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Discussion Starter · #1 ·
Hello Everyone,

Brand new to direct investing, have been reading posts on CMF for a few months. I`m currently a RBC customer with a 100k RRSP in their Select Balanced Fund and a few unregistered GIC`s that i needed to secure a line of credit for my business. Now that the line of credit is paid down I'll have the freedom to start direct investing next month with one of the 40k GIC`s coming due. I`m in my mid 40`s and have acquired most of the major material possessions I need for a while so I should be able to invest lump sums of money more frequently. Self-employed so no pension, and until recently just happy to have an RRSP for a bit of tax relief. Now that I've started to take my financial future seriously I`m amazed what information I`ve discovered and what I need to change. Still have approx. 80k room in my RRSP and have not ever invested in a TFSA. My plan is to take the 40K GIC to start and invest in ETF`s following one of Vanguard`s model portfolios.

Couple of questions:

1) Being an existing RBC customer should I be OK using their direct investing services? For the size of the bank, I don`t read much discussion involving them on CMF

2) Am I missing something regarding the work/knowledge involved investing in ETF`s as compared to recommend index mutual funds on the couch potato site? I personally don`t see rebalancing my portfolio yearly as much work if it benefits me in the long run but I haven`t done it yet so I have no experience.

I plan on eventually converting the Select Balance Fund RRSP to something with a lower MER once my knowledge and confidence develops more.

Cheers!
 

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Most of the big banks are pretty similar with their do it yourself investing accounts. Unless there is something specific you are looking for if you already bank with RBC it's probably the easiest. If you are an active trader than there are places with lower cost trades though.

I'm not quite sure what your second question means, but if you are already using a do it yourself account it's no more work to balance ETFs as opposed to mutual funds. There are the trading fees but for the amount of money you are talking, the MER savings are well worth it.

Happy investing!
 

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Discussion Starter · #3 ·
Thanks CalgaryPotato,

What I meant by my second question was: due to my inexperience with ETF`s is it that more complicated/time consuming to rebalance my portfolio yearly than I think it is as compared to say Couch Potato`s option 1 like a Tangerine Investment fund that rebalances automatically and is virtually maintenance free?

I don`t mind spending the time rebalancing my portfolio as I add lump sums of money and am eager to expand my investment knowledge


Thanks
 

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Rebalancing with ETFs is fairly simple. The only thing that’s a bit more complicated compared to mutual funds is with taxes and tracking your adjusted cost base (not a factor if you’re investing in registered accounts). Are you planning to put that $40k in your TFSA? You may as well take advantage of your TFSA room.

Also +1 for sticking with RBC (if you’re happy with them). If you don’t trade frequently then there’s not a big difference between brokerages.
 

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Discussion Starter · #5 ·
Hi Woz........was planning on putting the 40k in my RRSP (hard to resist the 40k income tax deduction then reinvest the savings) with the plan to hopefully max my contribution room in both RRSP and TFSA eventually.

Do you think at the stage of the game I need to concern myself with the theories that TFSA`s are better for Canadian equities and RRSP`s for US equities for tax withholding purposes? It`s just something I read on a CMF post
 

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The US/Canada RRSP/TFSA thing is only an issue because of the US withholding tax on dividends in a TFSA. If you're putting everything in your RRSP then it's not a factor. If in the future you start using your TFSA as well then it's easy to rebalance your accounts so that you don't have any US stuff in your TFSA.

Also, the dividend yield on the S&P500 is ~2% so a 15% withholding tax on dividends is only a 0.3% (2%*15%) tax drag. It's a factor, but not as big a deal as it's sometimes made out to be.
 

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"Hi Woz........was planning on putting the 40k in my RRSP (hard to resist the 40k income tax defermentthen reinvest the savings) with the plan to hopefully max my contribution room in both RRSP and TFSA eventually. "
 

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"Hi Woz........was planning on putting the 40k in my RRSP (hard to resist the 40k income tax defermentthen reinvest the savings) with the plan to hopefully max my contribution room in both RRSP and TFSA eventually. "
Actually it is correctly referred to as a "deduction". Refer for example to your "Calculation of 2015 RRSP Deduction Limit" statement from the CRA. You are referring to the fact that the deduction from income and tax refund that your contribution provides will be offset (to a greater or lesser degree) by tax that is payable when you bring the RRSP funds back into you income in some future year. Yes, it is important for people to realize the nature of RRSP's in deferring taxes to some future year. Those two certainties - death and taxes.
 

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If you’re making a large catch-up RRSP contribution, it’s sometimes better to stagger your contributions over multiple years in order to maximize your return; especially if your contribution results in a large drop in your marginal tax rate.

Take your net income. Deduct the amount you plan to normally contribute to your RRSP every year. Determine how much above the next lowest tax bracket you are. That’s how much of the $40k you’ll want to contribute each year. If it’s too small a number then move down to the next lowest tax bracket. In the meantime any excess funds can be put in your TFSA.

