# What investment to put in TFSA



## archanfel

I am kind of tore on what to put in my TFSA. On the one hand, TFSA shield investment income from taxation, therefore it's most suitable for fixed income investment. On the other hand, bigger TFSA can generate larger tax free/clawback free income after retirement, so higher long term return is also important. 

What do you guys think? With retirement in mind, what's the best investment to be held in TFSA?


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## Canadian Finance

archanfel,

I'm thinking REITs might be the best candidates for a TFSA. With the return of capital, dividends, interest... a TFSA would shelter these payments from tax. And, as you pointed out, the potential growth won't be subject to any tax of clawbacks come retirement.

I wrote more about the TFSA here:

*TFSA - Tax Free Savings Account*

And specifically what REITs I would choose first for a TFSA, instead of indexing this part of your portfolio:

*Real Estate Investment Trust (REIT) Portfolio*


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## takingprofits

I started my TFSA at the end of January and struggled with what to buy. While I was pondering, I decided to to buy Thompson Reuters which looked cheap and paid a dividend.. After two weeks it had gone up 13% - hmmm... that is a lot more than a couple of years worth of dividends I thought - and sold. (The stock then reversed). I put that money to work with Yellow Pages which then went up 10% in a week or so - and then sold that and bought... and so on and so on. 

I am buying income producing stocks with the idea of perhaps holding them but if they appreciate greater than what their income would be in a year or two - I have concluded that taking profits is a good thing. It seems that my TFSA will be used primarily to chase capital gains 

Most REITs don't seem to have that same opportunity to increase in value beyond what their annual distribution is so they have not made it into my TFSA yet although I have held a few outside of my TFSA.


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## mfd

I'm planning to invest in index funds for growth and then when I'm ready to retire I'm going to put it all into some sort of bond ladder to earn the tax free income. I haven't fully evaluated this setup though just my initial thoughts.


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## archanfel

Canadian Finance said:


> archanfel,
> 
> I'm thinking REITs might be the best candidates for a TFSA. With the return of capital, dividends, interest... a TFSA would shelter these payments from tax. And, as you pointed out, the potential growth won't be subject to any tax of clawbacks come retirement.
> 
> I wrote more about the TFSA here:
> 
> *TFSA - Tax Free Savings Account*
> 
> And specifically what REITs I would choose first for a TFSA, instead of indexing this part of your portfolio:
> 
> *Real Estate Investment Trust (REIT) Portfolio*


Good point. I never thought about REITs. The worry there however is how much long term growth REITs have. As I understand it, their dividends are mostly return of capitals. Also, the real estate market in Canada worries me. The residential market hasn't fully corrected yet and the commercial market is being hit hard in the states. 

That being said, I currently have no REIT exposure, might be worthwell to add some. 



takingprofits said:


> I started my TFSA at the end of January and struggled with what to buy. While I was pondering, I decided to to buy Thompson Reuters which looked cheap and paid a dividend.. After two weeks it had gone up 13% - hmmm... that is a lot more than a couple of years worth of dividends I thought - and sold. (The stock then reversed). I put that money to work with Yellow Pages which then went up 10% in a week or so - and then sold that and bought... and so on and so on.
> 
> I am buying income producing stocks with the idea of perhaps holding them but if they appreciate greater than what their income would be in a year or two - I have concluded that taking profits is a good thing. It seems that my TFSA will be used primarily to chase capital gains
> 
> Most REITs don't seem to have that same opportunity to increase in value beyond what their annual distribution is so they have not made it into my TFSA yet although I have held a few outside of my TFSA.


The problem is that TFSA does not cover capital losses. That 13% can easily be negative. Yes, the market is in a bear rally, but there's no telling how long it will last. Timing the market always work for some people. Unfortunately, they tend to be different people at different times. 



mfd said:


> I'm planning to invest in index funds for growth and then when I'm ready to retire I'm going to put it all into some sort of bond ladder to earn the tax free income. I haven't fully evaluated this setup though just my initial thoughts.


The problem is that index funds hardly trigger any taxes at all, which pretty much negate the whole idea of tax sheltering. For foreign fund, the dividends are still subject to 15% withhold tax for TFSA, unlike RRSP.


