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.
Should you invest in taxable accounts?
Are there considerations before investing in taxable accounts?
Today’s post will tell you what I think about, why, and offer some considerations for your portfolio.
Should I invest in taxable accounts over other accounts?
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).
I essentially unbundled a big Canadian ETF like XIU a long-time ago.
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.
You can find more details about how I built my own Canadian dividend stock portfolio here.
- 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.
Here are some of the best low-cost ETFs for your RRSP.
Reader question about taxable investing:
Hi Mark, I read your newsletters with vigor and I enjoy reading about your journey.
I have learned from your site that:
- 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 this post.
- 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. Make the right financial and emotional decision for you. Personal finance is more than math.
The definitive answer to 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 sooner. BIG lesson learned.
With good paying jobs and a responsible savings rate, we’re fortunate to have maxed out contributions to our TFSAs (every year since TFSA inception actually).
Our RRSPs are also out of contribution room as well.
So, other than making a few lump mortgage payments (which we do now and then) 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 |
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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.
Best practice for me is to keep U.S. stocks and U.S. ETFs inside our RRSPs.
You’ll also see above that British ADRs are very tax friendly inside the TFSA.
More on that here.
Should I invest in taxable accounts summary
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!
Mark
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
I like your chart! I used to get really hung up about tax efficiency and optimization so much so that I wasn’t investing in US dividend paying equities because of that. I am not so much focused on this now.
Ya, I don’t get fussed on the “you have to put certain stocks or ETFs in certain accounts” kinda stuff.
I follow some general (proven) guidelines but at the end of the day if folks want to invest with XUU in a CDN RRSP (because it’s a CDN ETF and no currency exchange to worry about) but still want access to U.S. market, go for it. Same goes with low-yielding U.S. stocks inside a TFSA. They can do that for growth and build up a nice USD $$ tax-free travel fund 🙂
There are far worse ways to invest!!
Great article Mark as usual !
First time, I write you. You are since a couple of years an example for my investments actually.
Concerning if people should invest in their taxable account, I’ll say yes with canadian dividend stocks & canadian ETFs, just like my name. I think it’s a great strategy way better than leaving your account into a GIC for 5 years with only 1% return, you’ll end up broke & poor. Everyone here knows that the dividend technic is tax friendly & you could reinvest them too inside a taxable account !
Keep up the good work ! ???
Thanks for nice words and comment.
Yes, Canadian dividends are very tax friendly for sure but likely wise not to invest in them without maxing out TFSA and RRSP first. If folks can do that over 30-40 years, max out TFSA and RRSP, many Canadian won’t need a taxable account due to the amazing compounding power of assets inside those accounts + government benefits.
Thanks for stopping by!
Great article Mark!
One comment on US stocks in RRSP. It’s all about the dividend tax so if you buy non-dividend US stocks, you can hold them anywhere. The capital gains tax is the same. The higher the dividend yield, the more reasons to hold in the RRSP but I started holding low yield dividend growth stocks like MasterCard or VISA in the other accounts. You have a tax withholding of 15% on 1% so it’s pretty insignificant.
Yes, indeed, you can recover some of the tax in a non-registered account but that means to your point you should be putting any U.S. or international stocks that pay dividends inside your RRSP (first) for that very reason. Better to have tax-deferred than taxable no?
I’ve done this since day 1 and will continue to my friend!
At some point, I might put U.S. stocks that pay little to no dividends inside my taxable account but not unless I have to for extra diversification. Potentially a few years down the road!
Great comment.
Mark
On the premise that RRSP is full or limited due to pension. You should not avoid US stocks because of the 15% tax on dividend. They are still worth investing in. My RRSP is all US stocks and full for example.
Also, it was not so much about recovering taxes but about the minimal impact on the investment performance. The accounts mentioned is a good rule of thumb but choosing between investing in Visa (low yield) vs a Canadian stock with limited growth, go with Visa. The TFSA is probably better than non-registered due to the capital gains potential.
In the end, it’s about making money and getting a good return. On a great US stock that pays a small dividend, the tax impact on the dividend is usually very negligible on the performance. Those stocks usually have high dividend growth in the double digits unlike our banks and it usually allow for a Canadian investors to invest outside the usual Canadian enegery, financials or REITs.
In general, I find there is too much focus on the 15% withholding tax and little consideration on the actual investment performance potential. I realize it’s easy to comprehend the tax compared with potential growth of an investment but that why I like the Chowder Score as it can easily help estimate investment growth for dividend paying stocks.
