# TFSA Opinions



## pedant (Apr 25, 2011)

Asked this in my money diary update, but figured I'd get more response here...

I have a TD e-series mutual fund that I'd put $7475 in to over 2011 and early 2012. I was following the couch potato strategy of 40% bonds, and 20% each Cdn, US, and International index funds. Then I took the _*extreme*_ couch potato approach... and haven't touch the account since March 2012 :rolleyes2:

As it stands right now, this is the fund (rounded to nearest $50):
-Cdn index: $2300 
-US index: $2450
-Cdn bond index: $2900
-Intl index: $2850

I have come into the means to max out my TFSA and would like your advice on how/when to invest the $23,525. 

-Opinions on bond index funds seem to have changed since 2011/12. I'm 27, and trying to create a nest egg I won't have to draw on my for atleast couple of decades. I'm thinking when I invest, I will drop the bond allocation to 25% and push the equities up to 25% each. Bad idea? Should I buy GICs instead of the bond funds?
-How should I time my investments? I don't mean timing the market, but in terms of dollar cost averaging. I'm guessing I should not just dump $23,000 in all at once, tomorrow? How would you divide it up? $1000 at a time? $5000 at a time? invested weekly? monthly? 

Advice is appreciated!


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## wendi1 (Oct 2, 2013)

Well, it costs me money to buy stuff, so I would invest it all at once. Also, since you don't seem to obsess over this stuff, or micromanage it, just put it into your 4 buckets, and let it be.

As for allocation, that depends on what else you own. If this is long term money, that you mostly ignore, bond funds should be fine, especially at 25%. Remember GICs have to be rolled over every 5 years - a bond fund can just sit.


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## marina628 (Dec 14, 2010)

Not sure of your age but for myself last year I dropped bonds in favor of dividend stocks like the banks. I am 46 and can handle more risk ,for 2014 I am doing 25% USA index ,25% international and 40% dividend paying stocks,the other 10% I am trading .This excludes the value of my real estate portfolio just investments ,cash and retirement accounts and I made a respectful 22% in 2013 .


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## pedant (Apr 25, 2011)

Thanks for the responses. I'm 27, 18 months away from completing specialty training in medicine. I don't own anything else. Just came into the money so am paying off my loans and investing the rest. Going to save RRSPs and aggressive saving for when my income increases, but want to take baby steps to gain investing experience now. 

I'm actually interested in trying out some trading... But with only 31k in investments i don't know that it's worth opening a brokerage account.


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## leeder (Jan 28, 2012)

There's really no right or wrong answer to your first question... really, it comes down to personal preference. So in terms of pushing down your fixed income allocation, if you can tolerate more risk, then go for it. In his book, "The Intelligent Investor", Benjamin Graham did suggest as a fundamental guiding rule that investor should never have less than 25% or more than 75% of the funds in either stocks or bonds. In essence, you can't really go too far wrong. Go with an allocation that allows you to sleep well at night. 

Regarding the choice between GICs and bonds, if you do intend to maintain (or even contribute to) your investment and not withdraw in the near future, you're likely fine holding the bond index product, as you are likely holding the bonds (inside the fund) to its maturity.

Finally, studies have shown that you are better off investing the money in lump-sum and letting the money go to work (i.e., compound). However, if you feel nervous about going all in, I personally have no issues with someone putting money in gradually and DCAing it. That said, if you are investing for the long-term, every new contribution that you make annually acts as a DCA anyway. If you don't plan to use the money, I would lean towards just putting it all in right away and not worry too much. Either rebalance your portfolio in about 6 months or when you are contributing again next year.


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## richard (Jun 20, 2013)

If the amount is not very large relative to your future income and you won't be living off of the portfolio any time soon, you will likely do better by dropping the bond allocation as long as you are comfortable with that. Personally I don't hold any bonds because I don't expect to be withdrawing soon and I can't see bonds having high returns over the next 10 years. But anyone who is nervous about the markets or more sensitive to short-term returns may feel better holding some bonds anyways.

With regards to the new amount you are investing, the majority of the time you will do best by investing it all at once. DCA is a gamble, hoping for a market crash before you're done. Most of the time that doesn't happen. If you couldn't live with yourself investing all at once and then having a small decline immediately after, then go for DCA. I prefer not to gamble. I'm also looking at putting in a large amount soon and I will have that fully invested as soon as the cash can be transferred to the brokerage and I can enter the trades.


