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Reader Question – Should I invest directly in the USA outside registered accounts?

Readers of my site likely know by now I’m a fan of investing in dividend paying stocks and indexed Exchange Traded Funds (ETFs) to fund my financial freedom.

I invest in dividend paying stocks for a few key reasons:

  • I like it when companies pay me money every month or quarter,
  • In many cases, these companies increase their dividends every year, providing some inflation protection, and
  • In a non-registered account, the Canadian stocks I own qualify for the dividend tax credit.

I invest in indexed ETFs for a few key reasons:

  • To achieve market performance less minuscule money management fees,
  • To provide great diversification, beyond Canadian stocks and ETFs, and
  • To somewhat “set and forget” part of my retirement portfolio.

Beyond my Canadian dividend paying stocks, I also hold a few U.S. dividend paying stocks but only in my RRSP.  The TFSA is OK for U.S. stocks and U.S.-listed ETFs but not an ideal location since any dividends received from these U.S. investments get hit with 15% withholding taxes in the TFSA and cannot be recovered.  This brings me to my investing rule of thumb about foreign investments:

I hold investments that attract the most tax, including all my foreign investments that pay dividends, inside my RRSP.  I do this to defer taxes for as long as I can.

Thanks to a reader question, I’ll cover a few tax considerations associated with holding U.S. stocks or U.S. ETFs outside registered accounts today.

First, popular investments that attract the most tax are as follows:  cash, Guaranteed Investment Certificates (GICs), money market funds, individual bonds and bond ETFs, and foreign stocks that pay high dividends.  This means you should consider keeping those investments inside registered accounts.

Second, popular investments that attract the least tax are as follows:  Canadian stocks (dividend payers and non-dividend payers), Canadian ETFs, and foreign stocks and foreign ETFs that pay little to no dividends. Since these investments don’t attract very much tax, these are your main investing choices outside registered accounts.

Where should you hold your U.S.-listed investments?  I cannot answer that question for you but maybe you should consider asset allocation in your decision-making.  If your registered accounts like the RRSP and TFSA are maxed-out (well done by the way), and these accounts already have a healthy dose of fixed-income products that attract the most tax, then you could consider holding U.S. securities non-registered.  If you decide on that be aware U.S. investments held in a non-registered account are hit with withholding taxes but you can claim a credit for that when filing your annual tax return.  You can read more about Federal Foreign Tax Credits here thanks to Canada Revenue Agency.  Keeping U.S.-listed investments outside registered accounts like the RRSP and TFSA simply makes things a bit tricky, tax-wise so consider consulting a tax professional before doing so to ensure this is an effective strategy for you.  You can read more about making some smarter asset location decisions here on Dan Bortolotti’s site.

For my account, I will continue to hold U.S. stocks and U.S.-listed ETFs in my RRSP and will only consider holding U.S. securities in other accounts at the time of retirement.

What account do you hold your U.S. stocks or U.S.-listed ETFs?

Filed in: Asset Allocation, Withholding Taxes

9 Responses to "Reader Question – Should I invest directly in the USA outside registered accounts?"

  1. Like you, all of my US investing is within my RRSP. My accounts are definitely not maxed out, though one day I’d like to get there (hopefully soon). I’ll continue using my RRSP for that purpose.

  2. Helen_in_Toronto says:

    Thank you for an excellent, clear, consise and very educational post.

    DIVIDEND PAYING ETF’s

    I’m wondering, if it would be wise to buy either Canadian or US dividend ETF’s, such as “dividend aristocrat” type ETF’s? Then, one can just sit back and let the dividends roll in. Am I missing something? Is this not a better alternative than buying individual company shares and hoping to pick “winners” that will be consistent and long term dividend payers and dividend growers?

    BTW: I’m just getting myself ready and educated to start buying some ETF’s; a move that is long overdue.

    I welcome all opinions and comments.

  3. Helen_in_Toronto says:

    About my previous comment: WOops! I just realized that I had not yet read the following:

    2.Reader Question – Why don’t you just buy dividend ETFs?

    Now that I have read it, some of my questions have been answered. Any other comments are stil welcome.

    Thank you!

  4. Excellent advise man! Thanks for sharing! I just started to invest for the long term and have found your blog to be very useful. Great stuff, keep it up!

    Regards,
    LT

  1. […] this week, I answered a reader question about investing in the U.S. outside registered accounts and I also took a shot at Old Age Security reform through a controversial post here.   I should […]

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