# Balancing between an RRSP and Tax Free savings account



## hates soup (Apr 2, 2015)

First of I am new here so I hope this has not been posted before.

I want to build an Index portfolio similar to the Couch Potato. But I have about 30% of my available funds in RRSP. Should I have 2 separate portfolios one for my RRSP and one for TFSA? 
I want to have the option to use money from the TFSA in the 5-10 years for other investments (real state) .
With RRSP I will obviously not be drawing money until retirement so would I be better off picking a more aggressive path inside the RRSP?

Or is it recommended to balance a portfolio between the 2 accounts.

Let me know if I am being too vague with my question?


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## Westerncanada (Nov 11, 2013)

I am always curious to hear/see what others are doing.. but for me personally I have a Lower Risk Couch Potato in E-Series in my RRSP and my TFSA is now all single stock picks of great companies that are currently undervalued and have a solid plan for increased capital/Return over a long period of time. 

I currently do not require either fund and plan on using both for retirement purposes and although my RRSP Balance is higher I contribute 50% of my income to split in half to these two funds equally per month.


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## humble_pie (Jun 7, 2009)

soup one would normally not have an identical portfolio in both TFSA & RRSP.

your use-TFSA-to-buy-real-estate plan suggests to me that you might be young. If so, now might be a time to max the TFSA first. There is even a possibility that the gummint might eliminate or greatly reduce tax-free accounts, although it would be expected that existing TFSAs would be grandfathered. In short, take full advantage now.

if your RRSP contributions are not fully used, be sure to remember the unused portion that will be carried forward. Again with a young person, this can be used in future years when salary will be higher.

also remember that, in TFSA, US foreign tax withholding will apply to US securities. For this reason, US securities are best held in RRSP, where the joint canada-US tax convention protects their dividends from NR withholding tax.

another reason not to have the exact same portfolios in both tfsa & rrsp is that one would not want to pay double broker commissions, ie buying a little bit of something in each account. 

your goals for your TFSA might include conservative choices, so that the $$ would indeed be there in 5-10 years when you go to buy the house or other real estate.

best wishes with everything.


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## CalgaryPotato (Mar 7, 2015)

You can balance each separately, however if your balances are relatively small and you have a few years time frame you can balance them as a whole, just keeping in mind that your overall balance has to account for your short terms goals as well. Having to rebalance in 10 years is easier/less costly than having to duplicate your entire portfolio in two places.

It becomes really relevant when you are married and have kids. I have two TFSAs, two RRSPs, two RESPs. If I had to keep them all individually balanced it would be a lot more overhead than just balancing the portfolio as a whole.


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## newfoundlander61 (Feb 6, 2011)

I only use a TFSA as I like the idea of keeping all the money instead of being taxed when converting an RRSP to an RRIF, and the govt keeping a chunk.


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## 0xCC (Jan 5, 2012)

You only get taxed on withdrawal from an RSP or a RIF, not when converting from RSP to RIF. Also, the govt isn't keeping a chunk, they are taking back what they lent to you when the contribution was made (RSP contributions aren't taxed so making "pre-tax" contributions is like the govt giving you a loan equal to the tax you would have paid if you didn't contribute to the RSP).


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## humble_pie (Jun 7, 2009)

0xCC said:


> You only get taxed on withdrawal from an RSP or a RIF, not when converting from RSP to RIF. Also, the govt isn't keeping a chunk, they are taking back what they lent to you when the contribution was made (RSP contributions aren't taxed so making "pre-tax" contributions is like the govt giving you a loan equal to the tax you would have paid if you didn't contribute to the RSP).



agree with the first point, ie taxed only upon withdrawal.

with respect to chunks that will be collected by the tax authorities, the question of whether RRSP/RRIF or TFSA will be more effective in the long run is controversial. I for one believe that many folks will have more income in their RRIF years than they had really expected (via sale of marital homes & businesses, inheritances, pension benefits, etc)

at that point the 100% fully-taxable aspect of the RRIF withdrawals will begin to weigh heavily. Tax advantages such as dividend tax credits or favourable capital gains taxation that could have accrued to securities in the RRSP/RRIF will be lost.

a huge problem is that most folks in their 30s & 40s - perhaps 50s as well - have no clue whether they're going to be well-off in retirement or not. So it's a good idea to keep both RRSP & TFSA going, just in case. If retirement income is going to be well below earned/salaried income, then conventional wisdom always says an RRSP/RRIF plan will do ya better.


