Thoughts on RIFs and TFSAs

First, an overview. I have a RIF. Each January I move the mandatory withdrawal as an in-kind transfer from my RIF to my TFSA and, if I run out of contribution room in my TFSA, I move any remaining funds to a non-registered self-directed account.

The contribution room in a TFSA is the sum of the annual contribution room plus the total amount of withdrawals made in previous years and that have not been replaced.

My TFSA is filled with good, solid, dividend-paying stocks. I withdraw the dividends to live in retirement and I replace that withdrawn dividend cash the following year with dividend paying stock of equal value.

The contribution room in my TFSA is not large enough to hold the entire in-kind RIF mandatory withdrawal. I transfer the remainder to my unregistered self directed account. I also remove the dividend cash from this account to live in retirement. As this is dividend income from Canadian companies, the tax is paid at the reduced dividend tax rate.

Some of the stocks in these accounts are paying a very handsome dividend. For instance, my HR.UN REIT pays 6.31% today. Click the link to discover what it is paying today. Another, EMA, is paying 5.15%. Each year, the amount of stock grows and the dividend income increases.

Stuff to watch:

• Annual minimum withdrawal amount from your RIF. Make sure you withdraw enough.
• If it's a LIF, you must know both the minimum withdrawal demanded and the maximum withdrawal ceiling. Do not withdraw more than allowed.
• Keep your own TFSA records. I find my records are more up-to-date that the government ones, at least early in the year. Check the TFSA contribution room very carefully. Do not over-contribute to your TFSA.

Overall view of RIFs
Receiving income from RIFs
Making or replacing withdrawals from a TFSA

Something to note: there is no withholding tax on minimum withdrawals from RIFS but, and it is a big but, you must pay tax in the following year. For this reason, when I remove the dividend cash to live, I tell the bank to withhold 30% for income tax. This amount is large enough, at the moment, to cover both the tax bill on the in-kind withdrawal and the tax on the cash withdrawal.

My hope is that I can shrink my RIF fast enough to prevent the increasing withdrawal percentage from forcing me to part with some of my stock.

One last caveat: take care not to have too much income and trigger the old age security clawback. For info on this see: Old Age Security pension recovery tax.

If you are familiar with how a spreadsheet works, I have found setting up a spreadsheet makes tackling all of this quite easy. My TFSA contribution room numbers are always up-to-date and trustworthy. I've found the government TFSA contribution room estimates are about a year behind in January. If I went blindly by the number issued early in the year by the government, I'd be in big trouble. When you understand how the number was calculated by the government, the reason for the problems will be clear.

Comparing investment approaches or apples to oranges?

If you've read my post before this one, you will know that I am running a test of highly respected and frequently recommended investment approaches. I like to describe what I am doing as comparing approaches. My hope is that this description will sidestep the "comparing apples to oranges" criticism. And it's a very valid criticism, I might add.

A portfolio that is one hundred percent equities is clearly going to be more volatile than one that contains a good percentage of bonds. A volatile portfolio has wider swings in value. In good times the one hundred percent equity portfolio will soar higher and during corrections or bear markets it will settle deeper into the financial hole. Bonds in a portfolio smooth out the ride somewhat. The more bonds the smoother the ride.

The market, so far this year, has been performing very well. Therefore, it is no surprise that the Morningstar Canadian Income Portfolio is leading the pack. It is a one hundred percent equity based portfolio.

Likewise, it is no surprise that my own personal portfolio is doing well. You see, I have jettisoned almost all bonds from my holdings. There are a few hiding in a couple of mutual funds. (Yes, mutual funds. I hold my head down in embarrassment. Why do I hold these two monthly income funds? The two funds are my weak attempt to soften the great volatility my portfolio endures.)

I need the dividend income to live in retirement and have made a conscious decision to suffer through market pullbacks in return for increased dividend income. I must confess, it is a tough ride. I only succeed because my wife has nerves of steel.

My test, so far, is revealing what we could have surmised from the various portfolio compositions. More bonds, less benefit from a rising market. Portfolios with a high equity content are outperforming in this market.

So, why do a test like this at all? Well, for one thing, it appears the Couch Potato Assertive Portfolio  based on ETFs is, for me, a better bet than the Couch Potato Portfolio that uses the e-Series funds from the TD. I have pitted these two approaches against each other in the  past and each time the e-Series portfolio tends to trail the ETF one. Note the word tends. In the past, the e-Series portfolio has outperformed the similar ETF based portfolio now and then.

