Asset shift

Before we moved back, our assets were split per the below chart:

Our home made up the majority of our equity (66%), then our Canada ETFs and Irish stocks (Mr. MH’s old work scheme) made up 11% each and our Irish ETF portfolio made up 7%. We kept a cash buffer to cover a few months of living expenses, making up 3% and our car made up 2%.

For now, our new asset breakdown looks like this:

79% of our equity is now made up of our Canadian ETF portfolio. 12% remains in our Irish stock account which we will start to sell off when we start to withdraw from the portfolio. 5% is the value of our car and 4% remains in cash as an emergency fund.

In terms of existing assets, I wasn’t going to sell them off and trigger a tax event unnecessarily so for now our portfolio will look a bit more complicated than it needs to be. Eventually, as we start to sell off funds when we start to withdraw, we will sell off the funds we no longer want to hold first and our portfolio will get simpler over time.

Detailed Canadian ETF Breakdown

Once we moved, we had to decide how to restructure our assets. I didn’t want to have assets in 2 countries as I didn’t want to have to keep filing taxes in both as well as to continue managing multiple investment accounts and portfolios. I’m a big fan of the keep-it-simple approach.

As mentioned in my last post, we decided we would rent instead of buy a new home for the time being and so we wouldn’t be needing any large sums any time soon and even if we do want to buy again, we’ve decided we’d like to save up and start again, leaving the rest of our assets invested to grow.

To start building out our new portfolio, I did up a budget, figuring out how much cash we would need to cover the next twelve months including the purchase of a new car and other setup costs. I also figured we needed to leave some cash in our Irish account as we had plans to travel to France, Portugal and Ireland within the next twelve months and there was no point converting the cash only to convert it back again a few months later. Once I knew how much we needed to leave out, we took the money from the sale of our Irish home, sold our Irish ETFs and moved the money to Canada. From there I took the opportunity to apply the knowledge I’ve acquired in investing so far and made up a new consolidated ETF portfolio.

Initially, I was just going to continue replicating the ETF portfolio I already had. It has performed well enough and has good diversification, but when it came to investing the largest sum of money I will probably ever invest at one time, I thought about all the other long-time FIRE bloggers that I follow. All of the American bloggers have said time and time again to just invest in VTSAX (Vanguard Total US Stock Market Fund) and block out the noise about anything else. J L Collins says he plans to never sell and just live off the dividends.

The bloggers I follow worked to reach their full FIRE number before retiring early but have way more now than they will ever need, partly because they never really stopped working. They just work how and when they want to work now, on things that they are passionate about. Working for money is optional for them but if you have the drive to reach FIRE, you are not going to be the kind of person to sit back and never earn money again. Looking at my investment portfolio and own journey to FIRE in this light gave me new perspective. I decided I would follow suit and take a bit more risk than I previously would have by investing in one ETF with exposure ONLY to the US stock market.

Consideration 1: VTSAX is not available in Canada. After some research, I found a very similar fund. This post gives a good comparison. In summary, if you buy VUN (Vanguard Total US Stock Market ETF), it’s made up of the same underlying stocks as VTSAX but it is purchased in Canadian Dollar. Unfortunately, the annual management fee is 4 times higher than if you were in the US (0.16 instead of 0.04) :(, I suspect this is due to currency conversion costs.

I could have converted my Canadian Dollar to US Dollar and bought VTI or VUS (other similar funds in USD) but that added more complexity, more currency hedge risks and would subject me to US withholding taxes which I’d have to track and claim back at tax time. Again, I’m all for the Keep It Simple approach which just means I’ll pay a slightly higher annual fee.

Consideration 2: Not all of this money is mine alone, some belongs to Mr. MH and so he had to agree with the latest shift. He bought his previous ETF portfolio after me and although his was made up of the same funds as mine, the timing meant that his portfolio dipped for much longer and his best-performing fund during the pandemic was VCE (Vanguard FTSE Canada Index). Because of this, he felt more comfortable keeping at least some of the portfolio invested in a Canadian stock market ETF.

