within tax sheltered accounts to the asset allocation at a future point in time.

3. As already pointed out, maintaining identical portfolios likely means more trading and hence extra costs.


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## MrMatt (Dec 21, 2011)

investordude said:


> I'm having a hard time adjusting my portfolio to my targeted allocations. Because i treat my margin, RRSP, TFSA, RRSP Spousal and my wife's TFSA as one portfolio, it's difficult to keep things balance. All of this accounts are meant for a long-term horizon.
> 
> For instance, let's say I'm up 10% on my Margin and down 10% on my TFSA, I can't just sell a portion of my margin and use this money to buy more in my TFSA, why? because there is a contribution limit that I must not go over.


When you rebalance, focus on the asset allocation you want, and the money you have today.

Here is an example
Lets say your target is 70/30 equity/bond.

Lets say you have 
TFSA $10k equity $10k bond
RRSP $50k equity $30k bond

Total portfolio is $100k, split 60/40, to get it in balance, you need to shift $10k from bond to equity.

Adding more accounts or categories doesn't change much.
I actually built a spreadsheet that has all my accounts (along with current stock quotes) which makes this inspection trivial.


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## Eclectic12 (Oct 20, 2010)

CanadianCapitalist said:


> I really don't understand why rebalancing across accounts has to be painful either.
> 
> I just consider all accounts as one giant pot with portfolio components located where they are tax efficient.


+1




CanadianCapitalist said:


> 1. Tax savings is a free lunch. Why would investors sacrifice it?
> The difference in tax savings are not trivial.
> 
> If you hold US stocks or ETFs in a TFSA instead of a RRSP, you are incurring a cost of 0.30%.
> ...


I'm not understanding the 0.30% (I'm thinking a typo?) tax hit in the TFSA.

If it's a non-dividend paying US stock - the TFSA is better than the RRSP (no tax hit versus tax deferred in the RRSP - though only less than the full $ can be invested).

If it's a dividend paying US stock - the tax hit paid to the IRS, should be 15% of the dividends (i.e. 0.15 ) compared to the RRSP.


Cheers


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## CanadianCapitalist (Mar 31, 2009)

Eclectic12 said:


> I'm not understanding the 0.30% (I'm thinking a typo?) tax hit in the TFSA.
> 
> If it's a non-dividend paying US stock - the TFSA is better than the RRSP (no tax hit versus tax deferred in the RRSP - though only less than the full $ can be invested).
> 
> If it's a dividend paying US stock - the tax hit paid to the IRS, should be 15% of the dividends (i.e. 0.15 ) compared to the RRSP.


You are right about the tax treatment. I was responding to a post about holding couch potato components. US stocks pay 2% dividends, so a 15% withholding tax on it works out to an extra cost of 0.30% if one held a US index fund in a TFSA instead of a RRSP.


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## Eclectic12 (Oct 20, 2010)

CanadianCapitalist said:


> You are right about the tax treatment.
> 
> I was responding to a post about holding couch potato components. US stocks pay 2% dividends, so a 15% withholding tax on it works out to an extra cost of 0.30% if one held a US index fund in a TFSA instead of a RRSP.


Fair enough ... I missed the first part.


Cheers


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## investordude (Dec 14, 2012)

CanadianCapitalist said:


> I really don't understand why rebalancing across accounts has to be painful either. I just consider all accounts as one giant pot with portfolio components located where they are tax efficient. In portfolios where regular savings are added, rebalancing by selling some asset class and buying another should be relatively infrequent anyway.


OK let's take the Canadian couch potato portfolio...

Complete Couch Potato 
iShares S&P/TSX Capped Composite (XIC) 
Vanguard Total Stock Market (VTI) 
Vanguard Total International Stock (VXUS) 
BMO Equal Weight REITs (ZRE) 
iShares DEX Real Return Bond (XRB) 
iShares DEX Universe Bond (XBB)


Which accounts would you put these in and how would you re-balance them if say your target was 60/40?


