“My TFSA is boring,” admits 49-year-old Fred Penney, vice-president of Labrador Concrete Products in Goose Bay. “I think of it as safe money.” Penney, who opened his TFSA in 2009 with a $5,000 deposit, loves the account because all the interest and capital gains can be withdrawn tax-free later in life. “I’m going to die with my boots on,” says Penney, who has no plans to retire early and gave up on RRSPs eight years ago. “I know the RRSP sounds wonderful, but if you intend to keep working past 65 like me, the taxes will hit you hard when you have to start making your mandatory withdrawals.”
Penney uses an active trading strategy in his taxable account, so he likes to keep his TFSA investments conservative. That’s why he has only one holding: the iShares DEX Short Term Bond Index Fund. This ETF holds a mix of low-risk government and corporate bonds with maturities of five years or less. His returns have been a modest 3% to 4% annually, making his TFSA account worth about $5,400 right now. “It’s not much, but I don’t worry about it. My main investment strategy is very volatile, and I put all my energy into building up that account. The bond holding in my TFSA counterbalances that.”
What the experts say
Lamontagne notes that if you have both registered and non-registered accounts, investments taxed at a higher rate should generally be kept in a registered account such as an RRSP or a TFSA. Such investments include bonds and GICs, since interest income is taxed at your full marginal rate.
More lightly taxed investments can be held in a non-registered account. That usually means equities, since dividends from Canadian stocks are eligible for a generous tax credit (foreign dividends are not), and you only have to pay tax on 50% of your capital gains at your marginal rate.
For these reasons, Lamontagne and Heath like the way Penney has structured his portfolio. “I think you’re better off holding risky investments outside your RRSP or TFSA,” says Heath. “That way, you can use any capital losses to offset future gains on other investments. If you have a loss in your RRSP or TFSA, the room is lost forever and the loss is meaningless.”
If you’re going to hold so-called “boring” interest-paying investments like bonds, they’re best kept in an RRSP or TFSA. “In many cases, you may be doubling your investment return, because interest income is otherwise taxed very punitively,” says Heath. “If Penney held his bond fund in a non-registered account, he would be paying over 42% tax on his interest income in Newfoundland.”