Asset Location - Part 1: Key Concepts
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- Опубликовано: 10 июл 2024
- Hands down, asset location is the topic I receive the most questions about from Canadian investors, and with good reason. The tax concepts are not easy to grasp, and even when you think you’ve mastered them, you soon realize there’s more to it than you thought. In this video, I’ll show you the key concepts to master if you want to start making sense of your asset location.
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If this video has helped save you a few dollars on fees or taxes, please consider donating a portion of your savings to SickKids Foundation: www.sickkidsfoundation.com/
You know what? That's pretty awesome of you guys to do that. You're helping to educate us and you're using the money you make to help SickKids Foundation. You guys are pretty cash money. No lies. Keep up the great content and doing some good for others. :)
@@moalisiddiqui why not justin leave some for themselves and their family? if you leave 30% reveue, no one will say anything.
Hey quick question! @ Justin & Shannon Bender
What if I use my RRSP money to fund the Home Buyers' Plan where no withholding tax is paid, and the withdrawal will not be considered income. On top of the 35,000$ tax free withdrawal, I also receive a deduction for the amount I contribute from taxable income when I file my taxes. In this circumstance isnt the RRSP worth more than the TFSA in a "Light strategy" asset location? Thanks!
@@ilovetoo7009I think it depends on your current tax bracket. You will have to pay back into the RRSP, and any future contribution that's allocated to the HBP is taxable, for up to 15 years.
Interesting prospective. Never thought about me being "free portfolio manager" for the government
This is incredible information. Your service to humanity is massive. I have a disabled child and your channel’s video’s along with Ben’s will enable me to give her a higher standard of living.
This isn’t just allowing some person to buy a sports car, it’s raising a wonderful young lady out of poverty, to help her deal with the challenges life has given her.
I hope every morning, you wake up knowing there are people out there sleeping in a safer home because you taught us how to generate the wealth needed to do so.
My eternal thanks
@D K - Your words mean so much to us - thank you for taking the time to reach out 🙏
We hope you and your daughter are able to overcome anything life throws your way. Please keep us posted on your success!
@@JustinBenderCPM I’m glad you read my comment. It’s the most sincere thank you possible. Thank you for your well wishes. They are appreciated.
I have two issues with this scenario. 1. What about the tax return you get from adding to an RRSP? That can go into a TFSA and grow and be withdrawn tax free. 2. Most people (at least through my lens) will earn less in retirement than they do when working, so their tax bracket will be lower - not 40%. For those two reasons, adding to the RRSP first may make more sense to some people. Say a person is making $150k now and will be around $60k in retirement. That income tax difference is instant profit from the RRSP. Put it in and save 40% tax on that amount, withdraw it at say 25% tax rate and there's 15% profit.
@ib516 - You can adjust the figures for your own situation (it's the tax concepts that are important).
@@JustinBenderCPM that was the question I had when heard about 40%. Thanks for clarifying :)
Liked and shared.
Justin@ good to see that you are back on RUclips.
I need to rewatch this video.
My main taken away - stick to ETF investing.
First-class content, thank you very much.
Great video, Justin. Very clear explanation of a topic that trips up many, if not most DIY investors.
@Grant Maxted - It's so nice to hear from you! We're glad you enjoyed the video - hopefully the next two videos in our asset location series will provide even more clarity to DIY investors :)
Very thorough, I'm impressed!
Hi Justin, thanks for this video! I’m looking forward to seeing your next one! Very interesting!
@Ilya Chidyakin - Thanks for watching! The next videos should be shorter and easier to digest than this one ;)
Really appreciate the amount of effort/knowledge clearly put into your video series, Justin. Widening my understanding every time. Thanks.
@D C - I'm glad you enjoyed the video - the next two should help solidify some of these asset location concepts :)
*mind blown* Your videos are top notch. Thank you for the time and effort you put into these.
@Mike V - We're so glad to hear you're enjoying the videos! We're planning to release many more this year, so keep an eye out for those :)
Amazing video!!! Very nicely broken down.
@Felipe Pereira - Thanks - we're so glad you liked it!
Great video ❤
Great video. I think Asset Location strategies are more relevant once you have a sizeable non-registered account and you start having to deal with different taxation rates of Bonds vs Stocks as well as preferential tax treatments for Canadian Dividends. Furthermore, I think the size of your overall portfolio will determine whether it is worth the extra effort. If you only have a couple hundred thousand net worth, it probably doesn't make much difference, but a 0.5% benefit from Asset Location strategies on a 5M portfolio would be worth $25K in extra money annually.
No. The concepts described in the video apply regardless of the size of your portfolio. Stay tuned from the for the next videos if you want to go a bit further with tax efficiency and growth.
Excellent video Justin !
@Sylvain Bosse - Thanks! I really appreciate you taking the time to watch all 20+ minutes of it :)
There were some legitimately great jokes and references hidden in here. The Dunning-Kruger graph of learning this stuff, the Tesla-levels of difficulty - great stuff!