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## CanadianCapitalist (Mar 31, 2009)

investordude said:


> OK let's take the Canadian couch potato portfolio...
> 
> Which accounts would you put these in and how would you re-balance them if say your target was 60/40?


Give me some numbers. What are the actual percentages of the holdings? What registered accounts do you have and how much room in each? How much spills over into the taxable account? How much savings are you adding to these accounts on a regular basis?


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## MrMatt (Dec 21, 2011)

investordude said:


> OK let's take the Canadian couch potato portfolio...
> 
> Complete Couch Potato
> iShares S&P/TSX Capped Composite (XIC)
> ...


Foreign Holdings in RRSP, Canadian holdings in RRSP or TFSA.

If you run out of room, move the investments that will cost you the least tax. This might be Canadian stocks.


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## Eclectic12 (Oct 20, 2010)

MrMatt said:


> Foreign Holdings in RRSP, Canadian holdings in RRSP or TFSA.
> 
> If you run out of room, move the investments that will cost you the least tax.
> This might be Canadian stocks.


If least tax is a criteria, then for Ontario it's not as clear cut.

Where one's taxable income is over $43,561 - once the RRSP is full up, likely it's a better deal to use the TFSA than a taxable account, despite the 15% dividend withholding tax paid to the IRS. 

The Canadian tax for non-eligible dividends is 16.65% and could go as high as 36.47%. Eligible dividends on the other hand, range from 13.43% through 33.85%.
http://www.taxtips.ca/taxrates/on.htm

It's worse in Quebec where between $41,095 up to $43,560, the US stock is at 16.74% (compared to eligible @ 11.16%) & the slightly higher income of $43,561 results in 24.05% (compared to eligible @ 19.22%).

Quebec's non-eligible range is 16.75% through 38.54% where the matching eligible range is 11.16% through 35.22%.
http://www.taxtips.ca/taxrates/qc.htm

PEI has a whopping difference of non-eligible dividends @ 24.46% versus eligible @ 14.19% (difference of 10.27%) at the similar taxable income of $43,561.
http://www.taxtips.ca/taxrates/atlantic.htm

So YMMV ....


Cheers


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## My Own Advisor (Sep 24, 2012)

I'm with Mr. Matt but with some minor changes: Foreign holdings in RRSP, only a few Canadian holdings in RRSP. 

Canadian holdings in TFSA and non-registered. 

I treat it all as one portfolio.


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## MrMatt (Dec 21, 2011)

Eclectic12 said:


> If least tax is a criteria, then for Ontario it's not as clear cut.
> * "Important details omitted"*
> So YMMV ....


Yes, it gets tricky in the details, but the basic idea is simple enough.

If you consider a Income trust vs a bond, I'd throw the trust in the TFSA and leave the bond unregistered.



As far as Canadian holdings unregistered, I really think that's generally a last resort type of thing due to the tax advantages of RRSPs


Arguably there is a special case for dividend payers which you will never sell, purchased when your marginal tax rate is low, but most people don't fall into that category, and even then putting them in a TFSA until it is replaced with another investment makes more sense.

There is only once case where you should hold domestic investments unregistered as opposed to in your TFSA, that is when your effective dividend tax rate is negative. I can't think of any other case where registered beats a TFSA for domestic investments.


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## Eclectic12 (Oct 20, 2010)

MrMatt said:


> Yes, it gets tricky in the details, but the basic idea is simple enough.
> 
> If you consider a Income trust vs a bond, I'd throw the trust in the TFSA and leave the bond unregistered ...


Hmmm ... if you want to stop the bookkeeping, I can see this but from a tax perspective, likely this is not efficient.
Most trusts have a mix of income so they are likely to generate smaller taxes than the bond interest, which is included as income at a 100% inclusion rate.

Then too, where Return of Capital (RoC) is a significant part of the cash distribution - even after the ACB falls negative and the RoC portion has to be reported as a capital gain (CG), the CG inclusion rate is 50%.

