Weekend Reading: Maxed Out RRSP And TFSA Edition

Weekend Reading: Maxed Out RRSP And TFSA Edition

It’s generally a good idea to max out the available contribution room inside your RRSP and TFSA first before moving on to other investment opportunities. Those “other” opportunities may include accelerating your mortgage payments if you own a home, or buying a rental property, or opening a non-registered (taxable) investment account.

It’s a topic I get asked about frequently, so I thought I’d share my answer below. This question comes from a reader named Allen, who focuses more specifically on opening a non-registered account to invest. Take it away, Allen:

“Good day Mr. Engen,

I’m a regular reader of your weekly newsletter and have noticed that you use VEQT across your TFSA and RRSP accounts. I’m wondering what to do when those two accounts are maxed out. I rent, have no kids and no debt. So I see nothing to do with my money besides investing it.

Is it worth it to open a taxable account and start investing my ‘extra’ money, or is there something more valuable to do with those savings?

Also, if I go the taxable account route do I have to pay tax every single year the money is invested, and added — presuming the returns are positive — or is it only when I sell the securities inside the taxable account?”

Hi Allen, congrats on maxing out your RRSP and TFSA! Besides encouraging you to spend a bit more, I think it does make sense for you to open a non-registered investment account.

It’s all about creating a priority sequence for your savings. Priority one might be to max out your RRSP for the year, priority two is to max out your TFSA, and then if you don’t have a priority three (this could be extra mortgage payments if you had a mortgage, or money for travel, or furniture, or a new car, something more short-term in nature) then investing in a non-registered account makes logical sense.

Investing in a non-registered (taxable) account does typically create some taxable income for you. If you invest in ETFs then you’d likely receive quarterly distributions of dividends and/or interest.

For example, VGRO pays quarterly distributions of about 15 cents per unit. Here’s what that looked like in 2020:

VGRO distributions

This income is taxable to you. Using a quick example, if you had 1,000 units of VGRO then you’d receive about 60 cents per unit from the distributions each year. That’s $600 will be made up of eligible dividends, capital gains, interest, foreign income, and return of capital. You’ll receive a T3 slip from your financial institution at tax time breaking this down for you.

VEQT pays an annual distribution rather than paying it quarterly. Same idea applies, although since it doesn’t hold bonds the income would all come from Canadian and foreign dividends, plus some return of capital.

Finally, there are some ETFs that don’t pay any distributions. These are called “swap-based” or synthetic ETFs.

Horizons is famous for these and they have an all-in-one ETF called HGRO that uses this structure. Basically they don’t hold the underlying stocks directly but they use a counter-party (BMO, National Bank) to hold the securities and receive the dividends directly. The counter-party then “swaps” the total return over to Horizons.

The premise is that investing in HGRO won’t attract any annual investment income – it’s all deferred capital gains until you sell the ETF. This could be attractive if you’re in a high tax bracket now versus when you plan to sell.

But there are risks associated with these types of swap-based ETFs, including regulatory (the federal government could disallow this structure in the future). Horizons’ all-in-one ETFs are also not as diversified as traditional asset allocation ETFs from Vanguard, iShares, and BMO.

Allen, I invest in a non-registered account, it’s just inside my corporation rather than on my personal side. I hold VEQT in that account, just like I do in my registered accounts. It’s perfectly sensible to hold the same investment across all account types.

Finally, an off-the-beaten path answer to your initial question is to consider the Coast FIRE approach to savings.

I spent several years catching up on unused RRSP and TFSA room so my savings rate was abnormally high throughout my late 30s and into my 40s.

Now that I’ve maxed out my RRSP and TFSA, and got a good start on my corporate investing account, my plan is to dial down my savings rate in the future so I can work less and/or spend more on travel.

Life’s not about accumulating the biggest pile of money. We need to identify a purpose for our money so we can design the type of lifestyle that we truly desire.

This Week’s Recap:

This week we kicked-off the first of a three-part retirement series by author Mike Drak – this one on designing your ideal retirement lifestyle.

Over on Young & Thrifty I wrote about the best all-in-one ETFs in Canada.

I also reviewed the CIBC Investor’s Edge platform.