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## mfd

archanfel said:


> The problem is that index funds hardly trigger any taxes at all, which pretty much negate the whole idea of tax sheltering. For foreign fund, the dividends are still subject to 15% withhold tax for TFSA, unlike RRSP.



I'm not overly concerned about taxes. I just want to grow it at a decent pace for retirement. Ultimately I still haven't decided on what to do with the TFSA which is one of the things that got me all flustered when I turned 30


P.S. I didn't know the TFSA was subjected to withholding tax on foreign dividends. I'll need to look into that. Thanks.


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## takingprofits

archanfel said:


> The problem is that TFSA does not cover capital losses. That 13% can easily be negative.


It only becomes a loss if one sells. Since I started my TFSA, if a stock has declined I just hold it until it recovers. I am doing enough research before I buy a stock that there is more opportunity for reward than downside risk. Right now my TFSA is in cash as I see more risk than opportunity.

The Reits I have outside of my TFSA all seem to participate in the declines and not in the rallies. With the widespread talk that the commercial real estate market is at risk I see more possibility for downside than opportunity for reward from Reits which is why they have not made it into my TFSA. 

I am not timing the market - I am taking profits when they present themselves rather then enduring the pain of watching the profits turn into losses


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## archanfel

takingprofits said:


> It only becomes a loss if one sells. Since I started my TFSA, if a stock has declined I just hold it until it recovers. I am doing enough research before I buy a stock that there is more opportunity for reward than downside risk. Right now my TFSA is in cash as I see more risk than opportunity.
> 
> The Reits I have outside of my TFSA all seem to participate in the declines and not in the rallies. With the widespread talk that the commercial real estate market is at risk I see more possibility for downside than opportunity for reward from Reits which is why they have not made it into my TFSA.
> 
> I am not timing the market - I am taking profits when they present themselves rather then enduring the pain of watching the profits turn into losses


That's called timing the market. . 

The problem with this approach is there will be investment that loses and never returns. Stop-loss will not work if the stock crashes overnight. You will need massive returns on other stocks to cover it. 

Some people are very good at it, so I am not saying it's not the right thing to do. I don't seem to have any skills in timing though. In fact, I am very skilled in anti-timing meaning when I buy it sinks, so it's not suitable for me unfortunately.


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## archanfel

mfd said:


> I'm not overly concerned about taxes. I just want to grow it at a decent pace for retirement. Ultimately I still haven't decided on what to do with the TFSA which is one of the things that got me all flustered when I turned 30
> 
> 
> P.S. I didn't know the TFSA was subjected to withholding tax on foreign dividends. I'll need to look into that. Thanks.


My current couch potato portfolio goes like this, all 3 equity index funds are outside RRSP, the bond index fund is inside. The reason is that I really don't want my RRSP to grow big. It will only makes it that much harder to drain it. And RRSP shield the bond interests from taxes very efficiently.

TFSA on the other hand is a weird beast and I have no idea what to put into it. The only thing I could think of was foreign dividend ETF, but the withhold taxes killed that idea.


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## takingprofits

archanfel said:


> That's called timing the market. .
> 
> The problem with this approach is there will be investment that loses and never returns. Stop-loss will not work if the stock crashes overnight. You will need massive returns on other stocks to cover it.
> 
> Some people are very good at it, so I am not saying it's not the right thing to do. I don't seem to have any skills in timing though. In fact, I am very skilled in anti-timing meaning when I buy it sinks, so it's not suitable for me unfortunately.


I don't think of it as timing the market. I think of it as learning to read the technicals and using them along with the fundamentals to help guide investment decisions. It helps keep the losses smaller and the wins more frequent.

One experiences those same investment losses that never return with a buy and hold approach too. When a stock crashes overnight it is still usually best to sell and not hold - your first loss is your best loss. Remember BFI when they converted to a corp? ( I was still buying and holding back then) Or Russell Metals when they announced their dividend cut? (I sold just before that one  ) 

I "lost" a lot more by buying and holding in the last year then I ever did by selling to book a profit. Since I want my TFSA to make money fear of loss is probably what guides me to actively trade and sell when there is a profit to be made.