Let's say it's $1K in cash distributions versus $1K in bond interest.

For the first fifteen years or more, where RoC is 83% of the cash distribution, one would be paying income tax on $129 and foreign non-business income taxes on $38, where a total of $167 to pay taxes on. I haven't worked out the actual numbers but it would seem clear that paying taxes on $167 is going to be a better deal than on $1K. 

The situation will change should the ACB become negative so that the RoC needs to be reported as a capital gain. But because of the inclusion rate, the comparison works out to something like $582.74 taxable for the trust versus $1K.

Now some trusts will fluctuate wildly and others will be relatively consistent in the makeup of their income.


Cheers


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## Jungle (Feb 17, 2010)

CanadianCapitalist said:


> 1. Tax savings is a free lunch. Why would investors sacrifice it? The difference in tax savings are not trivial. If you hold US stocks or ETFs in a TFSA instead of a RRSP, you are incurring a cost of 0.30%. Why pay a cost you don't have to? The tax hit might be even larger when you hold foreign stocks in a taxable account when you could have held it in a RRSP. Here's an example. Assume investor has $50K in Canadian stocks and $50K in foreign stocks. RRSP room is $50K and investor has a 50-50 Canadian-foreign allocation.
> 
> Case 1: Investor keeps foreign stocks in RRSP and Canadian stocks paying 3 percent dividend in Taxable. On $1,500 worth of dividends, investor has a tax liability of $375 (25 percent tax rate on eligible dividends).
> 
> Case 2: Investor has a 50-50 allocation. Let's assume foreign stocks pay a dividend of 2.5 percent and Canadian stocks 3 percent. On $1,375 worth of dividends investor has a tax liability of $456 (25 percent tax rate on eligible dividends and 43 percent tax rate on foreign dividends).


According to a cc article here, http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/, 

Canadian listed ETFs, that hold US listed ETFS, the withholding tax is not recoverable in rsp.. example BMO ZSP (s&p500 in CAD dollars, sold on TSE)

So you would only be benefit in RSP by holding US listed ETFS, such as SPY..but then you have to convert USD currency, so pick 0.30% withholding tax gone vs currency exchange cost? Is it a wash? 

TFSA neither US or CAD listed ETFS will get the withholding tax back.. but if the RSP example above is a wash anyway, both accounts would be the same?

The only advantage I can think of is the tracking error of holding USD ETFS vs cad listed ETFs. But do we know if in this case it's worth it? 
At some point, the USD has to be converted back to spend in retirement as CAD dollar?

Let me know if this makes sense.


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## MrMatt (Dec 21, 2011)

Eclectic12 said:


> Most trusts have a mix of income so they are likely to generate smaller taxes than the bond interest, which is included as income at a 100% inclusion rate.


Which is why I said 
"If you run out of room, move the investments that will cost you the least tax. This might be Canadian stocks"

In most cases I'd expect the payout of a trust, particularly one with significant RoC, to be significantly higher than most bonds. 

Compare a 5 year GIC @3%, vs Strad Energy Services currently yielding 6% in non-eligible dividends.
Given that the distributions of both are fully taxable, more tax would be saved by putting the trust in your registered account.
If the equity holding was giving eligible dividends, ie a bank, it might be better to hold it outside.


This is all Dependant on your marginal tax rate, expected payouts and eventual capital gains or losses (if any). Which is why I said "cost you the least tax", because we all agree that is the goal, unfortunately determining the solution might be a bit complex.


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## Eclectic12 (Oct 20, 2010)

MrMatt said:


> Which is why I said
> "If you run out of room, move the investments that will cost you the least tax. This might be Canadian stocks"


Hmmm ... maybe I'm taking the lack of caveats & detail for the blanket statements 




MrMatt said:


> In most cases I'd expect the payout of a trust, particularly one with significant RoC, to be significantly higher than most bonds.