And there has been one big surprise: XGRO, an entire portfolio in one ETF, is doing mighty well. It is holding down second place this morning. And it contains a few bonds. Nice. I may give XGRO a look for my granddaughters' RESPs.

Comparing suggested investment approaches

I used equal amounts of money to create each of the following investment portfolios. One portfolio is labeled Our Portfolio Almost; the important word is almost. The investments reflect my own approach to investing but the amount of money used is but a wonderful dream. Forgive me, but one has to dream, don't they?

The year is only seven days old. The competition is too young to draw any firm conclusions. That said, I  find it interesting to note the Morningstar Canadian Income Portfolio is away ahead of the pack with a current value of $777,515.47. That's thousands of dollars ahead of the second place portfolio.
 

I am actually tracking more than the five portfolio approaches shown but I feel these five are the most interesting. If the ones not shown should have more success in the future, I will display those results as well.

The present line-up first to last is:

1. Morningstar Cdn Income: $777,515
2. Our Portfolio Almost: $773,170
3. XGRO ETF: $772,653
4. Couch Potato E-series Assertive: $770,219
5. Couch Potato ETFs Assertive: $769,931

The XGRO ETF is a complete growth-oriented portfolio in one iShares ETF. Very interesting, eh? This ETF offers one stop shopping for the newbie investor.

Don't count the Couch Potato Assertive portfolio out. I've run competitions like this before and the Couch Potato Portfolios were often in first place or near the top.

At the end of the year, I will look for two things: overall value of the portfolios and the dividend income delivered. Being retired, I  put a lot of weight on dividend income. I can live with paper losses but I need those real dividend dollars to live.

I should note that in years past, the great strength of my own investing philosophy has been the generous dividend income. This time I am not so cocky. The Morningstar Portfolio promises to deliver a third more in dividends than my approach.

The story tells itself

Last year I opened five test portfolios, each had an opening balance of $10,000. The TD Dividend Growth D-series was easily the best mutual fund investment of the five. The D-series is only available to those with self-directed investment accounts. The perk encouraging investors to use the D-series in the reduce MER compared to say the I-series.

Other than the MER, the two mutual funds are the same. Note how much better the D-series performed compared to the I-series.

The TD Monthly Income D-series performs better than the same fund in the I-series. Thanks to the balanced mix of the fund, it contains a lot of bonds, it tends to be less volatile than the dividend growth fund. It neither climbs as high during good time, nor dives as far down during the bad times.

Read the names of the funds. Clearly the Comfort fund does not deliver much comfort. It did not come anywhere near performing as well as the simple dividend growth fund. And the retirement fund would keep me up nights. It failed to perform. It hardly left the starting gate. The clue that these two might be slugs were the words comfort, retirement and conservative.

If you are going to make real money in the market, you are going to have to take some risks. This means investments like the dividend fund are usually a better bet. You may lose in the short run, but in the end, if you have the guts to hang tough, you should come out far ahead of the conservative competition.

And, one can always mix the funds one buys. Some in a U.S. Index fund, some in the TD Monthly Income to add some bonds and some in the Dividend Fund for income and increased growth. I've done some tests of such mixes and all the tests have performed rather well. In fact, I'm running another one of these tests right now. Come back in six months and I may be posting some of the first  results.

It's January 4th and there are reasons to smile

The market is down. My wife and my retirement is down in the large five figure range. And I am smiling. Read on and learn why.

Each year a minimum amount of one's RIF must be withdrawn by law. The minimum percentage that must be withdrawn is set by the Canadian federal government. Charts of this are readily available online. This year we are forced to withdraw a full five percent from our RIFs.

Judy and I do not remove this money in cash but we remove it in-kind by transferring a block  of stock equal to the minimum withdrawal to our TFSAs. If there is not enough contribution headroom in the TFSA to absorb all the withdrawal, we transfer the remaining stock to a non-registered self-directed account. Of course, there is always a small remainder that must be transferred as cash. The cash value is always an amount less than the value of one share of the stock being transferred.

The nice thing about this in-kind removal is that the tax does not have to be paid until next year. There is no withholding tax applied to the minimal withdrawal from a RIF or LIF. The stock can sit accumulating dividend income in one's TFSA until next year when the tax comes due.