@Benoit St-Pierre - Thanks! We like to scatter Easter Eggs throughout the videos to see if anyone picks up on them ;)
Thanks so much for sharing this information!
@piranhaa2 - You're very welcome - thanks for stopping by the channel! :)
Excellent video! I'm hoping what I get out of the future videos is a range of the "premium" for using a tax efficient asset location strategy compared to holding the same fund across all accounts. e.g you will get 0.2% to 0.7% effective premium. That way I can compare the complexity to how much more one would have to save to match it.
@supernumex - The after-tax benefit (assuming the investor implemented and managed everything perfectly) would be different for each investor (depending on their average tax rates, asset allocation, account types, account values, savings plans, whether they use U.S.-based foreign equity ETFs in RRSPs, whether they use tax-efficient bond ETFs in taxable accounts, etc.). However, I've been planning to create a calculator that could attempt to provide a rough estimate, which could be useful.
@@JustinBenderCPM I seem to recall an old white paper you, Dan or PWL did where you found that the benefit was around 0.3% on average, but it could easily swing into the negative or upwards of a full percent. Is that one too out of date to reference?
@@raz4943 - I would say it's pretty out of date. The benefit of an asset location strategy will be very dependent on the actual strategy employed, the ETF returns, asset allocation, dividend yields, account values, savings strategy, tax rate, etc. Most investors want a definitive "value-add" number, but realistically, there isn't a single number.
Top notch content as usual, Justin!
One question though: since we can't always reliably predict our retirement tax rate (and for the average Joe it should be well below 40%), how would we calculate that "after tax" allocation? Without consulting an expert, should the average investor just use this knowledge and "eyeball" it?
@Frank Underbush - Thanks for watching! :)
If you don't want to worry about predicting future average tax rates, you could consider a traditional asset location strategy (like the one from Scenario #2 - I'll be chatting about this "Ludicrous" strategy in my next video, and providing some practical ETF suggestions.
Thank you so much for the amazing content and blogs. Been so empowering for me. Question - if cash is part of my long--term allocation (e.g. 3%) and HISA/cash ETF rates are higher than bond fund rates (as they are right now by about 100 BPS from what I see at the moment), should I put my cash in my RRSP first, then put bonds in - in terms of priority of asset location?
Related - would love your take on choosing between cash management options! HISA, cash ETFs, GIC, etc
Good stuff as usual, however I need to lie down in a dark room with a damp cloth on my head after that.
Oh good - I thought I was the only one! ;)
still looking good Justin!!!!! ❤️ ❤️ ❤️
@Arjang - Lol - the laugh lines are starting to become extremely deep ;) Getting old is no fun!
OK, now add a third account asset location into the complexity: non-registered.
Since this account type is taxable, I assume it would behave like the RRSP account in your video? So for example bonds held there would be effectively partly owned by the government via future taxes, thus reducing their actual post-tax percentage of your asset type mix?
This is WAY over my head as a new investor at the ripe age of 57. How do I educate myself so I actually understand what you are saying :(
@L W - You don't need to understand this stuff to be a successful investor. If you've got a solid savings plan in place, and have already built a low-cost portfolio using broad-market ETFs (or a single asset allocation ETF), you're 95% of the way there. You can ignore these more complicated investment topics, as they're not necessary.
Genuine question - does this mean someone could put 100% of their maxed out TFSA and RRSP into VGRO (if the 80/20 allocation matches their risk tolerance), and that would be a good idea?
Hi Justin, seems that this video is made for people who are in the accumulation stage. What about the asset location when you are retired and withdrawing from tfsa/rrsp? Wouldn’t you want to hold more stocks in tfsa first because the higher expected growth is not taxed, whereas growth in rrsp is taxed?
@J J - These great questions are answered throughout the video.
@@JustinBenderCPM As I rewatch the video, I realize the message of the video is really saying a 50/50 stock/bond allocation should be thought of in after tax terms and when that is considered, one should be indifferent between TFSA and RRSP. Okay. But what if say someone wishes to allocate a 60/40 or 70/30 stock/bond (after tax) portfolio? Would it be more tax efficient to load the stocks in a TFSA first?
@@serjiang - If you were targeting a 60/40 or 70/30 stock/bond (after-tax) asset mix, it would make no difference (ignoring foreign withholding taxes) whether you held stocks in your TFSA first, or in your RRSP first (as long as you had the correct after-tax asset mix). If you were also attempting to mitigate foreign withholding taxes, then it would make sense to hold stocks in your RRSP first, starting with U.S.-based foreign equity ETFs (but as we saw in Scenario #5, you would need to increase the portfolio's overall "before-tax" allocation to stocks in order to end up with a 60/40 or 70/30 after-tax asset mix).
@@JustinBenderCPM Thanks Justin, I did a calculation based on an uneven asset mix, and yes the results are the same. Thank you for educating me that assets in an RRSP should be viewed from an after-tax perspective.
One other factor that people should consider though, it that it's very taxing if you die with a large RRSP balance. For that reason, would it be better to allocate equities to the TFSA first?
