# ETFs in TFSA



## wuinvestor (Mar 23, 2014)

Hello All,

I have about $3000.00 in my ING savings account that I want to put into a TFSA, invested as dividend-paying ETFs. I'll be contributing $100.00 a month to my TFSA (unfortunately I won't be able to max it out given other expenses). I've been reading up on ETFs and I've narrowed it down to these:

- Claymore S&P TSX Canadian Dividend ETF (CDZ)
- iShares Dow Jones Canadian Select Vlaue INdex Fund (XCV)
- iShares S&P TAX 60 Index Fund (XIU)
- iShares Dow Jones Canada Select Dividend Fund (XDV)

I'd like to invest in about 3 ETFs that give me broad market coverage. I'm looking to keep it invested for 10 to 20 years. I also have a RRSP invested as a mutual fund to which I contribute $100 a month. The TFSA _is not necessarily_ for retirement given I have the RRSP going as well.

My questions are:

1) Do these combinations make sense given that I'm trying to diversify? If not can you recommend how I should modify it?

2) If I were to set up the TFSA as a DRIP, does the re-invested amount count toward my yearly contribution limit?

3) How would I receive the dividend payments if I choose_ not_ to do a DRIP? Do I get taxed in any way if I were to cash out the dividend payments?

Thank You for your advice,

Ryan.


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## Spudd (Oct 11, 2011)

1) Do these combinations make sense given that I'm trying to diversify? If not can you recommend how I should modify it?
No, these are all Canadian equity funds of different types. I would recommend you keep it simple and stick with just XIU. 

2) If I were to set up the TFSA as a DRIP, does the re-invested amount count toward my yearly contribution limit?
No, it doesn't.

3) How would I receive the dividend payments if I choose not to do a DRIP? Do I get taxed in any way if I were to cash out the dividend payments?
The money would appear in your TFSA. If you want to withdraw it, there would be no tax on that. 

Are you with a broker that lets you buy ETF's commission-free? If not, I would not recommend this plan since you will spend 10% of every contribution on commission.


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## wuinvestor (Mar 23, 2014)

I use the RBC Direct Investing Account. I'll should check with them on their fees with ETFs as I'm not sure. Thanks for the head's up.


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## LongLiveTheMonarchy (Mar 20, 2014)

Is there any specific reason that you are not considering Vanguard's FTSE Canada All Cap Index ETF (VCN) for your TFSA? I personally like VCN a lot because of its low MER and the fact it holds large, mid, and small cap Canadian stocks as opposed to XIU, which just holds large caps (my wife holds it as I cannot hold Canadian domiciled ETFs due to my US citizenship). 



wuinvestor said:


> Hello All,
> 
> I have about $3000.00 in my ING savings account that I want to put into a TFSA, invested as dividend-paying ETFs. I'll be contributing $100.00 a month to my TFSA (unfortunately I won't be able to max it out given other expenses). I've been reading up on ETFs and I've narrowed it down to these:
> 
> ...


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## My Own Advisor (Sep 24, 2012)

1) Do these combinations make sense given that I'm trying to diversify? If not can you recommend how I should modify it?

I like what Spudd said, stick with XIU. Been very happy with it, nice returns, low costs, let it DRIP every quarter if you want so money that makes money makes more money.

VCN, ZCN and VCE are other great choices for the CDN equity portion of your TFSA. Just need one of these.

Other answers, see our friend Spudd!


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## Cal (Jun 17, 2009)

To get started you may want to do one transaction, then perhaps do one every 6 months or so, once 6 x $100 has added up, to keep your transaction fees lower.


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## AltaRed (Jun 8, 2009)

And just to muddy the waters, Black Rock has just reduced the MERS on 9 of their ETFs. The MER of XIC (which is the Composite rather than just large cap like XIU) has dropped to 5 bp effective Mar 25.


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## Eclectic12 (Oct 20, 2010)

wuinvestor said:


> My questions are:
> 
> 1) Do these combinations make sense given that I'm trying to diversify? If not can you recommend how I should modify it?


Others who are more into ETFs can comment .... 




wuinvestor said:


> 2) If I were to set up the TFSA as a DRIP, does the re-invested amount count toward my yearly contribution limit?


I don't mean to be offensive ... but it is concerning that you are apparently going to start using a TFSA without understanding the rules. 

First off - the TFSA contribution limit is reduced by .... well ... contributions. Like the RRSP, the TFSA is a container so gains/losses etc. within the account - don't affect the contribution limit. For example if one has $500 of available TFSA contribution room, whether one's TFSA is worth $50 or $100K, there is still only $500 of available TFSA contribution room.

Secondly - the TFSA yearly contribution limit is one factor in the total amount available to you, where depending on your age as well as residency status - you may have a lot more than the yearly $5.5K available to use. For example, if one was 18+ in 2009, has been a Canadian resident for 2009+ and has never contributed to a TFSA, the total TFSA contribution room available is $31.5K.

Please review the rules to make sure you understand them. 

Those who didn't ended up with a over-contribution penalties, at 1% per month for honest mistakes. There are a lot of good articles available now.
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/cntrbtn-eng.html
http://www.theglobeandmail.com/glob...ur-tfsa-land-you-in-tax-jail/article17123629/
http://business.financialpost.com/2014/01/17/10-things-you-should-know-about-tfsas/?__lsa=d559-db6e




wuinvestor said:


> 3) How would I receive the dividend payments if I choose_ not_ to do a DRIP? Do I get taxed in any way if I were to cash out the dividend payments?


 ... more suggestion that you have some learning to do.

Distributions paid into the TFSA (assuming none are from US ETFs as the US gov't get a 15% withholding tax from Canadians on dividends in a TFSA) will be paid as cash to the TFSA (same as an RRSP or taxable account). Since the TFSA is Canadian tax free - there is no tax to pay.

If you mean by "cash out" - withdrawing the dividends from the TFSA, then again there is not tax to pay. Any gains in a taxable account made from the dividends (ex. withdraw the dividends from the TFSA and put it in a taxable savings account that pays interest means the interest paid is taxed).

If you read the link posted - you will also find that the amount withdrawn from the TFSA will become new TFSA contribution room *the following year*. 

So if you withdraw $500 in 2014 from the TFSA, on Jan 1 of 2015 - there will be whatever unused TFSA contribution room available + the $500 from the withdrawal + the 2015 annual TFSA contribution room (assuming you are 18+ and a Canadian resident).


Cheers


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## Soils4Peace (Mar 14, 2010)

In order of preference, choose XIC, VCN, or ZCN. Those are the ones with 200+ stocks. 

With XIU and ~60 stocks, you get a negative size premium. It would be ok in a world without the above 3 etfs. 

And the others (except VCE) are just high MER for nothing special. TDB900 at 0.33% beats them on # stocks and MER. 

Some people like the safety of large caps offered by XIU, but for them, why not just increase bond allocation and get low and uncorrelated risk?


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## wuinvestor (Mar 23, 2014)

Thanks for all the advice guys. Very much appreciated . Looks like i have some more homework to do before jumping in. Better safe than sorry.

Ryan.


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## Eclectic12 (Oct 20, 2010)

No worries ... the key is to have a good understanding as in my experience, that's the best way to avoid costly mistakes or be taken advantage of.


Cheers


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