Promo of the Week:

American Express is going all out again with sign-up bonuses and perks that rival their best offers ever from this summer.

The American Express Platinum Card is offering a welcome bonus of 80,000 Membership Rewards points when you charge $6,000 in purchases to your card within the first three months. 

Here’s why you might want to pay a $699 fee to hold the Amex Platinum Card:

  • Get a $200 annual travel credit 
  • Earn 3 points per dollar spent on dining
  • Earn 2 points per dollar spent on travel
  • Transfer points 1:1 to several frequent flyer and loyalty programs, including Aeroplan)

Not only that, you’ll get free airport lounge access, a $100 NEXUS card statement credit, plus gold status at Hilton, Marriott, and Radisson hotels.

Alternatively, you can try my new favourite – the American Express Aeroplan Reserve Card. With this card you can earn up to 90,000 Aeroplan miles plus a Buddy Pass for an eligible round-trip flight within North America.

Here’s how it works:

Earn 30,000 Aeroplan points and a bonus Buddy Pass after spending $3,000 in purchases within the first 3 months.

Plus, earn 5,000 Aeroplan points for each monthly billing period in which you spend $1,000 in purchases on your Card for the first twelve months. That could add up to 60,000 Aeroplan points.

American Express says this is worth up to $2,900 or more in value within your first year! All of this for an annual fee of $599.

Weekend Reading:

Our friends at Credit Card Genius launched Genius Cash earlier this year and are giving away $10,000 cash or a Tesla Model 3.

A Wealth of Common Sense blogger Ben Carlson addresses the buy now, pay later phenomenon.

Rich Dad, Poor Dad author and noted investing seminar scammer Robert Kiyosaki predicted a giant market crash in October. This lines up with at least eight other “predictions” he made over the past 10 years. The problem is that even a broken clock is right twice a day.

Professor Moshe Milevsky explains why the 4% rule is too simplistic for modern retirement planning:

“There’s something odd about a rule that’s one-dimensional, Mr. Milevsky said. Four per cent regardless of tomorrow? I think decumulation plans must be multidimensional.”

Here’s Millionaire Teacher Andrew Hallam on how to beat the investment returns of almost everyone you know.

The Evidence Based Investor explains why the outcome of your investment decisions should be based more on evidence than on speculation, superstition or guesswork.

Gen Y Money breaks down the locked in retirement account and decodes the LIRA vs. RRSP rules.

Why retirees should start planning now to age in place if they want to avoid living in a seniors’ home.

Michael James on Money reviews The Deficit Myth by Stephanie Kelton

Finally, just a terrific interview in The New Yorker with Rick Steves about holding onto your travel dreams.

“For me, Europe is the wading pool for world exploration. My favorite countries may be elsewhere. I like Indonesia and India and Japan and Central America just as much when it comes to travel, but I’ve got a calling in life. And that is to inspire Americans to venture beyond Orlando. The practical goal is to get people who have been to Disney World four or five times to try Portugal. It won’t bite you.”

Who isn’t dreaming of a trip to Europe after reading that?

Have a great weekend, everyone!

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  1. GYM on October 2, 2021 at 9:39 pm

    Thanks for the mention Robb. I really liked that Rick Steeves interview as well, he sounds like a really interesting, well travelled, and down to earth guy. Hopefully the day of buying travel guides will return soon.

    • Robb Engen on October 3, 2021 at 5:57 pm

      My pleasure, GYM! It’s interesting how he’s stayed in his hometown all his life, despite travelling all over the world. I think that makes good sense, after travelling so much you want to come home to comfort and familiarity.

  2. Jim on October 3, 2021 at 12:25 pm

    Thanks for your valuable thoughts as always! This dovetails nicely with something I’ve been wondering about, which is whether to pull money from my newly-formed corporation to max out my TFSA or forget about the TFSA and keep as much invested within the corp as possible. I’ll always pull out enough to max my RRSP. What are your thoughts on this?

    • Robb Engen on October 3, 2021 at 6:03 pm

      Hi Jim, I’d think it’s probably best to pull out enough to max out your RRSP (as you’re doing) and then invest excess corporate profits inside your corporation. You’ll pay tax on your corporate withdrawals and then not get a tax deduction for the TFSA contribution.