@@serjiang - As you mentioned, loading up on equities in your RRSP can create other unintended consequences (such as OAS clawbacks or larger RRIF minimum withdrawals in retirement). For this reason, I tend to favour a traditional asset location approach (like the one discussed in my upcoming video).
A mistake on your ' After Tax - RRSP Total ' . It should be $60,000 NOT $600,000 at 5:37
@EngleHump - Whoops - thanks for the heads up!
The assumption that the taxation bracket for the RRSP will be 40% seems to completely defeat the purpose or its special reason to exist.
Any reasonable planning will assume that the withdraws will only happen once the investor already retired or has lower income. Either would lower considerable the tax burden for the RRSP withdraws.
Or I'm missing the point for this video?
The only lesson for me was that returns reflect the after tax underling risk for the allocation.
I think it more than makes sense (but it's just speculation). Probably, by the time most people retire and start withdrawing funds from their RRSPs, tax brackets will be higher than they are today, and so will cost of living (which will require them to withdraw more funds in the first place). Just some food for thought.
@Antonio B. - We could have used any effective tax rate in retirement (we chose 40%, as it made the asset mixes more rounded). The specific tax rate is not relevant to understand the key asset location and after-tax asset allocation concepts.
Even if you expect to get a 40% tax rate on the RRSP, you still get the powerful effects of tax-free compounding, just like a TFSA.
I don't quite get to whom this example applies. If you have enough money to be taxed 40% on your RRSP withdrawals, then a non-registered account with only equity is more tax-efficient since it maximum tax rate is currently below 30%. Most people withdraw a much smaller amount from their RRIF so I believe your example doesn't apply to most people. Also, I don't think you really invested 100k but more like (1-marginal_tax_rate)*100k since you get a tax return corresponding to your marginal tax rate. It would be great if you could clarify those point.
@fabienngo4350 - These asset location videos are simply introducing the tax concepts. You'll need to roll up your sleeves a bit to fully understand the nuances, and calculate your own figures using your specific tax situation.
Nice vid, but I think it's very wrong to consider a 40% tax rate for the RRSP and plan AA and returns around that. A lot of us will be able to withdraw from this at significant reduced marginal rate in retirement, and I personally will meltdown my RRSP in early retirement over a 10-12 years period in such a way as to pay $0 taxes to the government.
@Charles - As I've mentioned in my other comments, the examples are just that - examples. You can use any tax rate you'd like, but the key concepts don't change. I used 40%, as it made the examples "tidier". I could have chosen 20%, 30%, or 50%, and this would not have changed the overall point of the video.
So my personal take away as a 40 year old individual, is to pump more money into a TFSA, in XEQT until retirement while minimizing contributions to the RRSP. I also have a LIRA so would it make sense to hold XEQT in a TFSA and XBAL in both my RRSP and LIRA? To me now I'm thinking it might be wiser to slow the rate of growth in an RRSP/LIRA while increasing the rate of growth in a TFSA
@Marcello Nesca - The video concepts do not touch on whether to contribute to a TFSA or RRSP (but there are many articles online which discuss this decision).
Not that I know what I'm doing or is on topic of the video but, I'm working to max my TFSA first while putting enough in an RRSP to drop my income down one bracket (or try to). They are both tax free growth vehicles, and as Justin pointed out in the video, in the end there's little/no difference to what ends up in your pocket post tax. However, if I need cash in the near future, I can withdraw TFSA funds without penalty and get the contribution room back in the next calendar year (in the RRSP, that's not the case), and in retirement a TFSA withdrawal doesn't count as income (like an RRSP withdrawal does) so as to; hold a lower tax bracket, and hopefully help avoid OAS claw-back. FYI, xgro across both (maybe 25% of TFSA currently in Canadian blue chip stocks).
1) Do you not have your employer matching contributions to your RRSP though? Holding your initial contribution amount constant, I would say you may get much more money in the end if you used an RRSP rather than a TFSA. It's not like your employers are clawing back their contributed amounts cos that money is pretty much yours.
2) You'd also have to keep in mind the source of funds for your TFSA vs RRSP. Your RRSP contributions are pre-tax and straight from your payroll. Your TFSA contributions are after-tax and come from your disposable income. Assuming you've got a high enough income, you're likely being taxed much more now compared to whatever tax rate you'll later encounter upon retirement. In other words, if you're chucking everything into your TFSA, you may well be paying higher effective tax rates since you're forgoing the option of being taxed at a lower rate during retirement (when you'd be withdrawing these funds).
Of course, there's several implicit assumptions here (for example, we don't know if the relevant tax rates will even stay the same upon hitting retirement age) but hopefully this is a decent lead nonetheless.
Dude, you forgot to blink. My friend sitting next me thinks you are a ROBOT!
@Rahul Bahal - Initiating blink sequence now (please wait).
Invest 160k and walk away 10 years later with ~180k ouch
@Ben Nieuwland - Totally missed the point.