How to properly build your TFSA and RRSP accounts – Diversification is key. Or is it?

Today we’ll be covering what to hold in which of your Canadian retirement accounts – namely the Tax Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP). For readers from outside of Canada these are roughly equivalent to the Roth IRA and the 401k. As well as what to hold and where, we will also talk a bit about diversification, both what our current diversification looks like as well as what an ideal diversification would be in our ideal portfolio.

First things first, lets cover the major sectors of the stock market and see our current allocations:

So as you can see as with most Canadian investors with a hometown bias we have ended up quite heavy in financials, utilities and energy – this seems to be normal for most of us, however at one point not so long ago this was much more skewed than it is today. What’s changed? We started prioritizing RRSP investing and dabbling into the US market to get the diversification we felt that our portfolio was lacking.

This is probably a good time to introduce a very important part of anyones retirement accounts… WITHHOLDING TAX!!

If you don’t know what withholding tax is I’ll give you a brief description here and if you have further questions feel free to ask them below or on our instagram accounts (FindepenedenceCanada). Withholding taxes are usually 15% tax that you’ll pay without even seeing a transaction take place in your brokerage account on dividends from US companies if that company is held in either an unregistered account or your TFSA, I repeat you will in fact pay taxes on those US dividends even in your TFSA’s so be careful about which companies you hold and where! Scary right? well luckily there’s an easy solution. If you hold your US dividend payers in your RRSP account you will be exempt from paying these withholding taxes.

REIT’s are another special case as they are not usually deemed as “eligible Canadian dividends” and will also be taxed unfavourably in an unregistered account, so these too will need special attention. You ideally will hold all of your REIT’s in either a TFSA or RRSP.

What we hold where? Glad you asked:
TFSA- Canadian eligible dividend payers and REITS.
RRSP- REITS and our US dividend payers.
Unregistered- No accounts yet, but will be strictly eligible Canadian dividends.

Now, lets take a look at where our ideal diversification is in comparison to the present day:

In an ideal portfolio we would have:

Financials: 20%
Energy: 15%
Communications: 10%
Consumer Cyclical: 10%
Real Estate: 10%
Utilities: 10%
Bonds: 10%
Consumer Defensive: 5%
Industrials: 5%
Technology: 5%

We are big believers in the Canadian banking sector and have a great deal of confidence having multiple banks and financial services make up a healthy chunk of our retirement funds. We also feel great about the energy/utility sectors in Canada and will continue to support those sectors however, we would like to see their % drop down just a little bit to allow for more diversification, namely into the real estate, consumer defensive and industrial sectors.

There you have it, that’s our thoughts on how to diversify your holdings across your investments accounts and a breakdown of how we feel you can run a successful retirement/FIRE fund and so far it has been successful for us. These are just our opinions and everyone’s situations are different so please, if this has sparked questions for your own retirement funds go and see your advisor (if you have one) before making any changes.

Thanks for stopping by,

Mr. FIC