So my answer to this thread's question of "What investment to put in the TFSA? " would be to put in stocks with a good dividend yield and be prepared to sell them if your homework tells you the party is over. 

The long term trend may no longer be up but sideways - so the days of buying and holding may not be profitable for years to come. The stock you buy today may be worth less 5 to 10 years from now and not more. Would you buy and hold with the idea of never selling in that type of market?


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## archanfel

takingprofits said:


> I don't think of it as timing the market. I think of it as learning to read the technicals and using them along with the fundamentals to help guide investment decisions. It helps keep the losses smaller and the wins more frequent.
> 
> One experiences those same investment losses that never return with a buy and hold approach too. When a stock crashes overnight it is still usually best to sell and not hold - your first loss is your best loss. Remember BFI when they converted to a corp? ( I was still buying and holding back then) Or Russell Metals when they announced their dividend cut? (I sold just before that one  )
> 
> I "lost" a lot more by buying and holding in the last year then I ever did by selling to book a profit. Since I want my TFSA to make money fear of loss is probably what guides me to actively trade and sell when there is a profit to be made.
> 
> So my answer to this thread's question of "What investment to put in the TFSA? " would be to put in stocks with a good dividend yield and be prepared to sell them if your homework tells you the party is over.
> 
> The long term trend may no longer be up but sideways - so the days of buying and holding may not be profitable for years to come. The stock you buy today may be worth less 5 to 10 years from now and not more. Would you buy and hold with the idea of never selling in that type of market?


The problem with active trading (market timing or technical reading or whatever you want to call it) is that it's a zero sum game. In fact, it's a negative sum game. Every time you made money, somebody is losing money doing exactly the same thing. Therefore, to make money, you need to be smarter than 50% of the investment population. In the mean time, buy and hold of indexes depending on the economy as a whole to grow, therefore, it's usually a positive sum game. Of course, you never know. You are right, the long term trend may not be up anymore. 

I am against buy and hold just like I am against democracy. It's the stupidest form of investment just like democracy is a terrible form of government. However, I can't think of a better way of doing it in either case. I don't think I am smarter than 50% of the investment population, therefore active trading is not suitable for me. It is suitable however to 50% of the population, you being one of them. 

A piece of advice though. Never, ever say that "It only becomes a loss if one sells". As you said, "your first loss is your best loss". A loss is a loss, no matter whether you hold it or sell it. I always think the key of active trading is to recognize your mistakes and not let your pride cloud your judgment. I am sure active trading works for you, but unfortunately, it will not work for me.


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## Jon Chevreau

I put a Canadian bank stock in early in January, transferring in kind from a non-registered account. There were only a few possible candidates to pick from and -- it being January and the usual cash crunch -- I didn't want to use new money. With the dividends, I'll reinvest in the i60s because I don't want to stay that concentrated in one stock. 

Early in March, right near the bottom and using new money, we put half my wife's TFSA in the i60s, leaving the other half in cash as emergency funds.

If the C$ bought more in U.S. currency, I'd be tempted to put high-yielding U.S. dividend paying stocks in the TFSA, since otherwise the dividends are taxed like interest for Canadians. 

Since boomers only have a short window on the TFSA, we need to grow them aggressively and one day use the gained space to hold inflation-indexed Real Return Bonds.


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## Rickson9

archanfel said:


> I am kind of tore on what to put in my TFSA. On the one hand, TFSA shield investment income from taxation, therefore it's most suitable for fixed income investment. On the other hand, bigger TFSA can generate larger tax free/clawback free income after retirement, so higher long term return is also important.
> 
> What do you guys think? With retirement in mind, what's the best investment to be held in TFSA?


My wife and I are young. In late Feb/early Mar 2009 we bought FOSL and BKE stock and put them in our respective TFSAs. It was a perfect storm - the introduction of the TFSA and the economic crisis. Our TFSA are up over 30% in a month. We do not expect this ridiculous trend to continue.

We will continue to put only stock in our TFSAs. We also don't (very rarely) sell. We still have stock that we bought 10 years ago. We do not actively trade.