For example, if the tax brackets for $80k to $100k is 30% and $100k to $120k is 35%. If you make $120k a year and contribute $40k all at once then you get a $13k refund (20*35% + 20*30%). If you stagger it over two years then you’d get a $7k per year refund (20*35%).
 

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If you’re making a large catch-up RRSP contribution, it’s sometimes better to stagger your contributions over multiple years in order to maximize your return; especially if your contribution results in a large drop in your marginal tax rate.
It is perfectly fine to make the full catch up contribution. Just don't deduct all of it. Spread the deduction out over a number of forward years per your example.
 

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It is perfectly fine to make the full catch up contribution. Just don't deduct all of it. Spread the deduction out over a number of forward years per your example.
You'd still end up further ahead by spreading the contributions and using the TFSA than by spreading the deductions. Any growth during that 1 year would be tax free instead of tax deferred.
 

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If you’re making a large catch-up RRSP contribution, it’s sometimes better to stagger your contributions over multiple years in order to maximize your return; especially if your contribution results in a large drop in your marginal tax rate.

Take your net income. Deduct the amount you plan to normally contribute to your RRSP every year. Determine how much above the next lowest tax bracket you are. That’s how much of the $40k you’ll want to contribute each year. If it’s too small a number then move down to the next lowest tax bracket. In the meantime any excess funds can be put in your TFSA.

For example, if the tax brackets for $80k to $100k is 30% and $100k to $120k is 35%. If you make $120k a year and contribute $40k all at once then you get a $13k refund (20*35% + 20*30%). If you stagger it over two years then you’d get a $7k per year refund (20*35%).
Shouldn't one also consider what tax bracket they expect to be extracting the RRSP funds at?
 

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It is perfectly fine to make the full catch up contribution. Just don't deduct all of it. Spread the deduction out over a number of forward years per your example.
Haven't seen this recently, but I'll say it again.

Unless your TFSA is maxed out, don't put money in your RRSP with the intention of deferring the deduction. Yes it can be done, but tax fee is better than tax deferred! Put only what you plan on deducting in your RRSP. Any more investable money should be put in a TFSA. It can always be transferred to an RRSP at some later date when the deduction is to be used.

Jollybear doesn't provide his/her taxable income, so dropping it to a lower tax bracket may not be desirable, and a staggered contribution over two or more years may be preferable. Of course, with the OP having business income that may fluctuate, this form of tax planning may be difficult.
 

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Welcome jollybear.

Answers:
1. No nothing wrong. I've been using Direct Investing for years. Works fine and I don't trade enough that a few dollars saved at a discount broker means anything compared to convenience of staying where main banking is. When you have 250K in an account you'll qualify for the Royal Circle.

2. You have enough money to make investing in ETFs and rebalancing yourself worthwhile, especially since you're willing to learn more and can save money as well.

Sounds like you're in good shape to get more serious about your investments. Good luck.
 

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Discussion Starter · #15 ·
My income for the year should end up somewhere between 100-115k. Good advice to use my RRSP investment to put me in a lower tax bracket! Do I also need to consider the long term potential if I use the entire 40K this year and dump it into an RRSP and then invest my tax deduction as well.....

For example: If I invest the 40k into an RRSP this year I should have an additional 12k that I did not pay to revenue Canada to invest as well OR is it smarter to use a smaller portion of the 40k RRSP just to put me in the next lower tax bracket and the rest into a TSFA? (pay more income tax this year and have less to invest, but the investment I do make is permanently tax-free)

Might be tough to figure out not knowing future ROR`s etc.........

Thanks for all your posts!
 

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You also need to know your 2016 and potentially beyond income too if you are thinking of spreading your RRSP contributions into the future. Break out your crystal ball.

Have a look at sites such as taxtips.ca. You'll be able to see where the brackets are, and how much of a % difference each one would make. If you are making $115k, my feeling is to drop it $89,400 using your RRSP deduction, and invest the remainder, including tax refund, into your TFSA. Note that I am looking at the rates for Ontario. You'll have to look up your own province to see your personal savings. You will also have to have a close look at other deductions that can interact with your taxabke income such as child care expenses, employment expenses, ... Don't just look at your T4 or self employed net income.
 

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As Guban said, you need to get out the crystal ball for some future retirement planning.

Looking forward ...
What's your tax bracket situation now (fed + pov)?
How much do you plan to save, is it a minimum of 40k/year now?
When do you plan to retire ... in 15, 20, 25 years?
What level of income do you want in retirement (within what tax bracket)?

Its likely that maxing out your TFSA and putting the rest in RRSP would be fine but it really depends on the answers above.
 

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I would say with a good income like yourself, you're best to invest in the RRSP, and use the RRSP-generated to fill up your TFSA every year if you haven't already maxed out the TFSA first.

Once your registered accounts are maxed out, focus on killing any mortgage debt.

Once registered accounts are maxed out AND mortgage debt is at a low/modest level, consider investing in a non-registered account.
 
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