Now, this is where it gets really good. We need money to live. There is no maximum amount restricting how much one can withdrawal from a RIF. Sadly, with a LIF there is a maximum but one must just deal with that problem when it arises. So once a year, we remove all the dividend income earned by our RIF. We tend to make this withdrawal a few days after completing and checking our in-kind withdrawals. We try to keep the withdrawal to no more than four percent but it can be more if we made more and I don't worry unduly about it. We still have all our stock. And we always have 30% deducted for income tax. This is high but it ensures that come next year we will not face a huge tax bill related to our in-kind transfer. In fact, I see us getting a refund. Yeah!

With TD Direct Investing clients must call the bank and make the in-kind withdrawals with the assistance of a stock trader. I find calling just before the markets open is the best time to call but I make no promises. I always have all relevant information available:

• RIF account number
• amount of mandatory withdrawal
• stock to be transferred
• TFSA account number
• TFSA contribution headroom available (Check this carefully. Do not over-contribute.)
• Non-registered account number
• Do all the math in advance. This is important. The bank reps are busy. Mistakes happen. There are often calculations that must be done to determine one's TFSA contribution room. The bank rep may not have those numbers. And with LIFs one must subtract one's in-kind withdrawal from the maximum withdrawal to come up with the cash withdrawal amount. Do not over contribute to a TFSA or over withdraw from a LIF. 

The nice thing about the market being down right now is that we get to move more stock to our TFSA and then it sits there producing a stream of dividend income and eventually a nice capital gain.

My wife and I are nicely set for the coming year.

Click the LINK below to reach an excellent financial blog

If you are new to investing, click on the link. LINK. And don't just study the suggested portfolios, also read the background investment information provided.

I have played with some of the suggested portfolios and there are times I wonder if today I'd be in a better place financially if I'd stayed in the Couch Potato fold.

My gut feeling is a few solid, pure stock holding delivering very good dividends is the necessary spice to make my investment portfolio work. I'm thinking of stocks like Emera (EMA) or a good Canadian bank stock with a decent dividend.

If there is big pullback, and it really looks likely, I'm sure I will be moving some of my money into some of the ETFs suggested. I may not go whole hog into index investing but I'll be making a big commitment.

Attention nieces, nephews and other family members

When we got together in the late summer, I heard a lot of talk about getting into the stock market to make money for retirement or future education or simply to get wealthy. The market had been on a record setting bull run and optimism was running rampant with the bulls.

Well, the bulls have halted their stampede. The bears have come out of hibernation and holding onto one's gains seems to be the name of the game today. And its a tough game. And it may be the wrong one. I don't know. I'm holding on. I'm resigned to losing a lot. I celebrated my wins over the years and now I must take my inevitable licking.

So far I have sold one stock: Hydro One. And that was not a sale based purely on the recent market weakness. Hydro One, H, is showing of decline based on its close connection to and control by the provincial government in Ontario under the guidance of Doug Ford.

There are other stocks I might jettison if there is a good rebound, one big enough to get me back into the black. But, there has to be a rebound. I'm not prepared to take the large cut in income that accompanies the sale of a lot of my stock holdings.

That said, I am not going to simply sit tight and wait. I'm going to watch my holdings carefully in the coming year. If I see a good exit opportunity, a chance to re-jig my portfolio to  put it more inline with my present thinking, I'm going to jump at it.

For instance, I've owned mostly XIC for years but I've also held a much smaller position in XMD. I have not seen much advantage to this strategy. XIC has generally performed better than XMD and it has paid a larger dividend. Every so often XMD outperforms XIC and when this happens at some point in the future, I'm selling my XMD and switching the funds into a better performing investment. I might even put the money into XIC. I'll make more in dividend income and my portfolio will be a little simpler.

I'm also looking at my bank holdings. In the coming year, there may be a chance to diversify my exposure to the Canadian banks. With the banks, I'd like to hold more banks not less. I'm mostly into the Royal, the ScotiaBank and the TD. I'd like to spread this investment out a bit, to diversify my holdings, by buying some Bank of Montreal and some CIBC at the very least.

But I won't be dumping any bank stock without a matching purchase anytime soon. The banks have a history of resisting the temptation to cut dividends during tough times. I'm going to bet the Canadian banks will hold to that tradition and continue to pay me quarterly come whatever in the market. And nothing, short of a recovery, lessens the pain of a bear market like money, like dividend income.

So, my advice to all my relatives looking to get into the market is "have a plan". Develop an allocation model based on your own personal needs and bolstered by your personal financial beliefs. And then, stick to it. When the time looks right, buy the good stuff, build your portfolio and do it with the confidence that comes from having a plan.

Stay in touch and have a happy new year!