Managing my LIRA – Update

Some time ago I wrote about my LIRA.  No, not some Turkish currency I have lying around the house, but my Locked-In Retirement Account (LIRA).

Recall a LIRA may be better known as a locked-in RRSP. These accounts originate from money held within a company pension plan. As long as you’re employed with that company your money may be invested (and vested) in a defined benefit or a defined contribution plan. When you leave the company you may have the choice to move the money accumulated into a LIRA. That’s what I did almost 10 years ago.

Back in July, I told you I wanted more U.S. exposure in my portfolio. Since I didn’t own any Coca-Cola (KO:US) yet, I decided it was time to get some. I thought it would be a great idea because:

•Coca-Cola has paid uninterrupted dividends on its common stock since 1893.
•Coca-Cola has increased dividends every year for 48 consecutive years.
•Coca-Cola has an average five-year dividend growth rate of over 9%.
•They have almost $3 billion in cash flow.
•Coca-Cola’s total return over last five years is over 50%.
•They have a moderate (and sustainable) dividend payout ratio of just over 50%.
•They continue to increase volumes, sales and revenues in emerging markets like China and India year after year.
•Although U.S. based, they are truly an international company.
•When looking at historical data (more than 40 years), Coca-Cola has doubled their dividend payments on average every seven years.
•One of the largest holders of Coca-Cola stock is Warren Buffett – enough said.

While I didn’t consider my Coca-Cola purchase a long-shot by any means, I did have one reservation – I was unsure if there would be U.S. withholding taxes for dividends paid inside my LIRA. My financial hypothesis and personal research was saying “no”, although I didn’t know for sure. Unfortunately, after talking to at least seven (7) departments and various “tax specialists” at Revenue Canada about this concern and after multiple phone calls and emails to the Financial Services Commission of Ontario office, they didn’t know either. So, I made the transaction based on my own hunch – a LIRA would be treated the same as an RRSP account as they are both considered pension accounts (therefore, no U.S. withholding taxes).

What you should know:

1.U.S. stocks held inside your RRSP or RRIF: you pay no withholding taxes (excellent)
2.U.S. stocks held inside your RESP or TFSA: you pay 15% withholding taxes (that stings)
3.U.S. stocks held in unregistered accounts: you pay 15% withholding taxes PLUS tax at your full marginal rate (ouch)

What was the result?

Every cent of the Coca-Cola dividend payment of $0.44/share landed in my account last week. Surprised? Not really. Am I happy? Absolutely! Turns out my research (and hunch) was correct – there are no withholding taxes for a U.S. dividend paying stock like Coca-Cola in my LIRA – so I now have more money working for me so I don’t have to.

With or without a LIRA as part of your portfolio, I hope you’re putting your U.S. stocks in the right location. I learned something new and by reading this post, I hope you did too. Holding your U.S. stocks in various financial accounts definitely has tax implications – implications you should know about. As a DIY investor, I’m learning those tax laws more and more and trying to use that knowledge to my advantage. I hope you are too.

As the old saying goes, if you’re gonna play the game you should probably know the rules 🙂

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've grown our portfolio to over $700,000 now - but there's more work to do! Our next big goal is to own a $1 million investment portfolio for an early retirement. Subscribe and join the journey!

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