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## archanfel

Rickson9 said:


> My wife and I are young. In late Feb/early Mar 2009 we bought FOSL and BKE stock and put them in our respective TFSAs. It was a perfect storm - the introduction of the TFSA and the economic crisis. Our TFSA are up over 30% in a month. We do not expect this ridiculous trend to continue.
> 
> We will continue to put only stock in our TFSAs. We also don't (very rarely) sell. We still have stock that we bought 10 years ago. We do not actively trade.


Since you do not sell, you will not be taxed on any gains, why would you keep it in TFSA v.s. an unregistered account. Is the tax free room you are more interested in?


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## Rickson9

archanfel said:


> Since you do not sell, you will not be taxed on any gains, why would you keep it in TFSA v.s. an unregistered account. Is the tax free room you are more interested in?


You are right! Since we rarely sell any asset, a TFSA v unregistered account doesn't matter per se. We have both. However, if we ever wanted money it is good to have a wider variety of sources to draw from; each with their respective pros and cons.

It is true, that because of our methodology of buying and never/rarely selling, the TFSA isn't as big a benefit to us as it would be to other, more active investors. However, it is still a tax free vehicle and only $10,000 (for both of us) so we might as well take advantage of it.

I guess the bottom line is that we couldn't think of any reason NOT to open a TFSA.


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## ShowMeTheMoney

If the TSFA is used for retirement savings with a long term horizon, them I would think the same rules would apply as for what you put in an RRSP, ie. long term growth. It's not a good vehicle for short term market moves, because losses will occur, but cannot be claimed. If you're a long-term bear, then fixed income is the way to go, if you're a long term bull, then equities. Dividend producing equities are good for medium to long term horizon, but I was also not aware that foreign dividends are taxed in a TSFA, so that complicicates things. Personaly, I'm close to 100% stock in my RRSP. I'm using the TSFA to increase my fixed income allocation as I'm not getting an younger,and the TSFA has the advantage that there is no penalty for withdrawals, so that it can serve as an extra emergency fund if absolutely necessary.


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## Jon Chevreau

For the poster who doesn't trade much, the TFSA's ability to shelter capital gains from tax may seem less noteworthy but remember if it's also paying a dividend, the dividend income would be taxed outside the plan but will be tax-free inside.


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## Rickson9

Jon Chevreau said:


> For the poster who doesn't trade much, the TFSA's ability to shelter capital gains from tax may seem less noteworthy but remember if it's also paying a dividend, the dividend income would be taxed outside the plan but will be tax-free inside.


Good point!


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## Jon Chevreau

And further to that, remember a Canadian retiree relying on dividend income would see non-registered dividend income from Canadian stocks "grossed up" for tax purposes, speeding the clawback of Old Age Security benefits. Another good reason to put Canadian dividends in a TFSA.


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## archanfel

Jon Chevreau said:


> And further to that, remember a Canadian retiree relying on dividend income would see non-registered dividend income from Canadian stocks "grossed up" for tax purposes, speeding the clawback of Old Age Security benefits. Another good reason to put Canadian dividends in a TFSA.


After the current storm, I am not sure I will be relying on dividend income anymore. After 65, it's laddered GIC all the way. Growth would be meaningless since I would not have the years to spend it anyway. 

I do agree that the bigger the TFSA room, the better. So maybe I should maintain a mostly equity TFSA until I retire.


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## ethos1

archanfel said:


> After the current storm, I am not sure I will be relying on dividend income anymore. After 65, it's laddered GIC all the way. Growth would be meaningless since I would not have the years to spend it anyway.
> 
> I do agree that the bigger the TFSA room, the better. So maybe I should maintain a mostly equity TFSA until I retire.


post 65 I would probably have mostly Canadian preferred's inside the TFSA at 6-8% or GIC's, depending on what is going on at that time.

At this time after what we've seen in the last 12-months it would not be the ying-yang regular dividend stocks - you know, the ones that have dropped by 50%, some which have cut their dividends


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## Maple_Leaf

*Real Return Bonds*

I've been putting REIT shares in the TFSA. Once the account balance gets large enough, I'll probably sell and buy real return bonds and use it as an income generating retirement account.


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## archanfel

Maple_Leaf said:


> I've been putting REIT shares in the TFSA. Once the account balance gets large enough, I'll probably sell and buy real return bonds and use it as an income generating retirement account.