Sure ... but that's where the RoC can make a big difference.

Compare a 5 year GIC @ 2% that starts in Jan 2010 versus Chartwell Retirement Residences (CSH-UN.to), where $5K is invested.

If my math is correct, the GIC is paying $100 a year where between 2010 and 2012 for a total taxable income of $300 that is reported on the income tax return. With RoC being at least 83.5% or higher - the taxable income for the trust is $18.56, $16.70 & $64.26 for a total taxable income of $99.52 to be reported.

There also is the reduction of the trust ACB by $366.99, $368.85 & $321.30 but since the ACB is still $3940.85 - unless something changes drastically, there are several more years before either some action has to be taken or the RoC will add approximately $183 of taxable income to leap ahead of the GIC's taxable income per year.

The too, if one is paying attention, is aware of the possibilities and has the TFSA room at the right time, the trust can be transferred close to the date more taxes would be due for a minimal capital gain to the TFSA.




MrMatt said:


> Compare a 5 year GIC @3%, vs Strad Energy Services currently yielding 6% in non-eligible dividends.
> Given that the distributions of both are fully taxable, more tax would be saved by putting the trust in your registered account.


I haven't run the numbers but that looks reasonable. Though with what looks like entirely non-eligible dividends, I suspect this is a corporation rather than a trust.




MrMatt said:


> ,,, This is all Dependant on your marginal tax rate, expected payouts and eventual capital gains or losses (if any). Which is why I said "cost you the least tax", because we all agree that is the goal, unfortunately determining the solution might be a bit complex.


That's where if one knows where the bulk of the gains are - it would much easier to minimize tax. :biggrin:


Cheers


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## CanadianCapitalist (Mar 31, 2009)

Jungle said:


> Canadian listed ETFs, that hold US listed ETFS, the withholding tax is not recoverable in rsp.. example BMO ZSP (s&p500 in CAD dollars, sold on TSE)
> Let me know if this makes sense.


Unless net worth exceeds $5 million, I wouldn't hold Canadian-listed US equity ETFs that are (a) more expensive in MER terms (b) incur a withholding tax hit in RRSP accounts as you point out and most importantly (c) the popular currency hedged funds have additional drag and do not reduce portfolio volatility.

I agree that one has to convert currency to buy US ETFs. But investors can do something about currency conversion fees by Gambitting. They cannot do anything about the points mentioned above.


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## andrewf (Mar 1, 2010)

What about with non-reg? Avoiding tracking ACB in USD might be worthwhile?


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## CanadianCapitalist (Mar 31, 2009)

andrewf said:


> What about with non-reg? Avoiding tracking ACB in USD might be worthwhile?


Maybe. One has to track ACB anyways and I don't see how also tracking currency is an issue. But if an investor does feel this is onerous, they may think the difference in MER is a price they are willing to pay. Of course, the problem of a performance hit from currency hedging will be an issue whether the account is registered or not.


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## ChrisR (Jul 13, 2009)

But what do you do when RRSP space is severely limited? Would you hold a single asset class in the RRSP, or would you try to split up the RRSP among the less tax efficient asset classes?

Initially, I held :
•	Bonds, REITs, US, Int, and EM stocks in my RRSP 
•	EM stocks and REITs in my TFSA 
•	Can stocks in a non-reg account. 

As space in the RRSP became more limited, I started holding small pieces of the other asset classes in the TFSA and non-reg accounts as well. Now I have:
•	Bonds, REITs, US, Int, and EM stocks in my RRSP
•	Bonds, REITs, Int and EM stocks in my TFSA
•	Can, US, Int, EM stocks and REITs in my non-reg.

All in different amounts. What a mess!


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## ChrisR (Jul 13, 2009)

Here is an example of how complicated it gets when the RRSP space is limited (this is not my exact case, but close enough!):

Target asset allocation: CAN = 20%, US = 20%, INT = 20%, Bonds = 20%, EM = 10%, REIT = 10%.

