Should I invest in taxable accounts?
I’m well into my second decade of Do-It-Yourself (DIY) investing but that doesn’t mean you should invest using a taxable account like I have.
Today’s post will tell you why and offer some considerations for your portfolio.
First up, some background how I’ve invested for the last 10+ years as that passionate DIY investor.
I take a “hybrid” approach to investing
- Approach #1 – we own a number of Canadian dividend paying stocks for income and growth. We own Canadian banks, utility companies and REITs (Real Estate Investment Trusts) inside our Tax Free Savings Accounts (TFSAs).
We own stocks like these because we believe buying and holding such stocks will, with time, provide both growth and some steady monthly income for future wants and needs in semi-retirement. We hope to be five years away from that financial milestone. We also own similar Canadian stocks in our non-registered/taxable account. More on that in a bit but we do report how we are doing with that portfolio every month.
- Approach #2 – although we own some Canadian assets inside our Registered Retirement Savings Plans (RRSPs) we are buying and holding more units of low-cost U.S. Exchange Traded Funds (ETFs) inside our RRSPs over time. In doing so, we’ll add growth, passive income and diversification to our portfolio.
Reader question about taxable investing
Hi Mark, I read your newsletters with vigour and I enjoy reading about your journey.
- Canadian-listed ETFs like XIU, VCN among others (that own Canadian stocks) might be best held inside the TFSA (so there are no foreign withholding taxes to worry about).
- If I do decide to own Canadian-listed ETFs inside my RRSP, including those that hold U.S. and international assets (e.g., VEQT), I will have withholding taxes applied. You have shared the tax drag costs for holding VEQT are about another 0.25% (give or take) on top of the 0.25% MER product cost.
So, I’m considering owning Canadian dividend paying stocks in my taxable account for the Canadian Dividend Tax Credit like you – is that wise?
Thanks so much!
Thanks for your question!
I wish I could tell you but without much details let alone understanding your long-term goals I’m really not sure what I could offer. Just being honest! What I can say without getting into any regulatory trouble is how your questions relate to my plan.
Tax-free and tax-deferred is always better over taxable
Assuming of course your debt is under control and you should be investing in first place…unless you have an extremely high, consistent savings rate, I believe keeping your money tax-free and tax-deferred is always a great move over taxable investing.
I mean, why get taxed when you don’t have to???
That means, I think it makes great sense to prioritize contributions to your TFSA (first and always), then your RRSP (if your income is higher), and also your RESP(s) (Registered Education Savings Plan(s)) (to support post-secondary education for your children) before any taxable investing.
In point form:
- TFSA = tax-free investing at any salary is better than ongoing taxation in a non-registered account. This is one of the reasons why investing inside your TFSA makes sense. This is the other BIG reason in my book.
- RRSP = tax-deferred investing is better than taxable investing. As your income grows, after the TFSA is maxed out consistently, then it makes sense to lower your earned income every year using the RRSP-generated tax refund. **Just don’t forget that BIG reason link above!**
- RESP = tax-deferred investing (for future educational purposes thanks to the government grant) is also better than getting taxed on savings or investments. I mean, if you have the financial means to help your children obtain a better, educated future, do it. If you want to flip the RESP over the RRSP for investing, be my guest!
Heck, you could argue it makes sense to potentially make extra mortgage payments prior to any taxable investing.
Just be sure you read this definitive take on paying down your mortgage or investing.
What have I done?
I was so hell-bent on saving for investment purposes many years ago, I invested in my taxable account with proceeds from the sale of our previous condo. In hindsight, I might have been better off just killing my mortgage. Lesson learned.
With good paying jobs and a responsible savings rate, we’re fortunate in 2020 to have maxed out contributions to our TFSAs (every year since TFSA inception actually) and our RRSPs are out of contribution room as well. So, other than making mortgage payments (which we have since increased a bit in 2020 anyhow) taxable investing is our only way to go for now.
Readers continue to ask me what asset locations they should consider owning what investments in – for more tax efficient investing. Here are some of my favourite asset locations:
|RRSP Assets||TFSA Assets||Taxable Assets|
You won’t find international, U.S. dividend paying stocks or any U.S.-listed ETFs under my “TFSA Assets” column because withholding taxes on dividends earned will apply to the tune of 15%. *I don’t own any bond ETFs or GICs. I probably won’t until I fully retire into my 60s or 70s.
Best to keep U.S. stocks and your low-cost U.S. ETFs inside your RRSP.
You’ll also see above that British ADRs are very tax friendly inside the TFSA.
More on that here.
At the end of the day – taxation is important but not everything – the choice is yours!
To help you minimize taxes in the future (when it comes to taxable investing), consider owning the following, again just examples:
- Canadian stocks (that apply for the Canadian dividend tax credit),
- Canadian ETFs (like XIU) that are very tax-efficient, OR
- Stocks that pay little to no dividends – since capital gains when you incur them are – all things considered an efficient form of taxation.
At the end of the day I can’t really tell you what is right or wrong when it comes to investing but it is hope through this site you’re a bit more informed and can make a better financial decision for it. That’s even if you don’t follow what I’m doing today!
Happy investing and thanks for your reader questions. Keep them coming!