This meant that our target portfolio allocation was going to look something like 95% VUN and 5% VCN (Vanguard FTSE Canada All Cap Index) – this is a newer, broader ETF than VCE.

I started off by investing the proceeds of our house first. I bought mostly VUN and a small amount of VCN per the plan. Then as we were moving over the proceeds from our Irish ETF portfolio my nerves started creeping in about how over-exposed to the US markets we were. I decided I wanted to build back in some regional diversity and looked for another fund or two to help round out my portfolio. As we add more money we will purchase the other funds to balance it out a bit more.

Previously our ETF portfolio was made up of 5 funds. Now I think I can get the diversification I’m comfortable with in 3.

Our new target is something like 80% US, 15% Developed Markets excluding US, 5% Emerging Markets

This should give us a weighted MER of 0.19%, estimated annual growth of 12.02% and estimated annual dividends of 1.58% (based on returns since inception per current fact sheets).

Our current portfolio including our Irish stocks currently looks quite disorganised but I’m ok with that as the estimated returns of the portfolio are slightly better than the above projections. Our current weighted MER is 0.18%, estimated annual returns are 12.28% and dividends of 1.37%.

Once you get to a certain level of funds, you can start to see really fun gains or really scary losses on a daily basis. This has been an interesting experience. Our life’s savings are literally all in the stock market. We signed up to an account which lets you consolidate all of your investment accounts into one dashboard with reports. So far our Canadian accounts have gone like this:

The blue line is contributions and the green line is value of investments. So in August, we lumped in our house proceeds and we saw a nice uptick, very shortly followed by a downturn which didn’t go below our initial contributions but was still a drop of 24,000$ in the span of a few weeks. Thankfully, this has now gone back up to above where it was at the previous peak but before you go putting large sums into investments, be sure you are committed to the buy and hold strategy as the smallest drop in your share price can result in big drops in your portfolio. If you sell when it dips, you are locking in your loss, but if you hold on for long enough it will recover.

The current year to date returns are coming in at 14.53% not including dividends.

Different accounts

Another thing I haven’t gone into yet are the different investment accounts available in Canada. As soon as we got back, we opened up a number of new accounts under each of our names in order to maximise our tax benefits. Below are the different accounts we currently hold in each of our names.

• Tax-Free Savings Account (TFSA)
• Register Retirement Savings Plan (RRSP)
• First Home Savings Account (FHSA)
• Margin Account

The TFSA gives you a certain amount of money you can invest per year tax free. This is after tax income but grows tax free and is tax free on withdrawal. Unfortunately for us, your contribution room stops growing once you are out of country so we only have a portion of the 88,000$ room other Canadians have. Still it’s a great account to have.

RRSP’s are similar to Irish pensions in that they are tax-deferral accounts with annual contribution limits where you contribute to them in your higher earning years to reduce your taxable income, the investments grow tax free until withdrawal, at which time you pay your marginal income tax rate. The benefit Canadian RRSPs have over Irish pensions is that you can easily open an account and manage the funds yourself and there is no minimum age for withdrawal.

FHSA’s are tax-free savings accounts to help people save for their first home. There are annual contribution limits up to a maximum of 40k, contributions are tax-deductible, growth is tax-free and withdrawal is tax-free. Contrary to what the name implies, if you have NOT owned your primary home in Canada in the last 4 calendar years, you are still eligible for an account. If you do not decide to buy a house in the end, you can roll the money into your RRSP without impacting your RRSP contribution limits. Your contribution room only starts growing once you open an account so even if you don’t intend on investing/saving for a home, it might be a good idea to open an account just in case you do in the next few years.

Margin accounts are your usual taxable after tax investment accounts.