I think I will do that too since I got no real estate exposure right now.


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## ethos1

Maple_Leaf said:


> I've been putting REIT shares in the TFSA. Once the account balance gets large enough, I'll probably sell and buy real return bonds and use it as an income generating retirement account.


what are _"real return bonds"_, could these be CSB's & if there are others could you please post or list the ones you are interested in?

Thanks


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## FrugalTrader

ethos1 said:


> what are _"real return bonds"_, could these be CSB's & if there are others could you please post or list the ones you are interested in?
> 
> Thanks


Real return bonds are bonds that give you a return _after_ inflation. Check out the ishares real return bond index - XRB.


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## Maple_Leaf

*Real Return Bonds*

XRB is a good way to go if you are not concerned about timing your bond maturities. You can also buy many of the XRB's underlying bonds from a broker, but watch out! The retail bond market has little transparency and your broker can fleece you with a really wide bid/ask spread.

You can also use US TIPS if you are planning on snowbirding down south.


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## Taxsaver

I am waking up.  How do you transfer a stock or anything else than cash to a TSFA?


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## HaroldCrump

Taxsaver said:


> I am waking up.  How do you transfer a stock or anything else than cash to a TSFA?


It is known as a "contribution in kind".
Call up your bank/broker and tell them what you want to transfer and when.
They will take care of the necessary paperwork etc.
Note that the security that you are transfering into the TFSA will attract capital gains tax (if there is a capital gain), but any capital loss cannot be claimed in your taxes.


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## Sherlock

Or you can just sell it, then use the money to re-buy it in the TFSA.


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## HaroldCrump

Sherlock said:


> Or you can just sell it, then use the money to re-buy it in the TFSA.


You'll pay two commissions.


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## Taxsaver

Sorry for asking such basic questions like these: How does transfering investment is benefitial to me? What investments are worthwhile transfering and which ones are not?


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## Sherlock

Taxsaver said:


> Sorry for asking such basic questions like these: How does transfering investment is benefitial to me? What investments are worthwhile transfering and which ones are not?


Your TFSA should hold whatever whatever grows fastest. Your RRSP should hold the bond portion of your portfolio. And assuming you have no more room in your TFSA/RRSP but still want to invest more and need to open a non-registered account, it should hold dividend payers because dividends are taxed favorably compared to growth.


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## the-royal-mail

That's a personal decision. You definitely don't want to transfer things that have performed poorly for you. Look at your old statements and records to see which types of funds have done well for you in your current TFSA and investigate if competiting banks have something similar.

Transferring investments isn't as easy as it sounds. The recipient needs to be setup to handle the fund. For instance, I can't create an account with Scotia Bank tomorrow and ask them to transfer in my RBC Global Precious Metals fund. They probably have their own fund, so they would need to convert the RBC (for example) fund to cash by selling the units, transfer the cash and then buy the Scotia Bank Precious Metals fund (as an example).


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## Sherlock

You can buy one bank's mutual funds with another bank. For example I'm with CIBC investor's edge when I search through the list of mutual funds, I see RBC's funds (as well as funds from every other Canadian bank) so I can just click and buy them.


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## the-royal-mail

Sherlock said:


> You can buy one bank's mutual funds with another bank. For example I'm with CIBC investor's edge when I search through the list of mutual funds, I see RBC's funds (as well as funds from every other Canadian bank) so I can just click and buy them.


That' s a brokerage is it not? Does the average bank customer (like it sounds what slacker is) have access to funds from other banks?


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## Taxsaver

Let's say I want to transfer $1000 worth of stocks which I bought for $200 into my TFSA. At the time of the transfer I will pay a capital gain on the profit. Once in the TSFA they will have been considered bought at $1000. If I sell them again in three years for $5000, I won't pay any tax on the profit. Nor will I pay any tax on the dividends. Am I correct?


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## Four Pillars

Taxsaver said:


> Let's say I want to transfer $1000 worth of stocks which I bought for $200 into my TFSA. At the time of the transfer I will pay a capital gain on the profit. Once in the TSFA they will have been considered bought at $1000. If I sell them again in three years for $5000, I won't pay any tax on the profit. Nor will I pay any tax on the dividends. Am I correct?


You are correct.


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