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## pedant (Apr 25, 2011)

Thank you very much for your responses! 

Last (i hope) question. Is it ok to keep all the e-series funds in the TFSA at this point? 

I've read about tax credits for Canadian dividends, withholding taxes on foreign equities, and how bond funds particularly should be in a tax sheltered account like a TFSA. But since my entire portfolio is small enough to keep within a TFSA at this point, should I do that? Or will it come back to bite me later as the value of portfolio gets larger and I start RRSPs and non-registered investments? 

Thanks again!


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## wendi1 (Oct 2, 2013)

Well, you will have to do some research to answer your own question... Interest, capital gains and dividends from Canadian sources are not taxed in a TFSA. But American and some foreign dividends are taxed by the country that issued them (just in TFSAs and investment accounts, not in RRSPs and RRIFs).

There are some US and foreign ETFs and mutual funds that either do not take dividends, or have a fancy derivatives thing going that means the US and other foreign countries do not withhold tax on dividends. Mind you, this tax is not significant, and a lot of people just ignore it.

But if it bothers you, you should do some research and find e-funds or ETFs available at your broker that have no withholding of dividend tax. 

Or, you can move your US and foreign holdings to your RRSP (which is what I do - because I am cheap in small things).


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## leeder (Jan 28, 2012)

It's best that you first maximize your investments in your TFSA and RRSP before investing in your non-registered account. Even if there are things like withholding taxes on foreign equities, etc. that are automatically deducted from your distributions, you're not paying a lick of taxes in your TFSA and it's tax deferred in your RRSP. Regardless, if you maintain your investment plan and keep contributing over the long-term, your portfolio will grow.


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## richard (Jun 20, 2013)

pedant said:


> Last (i hope) question. Is it ok to keep all the e-series funds in the TFSA at this point?
> 
> I've read about tax credits for Canadian dividends, withholding taxes on foreign equities, and how bond funds particularly should be in a tax sheltered account like a TFSA. But since my entire portfolio is small enough to keep within a TFSA at this point, should I do that? Or will it come back to bite me later as the value of portfolio gets larger and I start RRSPs and non-registered investments?


If all you have is a TFSA, it's completely fine to keep everything there. Keeping bonds in a taxable account can be very expensive; other than that there are a few small gains to be had but they won't make a difference yet.


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## Guban (Jul 5, 2011)

I vote that you keep everything in your TFSA if possible. Tax free is better than tax deferred, or tax advantaged (getting tax credits)


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## wendi1 (Oct 2, 2013)

I was just reading the current issue of Moneysense - Bortolotti recommends the Horizons S&P 500 ETF (HXS) for American holdings in non-registered accounts, because of its use of a "swap structure" to change dividends into capital gains. No reason it shouldn't work in your TFSA, as well. 

It has a management fee of 0.15%, and an additional swap fee of 0.30%.


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## CanadianCapitalist (Mar 31, 2009)

wendi1 said:


> No reason it shouldn't work in your TFSA, as well.
> 
> It has a management fee of 0.15%, and an additional swap fee of 0.30%.


Why bother? VOO will cost you 0.05%. The hit from US withholding taxes in a TFSA is 0.30% (15 percent of 2 percent dividend rate). Total is 10 basis points less than HXS.


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## james4beach (Nov 15, 2012)

I don't like the sound of these ETFs that are swap/derivative based. Even if they waive the swap fees, they could come back in a future year.

My approach with ETF is to always use the plan vanilla ones, no derivatives, no leverage.


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## leeder (Jan 28, 2012)

Guban said:


> I vote that you keep everything in your TFSA if possible. Tax free is better than tax deferred, or tax advantaged (getting tax credits)


Well, I can't say that the TFSA is better place to invest than your RRSP. Certainly, if the OP decides to withdraw his RRSP, he would get taxed at the current tax bracket. However, if he contributes and does not withdraw his RRSP until he retires in the future (or when he is in the lowest tax bracket), there's no immediate tax implications. Additionally, the OP would benefit from the RRSP deduction, which would lower his current year's tax payable.



wendi1 said:


> I was just reading the current issue of Moneysense - Bortolotti recommends the Horizons S&P 500 ETF (HXS) for American holdings in non-registered accounts, because of its use of a "swap structure" to change dividends into capital gains. No reason it shouldn't work in your TFSA, as well.
> 
> It has a management fee of 0.15%, and an additional swap fee of 0.30%.