As we’ve been out of country for 9 years, our contribution room in our TFSA and RRSPs are not as high as they could be but something is better than nothing. So for now, we have maxed out our TFSAs, RRSPs and FHSAs and lumped the rest in our Margin accounts. As I haven’t worked much this year, this may seem like a waste as I won’t have income tax to reduce but getting the money invested and allowing it to grow as soon as possible will outweigh the tax savings I would have made if I had spread it out over higher income earning years.

There is also a Registered Education Savings Plan (RESP) we may look into for our son but I’m not 100% sold on the benefits vs. restrictions. Should our son not go to third level education in Canada, your marginal income tax is charged on withdrawal PLUS a 12-20% withdrawal penalty. For now I’ll just keep investing in our other accounts and use those funds to pay for college if needs be.

As Forest Gump once said: That’s all I got to say about that.

This is of no importance to me at the moment as I’m not earning Canadian income but it got me thinking. Is this a worth while approach?

In short, not if you could max it out without borrowing.

For non-Canadian readers: an RRSP is a tax deferral tool similar to a pension where you offset taxes in your higher earning years and pay your marginal tax rate in retirement once your income is (typically) lower.

Although this post looks at RRSPs in particular, the concept applies to any tax deferral investment tool.

The case against borrowing to max out your RRSP

Similar to management fees in regular investment accounts, even small percentages on a loan will decimate your long term earnings.

Put simply, if you do this every year and are paying 4.25% on your loan and your RRSP is earning 8% (after inflation) then your RRSP (or pension) is actually only growing at a rate of 3.75%. Or in other words, the bank is taking over half your profits and you’re taking on all the risk.

Over 30 years this means you end up with 70% less in your RRSP if you do not use your tax refund to pay down the loan than if you had maxed it out without a loan.

The other down side is that you now have a loan to repay which is an added risk and stress if you should get sick or lose your job.

If you are planning on using your tax refund to pay off part of the loan, this is a better option but still results in 30% – 56% less in your RRSP over 30 years depending on various income brackets which I’ll go into below.

Assumptions

• I used Ontario tax rates as an example
• I assumed a loan is taken out for the full contribution room for one year. Currently 18% of your gross income
• The loan interest rate is 4.25% as per the offer I saw today (prime + 0.5%)
• RRSP growth at 8% (average 10% historical stock market growth minus 2% for inflation)

Below is a table showing how the numbers work out depending on various income levels.

Walking through one example, say you are earning 50,000$, you take out a loan for 9,000$ and get a tax refund of 2,779$ which you use to pay down the loan.

You now need to pay down 518$ each month to pay off the remaining 6,221$ of your loan.

Your remaining loan incurs 264$ of interest where your RRSP earns 720$ leaving you with a net earning of 456$ in year 1.

Option 1: Don’t borrow and contribute through the year

If you hadn’t borrowed and made contributions through the year your 9,000$ would grow to 90,564$ over 30 years.

Option 2: Borrow full amount and use tax refund to pay back part of the loan

If you borrow the full amount and repeat this process every year your 9,000$ contributed in year 1 will have grown to 39,596$ in 30 years. This is 56% less than if you had just contributed throughout the year.

Option 3: Borrow full amount but use tax refund for something else

If you were tempted to keep the tax refund of 2,779$ to spend on something else then your 9,000$ would only grow to 27,157$ over 30 years. Resulting in 70% less than if you maxed it out through the year instead.

Option 4: Borrow full amount and contribute your tax refund to your RRSP

I’ve seen in other calculators that borrowing to max out your RRSP and using the tax refund to add to your RRSP as well results in more money than if you contribute through the year without borrowing but this didn’t add up in my calculations as you are still paying the full 4.25% on your loan every year and even though your initial sum invested is higher, you’re still only growing at 3.75%. You also have increased risk by having higher loan repayments through the year.

By my calculations this approach results in your 11,779$ (9,000$ + 2,779$ tax refund) growing to 35,543$ after 30 years or 67% less than if you contributed through the year.