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## 0xCC (Jan 5, 2012)

Right, the govt collects not only their "loan" but also how much you happened to make for them on their loan when withdrawing. As humble_pie states it isn't necessarily straightforward to figure out how to optimize RSP vs. TFSA contributions.


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## hates soup (Apr 2, 2015)

humble_pie said:


> soup one would normally not have an identical portfolio in both TFSA & RRSP.
> 
> your use-TFSA-to-buy-real-estate plan suggests to me that you might be young. If so, now might be a time to max the TFSA first. There is even a possibility that the gummint might eliminate or greatly reduce tax-free accounts, although it would be expected that existing TFSAs would be grandfathered. In short, take full advantage now.
> 
> ...


Thanks 
There is a lot here to consider. I will keep the US equites in my RRSP. But I do not plan on adding more to my RRSP as expect to have a decent pension at retirement. 
Also limiting commissions makes allot of sense as well.


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## My Own Advisor (Sep 24, 2012)

If you can find the means to contribute, invest and maximize the TFSA and RRSP, then do it for all the reasons above.

From the retirees and early retirees I've talked to, they are enjoying complaining about their tax problems and RRSP/RRIF withdrawals in retirement. What an excellent problem to have. 

Who knows what the future holds, just save and optimize the use of both accounts: TFSA for CDN-listed equities and RRSP for U.S.-listed equities. Enjoy


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## lonewolf (Jun 12, 2012)

My Own Advisor said:


> If you can find the means to contribute, invest and maximize the TFSA and RRSP, then do it for all the reasons above.


 Sometimes there is an exception, for example if income was so low did have to pay any income tax, 70 years old or slightly younger, with a few hundred million sitting in an RRSP. In this case would want to withdraw money from RRSP rather then add to it.


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## My Own Advisor (Sep 24, 2012)

Yes, there are always exceptions but I guess my point is, for the most part, saving and contributing to these accounts, often, is a very good thing.


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## gladaki (Feb 23, 2014)

humble_pie said:


> soup one would normally not have an identical portfolio in both TFSA & RRSP.
> 
> your use-TFSA-to-buy-real-estate plan suggests to me that you might be young. If so, now might be a time to max the TFSA first. There is even a possibility that the gummint might eliminate or greatly reduce tax-free accounts, although it would be expected that existing TFSAs would be grandfathered. In short, take full advantage now.
> 
> ...


I may have read or understand it wrong, but Wont its better to put US securities in Non register account so one can claim
withholding taxes ?


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## humble_pie (Jun 7, 2009)

gladaki said:


> I may have read or understand it wrong, but Wont its better to put US securities in Non register account so one can claim
> withholding taxes ?



yes, good idea, but the ultimate answer has another wrinkle!

me i go with the conventional wisdom which says:

- best choice for US securities is the RRSP, because inside this account there will be no US withholding tax at all.

- next best *could* be the non-registered account, although i for one dislike the fact that US dividend & distribution incomes are 100% taxable as ordinary income. This concern leads us back to the RRSP once again. 

- an alternative for US securities is putting them in a TFSA. This might work for investors in higher tax brackets whose RRSPs are already maxed with USD. Bear in mind that, in a TFSA, the maximum tax to be faced will be that 15% US NR withholding tax. No other tax applies.

it's true that a TFSA investor won't be able to claim foreign tax credits for the 15% NR withheld. But in some cases, they might come out ahead of investors who hold US securities in fully-taxable non-registered, when all is said & done.

only the individual investor/taxpayer can crunch those numbers for sure.


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## familyman (Apr 6, 2015)

humble_pie said:


> in a TFSA, the maximum tax to be faced will be that 15% US NR withholding tax. No other tax applies.


Humble_pie, can you please explain to me what this NR witholding tax is. Does this mean that you still end up "paying" (getting it subtracted from your mutual fund profits) if it's an American equity fund?

I was looking at the Mawer US Equity Fund. If I buy this and place it in my TFSA account, will they take 15% from the profits, or what exactly does it mean?