No, not avoiding them my friend, just that if I have a full RRSP now (nice problem to have) and no TFSA room (due to CDN stocks maxed out) and a growing taxable dividend income stream via CDN dividends (again, a great problem to have) it’s just another complication to consider with USD stocks or ETFs in a taxable account.
While I could and still might invest in U.S. low-yield stocks in a taxable account in 2021 (?) I prefer to focus extra income on paying down my mortgage (will be debt-free in a few years) and building a nice cash wedge for semi-retirement.
https://www.myownadvisor.ca/how-much-cash-should-you-keep/
Then, once TFSAs, RRSPs, and cash wedge is built, with no debt in coming years – with any additional income I can put into taxable account and buy low-yield U.S. stocks.
Nothing wrong with owning a great U.S. stock that pays a small dividend in a taxable account. If I had $$ to invest now vs. saving for 2021 TFSA and RRSP (I plan to max out both accounts in early 2021) then I might invest that way but not right now. Will keep you posted!
Hope all is well.
Mark
Great post Mark and I agree with your breakdown of holdings between the RRSP / TFSA / Taxable. It’s best to hold Stocks / ETFs that pay eligible dividends to minimize the tax burden (also covered this concept in my dividend investing video). After that, owning Stocks / ETFs that pay little dividends is also well thought out since you would only have to pay capital gains tax when you decided to sell.
Dividends from international holdings get taxed just like interest, at the highest marginal rates, so it’s best to avoid those in a taxable account if possible.
– DG Capital
Thanks DG! Yes, based on what I’ve learned and how best to apply to our income needs in semi-retirement I figure if I continue to max out TFSA and RRSP for the coming years, early/semi-retirement should occur. I can rely on dividend income from the taxable account and capital gains from that account to live from too!
Happy investing,
Mark
Hi Mark;
Given that many of our TFSA holdings have lost value these past months (mine which was max’d is now down a few % thanks to my REIT drop),
will CRA let us contribute some more money now to bring our total value back up to the current year’s maximum?
…OR given that we had previously contributed the maximum dollars allowable, does CRA deem that we may no longer contribute — even though our current total value is lower than their allowable 2020 maximum.
For those who may not yet have max’d their contributions, if they were able to contribute to top-up their reduced-value TFSA now, would they calculate their allowable top-up by subtracting their current TFSA value from their allowable total contribution?
… OR again would CRA only allow them to contribute the difference from their former contribution total (even if it is less than that value presently) and their allowable maximum contributions?
If you lose money in your TFSA, it is too bad for you, as you cannot even claim the loss if you sell at that loss. Likewise, you don’t claim the gains. You do not get extra contribution room for your bad luck.
My TFSA is at a huge book value loss. I keep REITs in there, along with others I thought would do well. Doesn’t always turn out that way. I also manage my husband’s TFSA and his is valued much higher than mine.
Wish one of my very huge cash account winners was in there, but alas it is all taxable gains.
My story exactly Barbara!
Yes, same thoughts to Toby.
1. If you lose money inside the TFSA it’s “your problem” since money has already been taxed prior to TFSA contributions.
2. I also keep REITs inside my TFSA (and have been hit rather steep because of it) but they will come back someday. I keep REITs inside my TFSA to avoid any messy tax returns more than necessary.
Stay well!
Same here with Barbara and Judy. I manage both accounts of mine and my husband’s. But his accounts always perform better than mine. Don’t know why. LOL. Fortunately, I have no plan to part with him.
As I consider TFSAs as potentially income generators after we retired, I don’t worry that much about capital loss as long as the investment income does not go down too much.
Hey Toby,
Great questions but sadly, when it comes to the TFSA, “we are all in this together too”! The rules are simple and the same for all of us.
https://www.myownadvisor.ca/tax-free-investing-tfsas-101/
https://www.myownadvisor.ca/what-should-you-put-in-your-tfsa/
1. Prior to making any TFSA contributions, they were taxed. So, any gains or losses inside the TFSA are just that = tax-free. This means no capital gains to be reported and you cannot claim a capital loss. It is what is it!
2. For those that have not yet maxed out contributions I suppose you have some choices – not to max it out, contribute a bit over time and invest and try and time the market, or try max out it as soon as possible and invest. I personally chose the latter. I prefer to have money working for me regardless if the value is down but that choice is yours and not easy these days I know.
Good luck Toby!
Reducing debt should be at the top of ones checklist. then if debt is manageable, and they have funds to invest, max out their TFSA (and spouse). Then an RESP and finally RRSP.
Yes, assuming your debt is well under control for sure assumes you should be investing in the first place!!
Hope all is well,
Mark