There’s also the question of this value being over your max contribution room for the year which results in you having to pay a tax of 1% per month on excess contributions that exceed your RRSP deduction limit by more than $2,000 unless you withdrew the excess amounts.

See how these figures play out for various income levels below.

When does it make sense?

Make your interest tax deductible

One hack is to sell off some other investments (if you have some outside of your RRSP) and use that to max your RRSP. Then, consider borrowing to replace the investments outside your RRSP. This way, the interest on your loan will be deductible (since you’ll be using the borrowed money to earn income in a taxable account). You’ll be entitled to a deduction for the market value of the assets contributed to your RRSP, assuming you have sufficient RRSP contribution room.

Some things to keep in mind here:

Capital gains

First, you’ll be deemed to have sold those investments you transfer to your RRSP, so you might trigger taxable capital gains if they’ve appreciated in value. Having said this, your RRSP deduction will more than offset the taxable amount in this case.

Capital loss

Second, if the investments have declined in value, your loss will be denied when you transfer the assets to your RRSP (as a registered transfer between fund providers), so you’d be better to sell those assets first, then contribute the cash to your RRSP, which will allow you to claim the capital loss.

If you do sell your assets at a loss, be careful not to reacquire those same securities inside or outside your RRSP within 30 days of your sale, otherwise the superficial-loss rules will kick in to deny the loss.

Interest free loans

Another option to consider is if you could get a credit card where you pay 0% interest on cash advances for 6 months, use that to max out your RRSP and then pay off the credit card before you incur any interest.

Your growth wouldn’t be affected but you would be under additional pressure to pay of the loan before interest kicks in.

Smaller top ups

Say you’ve contributed through work throughout the year and you only need to top up your contribution by the same amount as your tax refund, then you should be able to pay off the loan in full once you get your tax refund and it shouldn’t reduce your growth unless the interest is charged in full regardless of when you pay it off.

So in the 50,000$ income example, say you’ve contributed 6,221$ throughout the year (or 239$ over 26 pay periods), then you only need 2,779$ to max out your contribution room. If you took out a loan for that amount and got that same amount as a refund, then the only interest you’d incur would be that which accumulated between taking out the loan and getting your tax refund.

I’ve seen some loans offer the option to delay the start date of your repayments by up to 90 days (enough time to get a tax refund), but not sure how the interest works on those, I’m assuming you are still being charged interest even if you aren’t making repayments yet.

Summing it up

Here is a summary of the different options using the 50,000$ income example above:

Personally I think any of the options that “make it worth it”, are too much effort and risk. I would just start as you mean to go on and try to max out your contribution room going forward throughout the year.

Keep it simple!

As a result, if life throws you something unexpected and you need to stop contributing as much, then you have the breathing room to make those adjustments, which is not the case if you’d taken out a loan.

Calculators

If you’d like to run your own figures through here are some tools I used to help with my calculations:

Used to calculate tax rates per Province (it shows all Provinces in one calculation, just enter your gross income and hit enter)

Used to calculate estimated tax refund

This shows the difference in the first 4 options in the table depending on variables you enter. I’m not sure about the Plan 1 option as I couldn’t get the numbers to work out the same.

Why Transfer

As I mentioned in this post you may be paying high management fees with your current RRSP investment provider which could potentially be halving the profits you could be making in a self-directed account.

If you are ready to take the plunge and manage your investments yourself with simple ETFs (exchange traded funds) which automatically invest in a large portion of the stock market essentially following the long-term upward trend of 9-11%, then you can follow the below steps:

How to Transfer

1. Sign up for Questrade – a self-directed online brokerage account which has fee ETF trading (use the link provided to give me a small commission at no cost to you)
2. Once signed up, click on “Open and Account” in the top right corner
3. Select Individual RRSP account (make sure you select this one as you will incur withdrawal taxes in the transfer if you select any other ones)
4. Follow the remaining steps to setup the account
5. Once the account is setup you will have the option to transfer funds into the account, in the main menu select Funds and then click  “Transfer account to Questrade” 
6. Fill out your current RRSP institutions information
7. Select the transfer type of either cash, in kind or partial. In kind can be used if you like what you are currently invested in but want to reduce your management fees. You can only use this if the fund you are invested in is not proprietary to the institution you are currently invested with. Cash means the funds in your current RRSP will be sold and only cash will be transferred which gives you a blank slate on what to invest in. Partial is some combination of the two.
8. Questrade will take it from there, they will contact your institution and complete the transfer. They will also make the transfer as registered which means you will not pay withdrawal taxes as you are simply transferring from one RRSP account to another. They say it can take 20 business days but mine took less than a week. Note there is a fee of 150$ for transfer amounts less than 25,000$, also make sure you are not invested in DSC (deferred sales charge) funds which charge you a certain percentage to sell before a certain number of years, you should be able to see this in your current investment account if they offer a redemption fee calculator. If you are invested in a DSC account you can make the decision to see if the fees you will pay will easily be made up in a shorter time frame if you invest yourself – like I did here.

What to Do Once Transfer is Complete

If you transfer in-kind there is nothing left to do but monitor your account and perhaps rebalance or reinvest any dividends (I will write more on this later) and if you transfer in cash then you need to decide what you will invest in. I will write another post detailing my own portfolio should you wish to follow along.

And that’s it, your first step to investing!

If you’re lucky enough to have an employer that provides pension or RRSP matching as a benefit, it seems like a no brainer to maximise whatever portion you need to, to get the full match, after all it’s free money or a 100% return on what you put in!

EXCEPT….

There are some scenarios where this doesn’t work out in your best interest. This concept applies in both Canada and Ireland so I will refrain from mentioning specific currencies throughout the post.

Like we saw in the mortgage vs investment posts, it all depends on what management fees the group fund is paying and what growth rate it’s getting compared to what you could get in a self-directed account.

To demonstrate my point I looked at 5 different scenarios.

Assumptions:

• Salary: 55,000
• Growth term: 30 years
• Self-directed fund has MER fees of 0.23%
• Company fund has MER fees of 1% or 3%

MER fees are Management Expense Ratio fees which are charged on the overall value of your fund annually.

Scenarios:

• 100% matching up to 5% of salary where company plan and investment make 9%
• 50% matching up to 3% of salary where company plan and investment make 9%
• 25% matching up to 5% of salary where company plan and investment make 9%
• 100% matching up to 5% of salary where company plan makes 3% less than investment
• 25% matching up to 5% of salary where company plan makes 1% less than investment

Here is what I found where the best option is in green, mid-option in orange and worst option in red:

So generally speaking if the company matches higher percentages and makes the same growth you could get elsewhere then 1% or even 3% MERs still make more than you would elsewhere.

When your company makes smaller contributions or you could make 1-3% more in investment growth elsewhere then it makes sense to invest elsewhere.

So before you go upping your contributions to maximise your employer matching, ask you HR rep for details of the fund they are investing in and use this as a general guide to figure out if you’d be better off foregoing the free money and investing your portion elsewhere.

Questions to ask your rep would be:

• What is the fund invested in?
• What are the MER fees?
• What growth has it seen as a percentage historically?
• Is there a vesting period? – this is a minimum period of time that you need to leave the funds in your company’s group scheme before you move them elsewhere/sell them even if you leave the company
• Are there deferred sales charges (DSC)? – this is an early discharge fee, it can be a sliding scale which reduces by percentage per year the closer you get to the end of the term (think this is Canadian only)

If you do set up your own self directed account, as these are retirement/pension funds with deductions at source you’ll need to make sure you set up the correct investment fund to ensure your company can contribute pre-tax.

Another option you could consider is to make use of the matching and then transfer those funds into your self-directed account once you have access to the matched amount (usually subject to a vesting period).