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## humble_pie (Jun 7, 2009)

familyman said:


> Humble_pie, can you please explain to me what this NR witholding tax is. Does this mean that you still end up "paying" (getting it subtracted from your mutual fund profits) if it's an American equity fund?
> 
> I was looking at the Mawer US Equity Fund. If I buy this and place it in my TFSA account, will they take 15% from the profits, or what exactly does it mean?




most countries apply a non-resident withholding tax to dividends from their national companies that are being paid to foreigners.

the US rate of (mostly) 15% results from the reciprocal tax convention between canada & the US. It is protection from this tax convention that exempts US stocks in RRSPs from US withholding ... plus, of course, the same treatment goes in the opposite direction (no canadian NR tax on canadian dividends going to american retirement accounts.)

an exception to this tax convention protection is the newish canadian Tax Free Savings Account. I don't know the situation, perhaps the 2 countries have not yet got around to ratifying a mutually protective covenant, to be added to the existing tax convention as an amendment?

i can't speak for US equity funds in general or Mawer US equity in particular, but i would imagine that US NR withholding tax is applied to US dividends being paid into those funds & these amounts are allocated pro-rata to investors as "foreign taxes paid" on their T3 tax slips. Canadian investors then have a chance to claim foreign tax credits.

moving on, since i'm probably already in the doghouse with yourself, i wonder if i might make another suggestion that you may not like each:

several of your questions plus the fact that you have a TFSA as well as a discount broker TFSA are suggesting to me that, in real life, you do have an investment advisor. Suggesting that you are at the stage where you are just beginning to move away from said advisor, to manage on your own.

a slight problem is that you are skipping somewhat over the very first lectures in Investing 101. In those lectures, you would have learned how a Nasdaq Index Fund has nothing in common with a Mawer Balanced Fund, for example. 

every Nazz index fund would have performed heroically last few years, because US markets soared while the US dollar soared as well. However, this does not mean the same situation will prevail for the next few years. If anything, it suggests that an opposite scenario might occur or partially occur.

i believe that your arrival at the Mawer balanced fund idea is smart & sound. As others have mentioned in the pertinent thread, they find the relief from having to balance, fuss & fidget over an investment portfolio to be very precious.

in the early stages of learning how to manage one's own investments, this kind of support is well worth paying a few $$ in higher MERs, imho.

your other choices - steadyhand, philips hager - are excellent candidates too, in addition to Mawer.


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> ... the US rate of (mostly) 15% results from the reciprocal tax convention between canada & the US. It is protection from this tax convention that exempts US stocks in RRSPs from US withholding ... plus, of course, the same treatment goes in the opposite direction (no canadian NR tax on canadian dividends going to american retirement accounts.)


This is a Canadian forum where there are lots of Canadians who buy US investments so the 15% is accurate, assuming one of the rare instances of the broker messing up has not happened. 

To make it clearer and to help people figure out what to pay attention to for other countries ... IMO it is better to let people know that the US withholding tax rate is 30%. As Canadians, with the appropriate paperwork in place ... the treaty reduces the 30% in a taxable account to 15% and in an RRSP to 0%. 




humble_pie said:


> ... an exception to this tax convention protection is the newish canadian Tax Free Savings Account. I don't know the situation, perhaps the 2 countries have not yet got around to ratifying a mutually protective covenant, to be added to the existing tax convention as an amendment?


That's what I read early on, around 2009 and have hoped for. However, articles lately have been indicating that the US may be viewing the ability to withdraw from the TFSA at any time as making it different from a retirement account. One can withdraw from the RRSP at any time so I don't know how much water this holds (the RRSP would be taxed though).

Regardless ... there does not seem to be any movement and with the US looking for more tax revenue (ex. requiring more reporting for dual citizens in other countries), I suspect this is not going to change anytime soon.




humble_pie said:


> ... i can't speak for US equity funds in general or Mawer US equity in particular, but i would imagine that US NR withholding tax is applied to US dividends being paid into those funds & these amounts are allocated pro-rata to investors as "foreign taxes paid" on their T3 tax slips. Canadian investors then have a chance to claim foreign tax credits.


From what I've read on the Canadian Couch Potatoe web site as well as other articles ... this is true for a taxable account. In the TFSA, the fund knows a Canadian holds it so the US 15% is taken but since there is no T3 issued or required to be reported, there is no way to claim the FTC.