      Of course, like most personal finance decisions this depends on a number of factors like salary vs. dividends, current and future tax brackets, your plans to eventually withdraw from the corp, other retirement income streams, etc.

      • Jim on October 5, 2021 at 4:07 pm

        That’s very helpful, thanks! I have another question for which I’d love your input. I’m currently 95% invested in VEQT (virtually all in RSP with remainder in TFSA) and am wondering about asset location when I open the corporate investing account.

        I’m curious what you think about the following: slowly selling all VEQT and replacing that with underlying US, international, and emerging markets ETFs within the registered accounts and then buying mostly large-cap Canadian stocks within the corporate account to approximate a Canadian ETF. I would work up to a total portfolio regional exposure of something like 33% each of Canadian/US/international.

        Or am I overcomplicating things with limited upside and should just keep all the VEQT and maybe invest in HGRO within the corporate?


  3. Betty on October 4, 2021 at 9:25 am

    I made a mistake of depositing 15M in my TFSA Acct. ( fully subscribed) instead of my Margin account. I have it transferred now but what are the penalties?

    • Robb Engen on October 4, 2021 at 10:19 am

      Hi Betty, you’ve done the right thing by immediately removing the over-contribution. I would contact the CRA and let them know of the error, and also let your financial institution know what happened.

      The over-contribution penalty is 1% per month, so it’s a pretty hefty penalty. Hopefully they’ll see it was a simple mistake.

  4. Betty on October 4, 2021 at 10:47 am

    Thank you Robb for your valuable advice.

  5. Mike Holman on October 4, 2021 at 1:27 pm

    Hi Robb.

    I’ve heard/read Milevsky complain about the 4% rule numerous times saying it’s too simplistic and you are basically dumb if you use it.

    The problem is that he never seems to offer up an alternative, other than vague statements about how a dynamic withdrawal program should look like.

    I’m totally on board with a better dynamic withdrawal method, but I need to know how that method works in order to use it.

    One nice thing about the 4% rule is that it’s pretty simple, which is a great starting point, if nothing else.

    • Robb Engen on October 4, 2021 at 2:37 pm

      Hi Mike, you’re right that Milevsky doesn’t offer up much of a concrete alternative to the 4% rule aside from “it’s complicated”.

      I don’t find the 4% rule all that useful in practice. Working with clients we start with how much they want to spend to meet their desired lifestyle. Then we look at guaranteed income sources like employer pensions, CPP and OAS. Then we go to the portfolio, which could be made up of RRSPs, LIRAs, TFSAs, non-registered investments, cash savings, etc. – all with different advantages and tax treatments and withdrawal rules (RRIF / LIF mandatory withdrawal rates far exceed 4%).

      We test the appropriate withdrawal sequence from all account types to see if it meets their spending needs while ensuring there’s little to no chance of running out of money. In many cases we use buckets (cash, fixed income, stocks) so we’re not withdrawing from stocks during a down market. Nowhere in this process are we using 4% to determine the appropriate withdrawals.

      This type of approach seems more aligned with how Fred Vettese explains retirement spending. I don’t recall him ever discussing the 4% rule.

      I also think people who fixate on the 4% rule are more likely to invest in stocks or funds that pay yields of 4% or more to avoid spending their capital. This is probably not the most efficient or diversified way to invest.

  6. Cathy on October 5, 2021 at 10:30 am

    If you are retired and have a defined pension, and have RRSP room, would you suggest one contribute to it? We have maxed out our TFSAs and do have some money available to do so. We are debt free at this point.
    Thank you for your input.

  7. Bob on November 15, 2021 at 2:47 pm

    This is a gret question Cathy, I have checked back a few times hoping to read Robb’s answer and I am wondering if you ever received an answer to your question?

  8. Robb Engen on November 17, 2021 at 12:33 pm

    Hi Cathy & Bob, sorry for the late reply. The answer really depends on a bunch of different factors, including your taxable income at present time. I’ve had clients save some unused RRSP room because they planned on selling a rental property and they could make an RRSP contribution to offset the impact of capital gains. The same could be said for selling an investment held in a taxable account – if you plan on realizing a large capital gain it can make sense to have some unused RRSP room available to help reduce the tax burden that year.

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