You are correct in that HXS does not have the withholding tax. However, the additional swap fee of 0.30% essentially makes up for the withholding tax. Not to mention, investors would bear the counterparty risk. Something to keep in mind...


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## leeder (Jan 28, 2012)

CanadianCapitalist said:


> Why bother? VOO will cost you 0.05%. The hit from US withholding taxes in a TFSA is 0.30% (15 percent of 2 percent dividend rate). Total is 10 basis points less than HXS.


For the unsophisticated investor with a small portfolio, the question becomes is it worth going through the cost of currency exchange. In the original post, the OP said he had about $3k (or less) in US equities. Best bet is probably to stick with the e-series fund anyway, until he has a larger portfolio.


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## CanadianCapitalist (Mar 31, 2009)

james4beach said:


> I don't like the sound of these ETFs that are swap/derivative based. Even if they waive the swap fees, they could come back in a future year.
> 
> My approach with ETF is to always use the plan vanilla ones, no derivatives, no leverage.


Moi aussi. Sure in taxable accounts, these ETFs are very attractive tax wise but there is always the possibility of adverse developments...


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## Guban (Jul 5, 2011)

leeder said:


> Well, I can't say that the TFSA is better place to invest than your RRSP. Certainly, if the OP decides to withdraw his RRSP, he would get taxed at the current tax bracket. However, if he contributes and does not withdraw his RRSP until he retires in the future (or when he is in the lowest tax bracket), there's no immediate tax implications. Additionally, the OP would benefit from the RRSP deduction, which would lower his current year's tax


In general, you may be correct, however in the case of the OP, the TFSA preference may be clearer. In post #4, the situation seems to be that higher income years are to come as he/she is still currently in school. Of course, given enough investable money available, max out both, and take the RRSP deduction in a later, higher income, year.


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## leeder (Jan 28, 2012)

Guban said:


> In general, you may be correct, however in the case of the OP, the TFSA preference may be clearer. In post #4, the situation seems to be that higher income years are to come as he/she is still currently in school. Of course, given enough investable money available, max out both, and take the RRSP deduction in a later, higher income, year.


That's fair. Totally agree with the last part, but pay off the debt first!


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## pedant (Apr 25, 2011)

Guban said:


> In general, you may be correct, however in the case of the OP, the TFSA preference may be clearer. In post #4, the situation seems to be that higher income years are to come as he/she is still currently in school. Of course, given enough investable money available, max out both, and take the RRSP deduction in a later, higher income, year.


Yes. Gross income for 2013 is about $65K. Gross for 2016 will [hopefully] be about 350k (+/- $50,000). 

For now, student debt will be paid first... but I'll have about $25K left over once that's done. I've got a money diary thread that I recently updated with the details.


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## james4beach (Nov 15, 2012)

CanadianCapitalist said:


> Moi aussi. Sure in taxable accounts, these ETFs are very attractive tax wise but there is always the possibility of adverse developments...


We could also get changes to the tax code. These derivatives are new and the tax people are still trying to figure out how to handle them. For instance they recently went after the loop hole in those tax advantaged bond ETFs that used derivatives games to circumvent taxable interest income.

IRS and CRA have already started adapting to derivative based ETFs, for instance commodity ETFs. I wouldn't be surprised to see changes coming up that affect swap and leveraged ETFs, especially with the huge growth in that market. I don't want uncertainty like that. Plain old stock ETFs are a standard structure (a mutual fund, really) and there won't be surprises for plain ETFs.


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## richard (Jun 20, 2013)

james4beach said:


> IRS and CRA have already started adapting to derivative based ETFs, for instance commodity ETFs. I wouldn't be surprised to see changes coming up that affect swap and leveraged ETFs, especially with the huge growth in that market. I don't want uncertainty like that. Plain old stock ETFs are a standard structure (a mutual fund, really) and there won't be surprises for plain ETFs.


The tax rules for anything could change. Specifically, dividend and income taxes see frequent changes (apparently more so in the US than here which still affects anyone who holds US funds or stocks). Anything in a taxable account is exposed to uncertainty. Tax shelters are a little better but no guarantee. The TFSA contribution room may double soon. That's a positive at least, but still a large unknown. RRSPs are subject to any changes in income tax and the base rules could also be changed in the future. If you want to avoid unexpected changes to your taxation you need to give your entire net worth to charity and stop working


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