RRSP space = $60,000
TFSA space = $25,500
Total assets = $125,000

Future yearly contributions = $27,500
TFSA space = $5,500
RRSP space = $4,000

Based on these numbers, I could put one entire 20% asset class into the TFSA ($25,000), with just $500 of space left over. I expect that future contributions will maintain the single asset class in the TFSA ($5500 = 20% of yearly input, but of course it also depends on how the single asset performs relative to the portfolio). How many people hold just a single asset class in their TFSA? If you do, how do you decide which one? Aren't you worried that you will pick wrong and end up with the worst performing asset in your TFSA and therefore a low tax saving, and low accumulated TFSA space for the future? 

The RRSP is a little better at first, but because future space is so limited, it will also eventually hold just one asset class. Strategically, I have less problem with this because the RRSP ultimately has to be emptied (in contrast to the TFSA, which could be used to provide tax free income throughout retirement, if it gets big enough). Unfortunately, the logical asset class to hold in the RRSP seems to be bonds. I have a tough time wrapping my head around the logic of holding bonds in a separate account, when the only reason I hold bonds at all is for future portfolio re-balancing!

And if you read all this, I hope that you're not now as confused as I am!


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## MrMatt (Dec 21, 2011)

ChrisR said:


> And if you read all this, I hope that you're not now as confused as I am!


You're over thinking it. Why force each holding account to hold only a single asset?

US, INT & EM in RRSP.
REIT in TFSA & RRSP.

The rest, wherever it fits, the overflow is the tough part.
Deciding what the overflow should be is a bit tougher, but I'd go bonds or the Canadian stocks. 

You could put foreign stuff with non-recoverable withholding in unregistered.


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## CanadianCapitalist (Mar 31, 2009)

ChrisR said:


> Here is an example of how complicated it gets when the RRSP space is limited (this is not my exact case, but close enough!):
> 
> And if you read all this, I hope that you're not now as confused as I am!


It seems to me that you may be among the minority of Canadians who have a good pension plan *and* save a significant portion of their incomes. Good job there!

Unfortunately, there isn't a whole lot you can do because you are able to only shelter roughly 1/3rd of your future savings. So, you are going to eventually have the majority of your portfolio in a taxable account. 

I would start with INT & bonds & a portion of US in RRSP. REITs and Canadian stocks in TFSA. Everything else taxable. Then rejig things a bit the next year.


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## Jungle (Feb 17, 2010)

CanadianCapitalist said:


> Unless net worth exceeds $5 million, I wouldn't hold Canadian-listed US equity ETFs that are (a) more expensive in MER terms (b) incur a withholding tax hit in RRSP accounts as you point out and most importantly (c) the popular currency hedged funds have additional drag and do not reduce portfolio volatility.
> 
> I agree that one has to convert currency to buy US ETFs. But investors can do something about currency conversion fees by Gambitting. They cannot do anything about the points mentioned above.



This _may_ or _may not_ be a clear winner here..with the variables it still might be trivial.. but the answer could be _it depends _

For active contributions, the costs of converting currency might make this even.. I've read the costs of gambitting can range upto 100 basis points still, because of bid ask spread, commission, mer on dlr, etc. Even with us funds like VOO saving 10 basis points over zsp, this could be closer comparison than than we assume.

Now if you did a one time conversion and never had to contribute, or did not have to convert currency, I would say the odds are in _better_ favor of holding us etfs, over a long period.


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## Jungle (Feb 17, 2010)

Personally I like the idea of keepings a simple as possible..keeping each account (6 total) it's own allocation was easier for me. It's quite possible to save 10 maybe 30 basis points but this is not guarenteed and more complicated.


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## richard (Jun 20, 2013)

I've used a spreadsheet for a few years to help me track where I need to make adjustments. I'm building it into a freely-available online tool now, at http://rebalance-my-portfolio.com/. I'd love to hear any feedback on that tool!


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