The same thing applies in an RRSP, where a Canadian fund holds US stocks or a US fund that holds international stocks.


http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/
http://canadiancouchpotato.com/2014/02/20/the-true-cost-of-foreign-withholding-taxes/


To be clear for Familyman's question ... the US 15% applies to dividends and if I recall correctly, income. So for a US stock held in a TFSA, where it pays a 3% dividend of $3 and the share prices goes up 60%. The US withholding tax for that year's dividends will be 3% x 15% (or $3 x 0.15) and there will be no tax on the share price increase. For an investment like a fund or ETF that pays multiple types of income, the tax is likely smaller (ex. $0.60 of the $3 paid is dividends then $0.60 x 0.15 will be the tax that is taken).





humble_pie said:


> ... in the early stages of learning how to manage one's own investments, this kind of support is well worth paying a few $$ in higher MERs, imho ...


+1 ... I'd also add that by sticking to registered accounts until one has learned the bookkeeping as well as the yearly tax filing requirements before using a taxable account will likely save one a ton of grief as well as help guide decisions.


Cheers


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## humble_pie (Jun 7, 2009)

Eclectic12 said:


> ... I'd also add that by sticking to registered accounts until one has learned the bookkeeping as well as the yearly tax filing requirements before using a taxable account will likely save one a ton of grief as well as help guide decisions.



this is an excellent suggestion

(eclectic i know about the 30% US base rate of course but didn't mention in order to keep the message as simple as possible ... advanced details regarding the NR tax breakdowns of other countries are not where familyman is at at this moment in his journey, imho)


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## familyman (Apr 6, 2015)

humble_pie said:


> moving on, since i'm probably already in the doghouse with yourself, i wonder if i might make another suggestion that you may not like each:
> 
> several of your questions plus the fact that you have a TFSA as well as a discount broker TFSA are suggesting to me that, in real life, you do have an investment advisor. Suggesting that you are at the stage where you are just beginning to move away from said advisor, to manage on your own.
> 
> a slight problem is that you are skipping somewhat over the very first lectures in Investing 101. In those lectures, you would have learned how a Nasdaq Index Fund has nothing in common with a Mawer Balanced Fund, for example.


Thanks for your explanation. 

And if you were in the doghouse with me, I wouldn't have asked you personally to respond. I think you are very blunt sometimes, but you give good advice so that's why I like to read your posts. Better to be rebuked by a wise man, than to be praised by a fool!

As for having an adviser, to be honest the only professional advice I've received was from a CIBC mutual fund adviser with whom I have had one meeting when I was opening up an RESP account for my daughter some time ago. The reason why I'm trying to move away from such advisers is I believe they are very biased in the information they give. I didn't know much about mutual funds and had never even heard of such a thing as an MER and the mutual fund he ended up selling me was one with 2.46% MER with pretty low returns. But as soon as I got home I started to research and realized it was nothing more than highway robbery, and read up like crazy about these types investments. As time goes by, I'm sure I'll be able to "fill in the gaps" of my knowledge base, which is why I am here reading posts.

I'll keep in mind what you said about the US Nasdaq Fund. Perhaps I'll have the Mawer as my investment core and invest a small portion in to Nasdaq Fund which I could always sell should things start to look unfavourable. How does that sound?


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## My Own Advisor (Sep 24, 2012)

familyman said:


> The reason why I'm trying to move away from such advisers is I believe they are very biased in the information they give. I didn't know much about mutual funds and had never even heard of such a thing as an MER and the mutual fund he ended up selling me was one with 2.46% MER with pretty low returns. But as soon as I got home I started to research and realized it was nothing more than highway robbery, and read up like crazy about these types investments.


Yup 

Good on you to watch your money management costs!


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> this is an excellent suggestion


I wish I'd have followed it when I bought my first batch of REITs. 

The info on the internet is probably making it easier to deal with a similar situation but as I've said before - having the info disappear because the REIT had been bought out made it a lot more work. 




humble_pie said:


> ( ... advanced details regarding the NR tax breakdowns of other countries are not where familyman is at at this moment in his journey, imho)


Fair enough ....


Cheers


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