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The Q&A box is filling up more quickly than usual these days, so let’s finish off the year with the latest batch of your questions and some answers that hopefully will get the New Year started off on the right foot.
Where to hold cash
Q – Like many, we are starting to hold significant amounts of cash in all our accounts (RRSP, RRIF, and TSFA). We would appreciate knowing your advice on what to hold the cash in to at least earn something while we wait for more buying opportunities (perhaps early in the New Year) and further stabilities to occur (tariff and trade settlements, etc.). We’re pretty open minded, however tend to be on the conservative side with investments (generally preferring value for long term with a touch of growth) and always appreciate keeping our costs associated with such investments to a minimum.
Thank you in advance for sharing your thoughts. – Dave L.
A – With interest rates so low, the best place for cash right now is a high-interest savings account. But you have to turn to smaller financial institutions like credit unions or online banks to get the best rates. That means paying closer attention to deposit insurance coverage – is your money protected by the Canada Deposit Insurance Corporation (CDIC) or by a provincial program? The CDIC is an independent Crown corporation, established in 1967. As such, it is backed by Ottawa and protects your deposits (principal and interest) up to $100,000. You can find more details at www.cdic.com.
Some provincial plans offer higher coverage limits, but their financial backing is not as strong and varies between provinces. Ask for specific details if you are consider going that route.
The best return I could find recently is from Laurentian Bank’s digital account, which pays 3.3%. Also attractive is Motive Financial’s Savvy Savings Account, at 2.8%. Both are protected by CDIC. EQ Bank, the on-line operation of Equitable Bank, is also a good choice with a rate of 2.3%, tied with Oaken Financial. They too are covered by CDIC. Note that these rates were available at the time of writing, but they change daily.
High interest accounts usually come with restrictions, such as a limit on the number of cheques you can write, or may have a limit on the amount you can deposit. Some are not be available for registered accounts – EQ Bank does not offer RRSPs or TFSAs, whereas Motive does. Each company has its own policies, so you’ll have to do some research. – G.P.
Portfolio for son
Q – My son will turn 18 in the fall, and I would like to build him a portfolio. It’s a small amount but, time being on his side, should I focus on buying indexes, individual stocks (banks, telcos), ETFs? This is money he won’t need in the near future, but again, the magic of dividends could help a lot. – Bobby S.
A – Since the amount is small, I would focus on exchange-traded funds (ETFs) at the outset. This will provide more diversification than individual stocks and will be cheaper than mutual funds. Start with three basic ETFs that, together, will provide global exposure.
I would suggest investing half the portfolio in an ETF that tracks the U.S. market, since it has been the best performer in the industrialized world in recent years. One possibility is the Vanguard S&P 500 Index ETF (TSX: VFV), which has a low management expense ratio (MER) of 0.08%.
Invest 25% in a fund that tracks the S&P/TSX Composite Index, such as the iShares Core S&P/TSX Capped Composite Index ETF (TSX: XIC). It has an MER of 0.06%.
Put the other 25% in an ETF with a global focus. One example is the BMO MSCI EAFE Index ETF (TSX: ZEA). It’s more expensive, with a 0.22% MER, but it offers broad international exposure and is ahead about 15% so far this year to the end of November.
I would not suggest holding any fixed-income securities, given your son’s young age. As the portfolio grows in value over time, he can add more asset diversification, but for now keep it simple and equity focused. – G.P.
Tax-effective withdrawals
Q – I have topped up my RRSP, TFSA, and non-RRSP money. I took retirement about two years ago at age 55. For the best tax implication, which order should I take the money? RRSP first? Last? The order? Thanks. – Arlene W.
A – Normally, my advice would be to leave money tax-sheltered for as long as possible, which would imply using the non-registered funds first.
However, in this case you need to do some creative planning. You are not old enough to draw Old Age Security yet, but when you reach age 65 any money withdrawn from your RRSP (or subsequent RRIF) will count as income and could push you into clawback territory. This year that threshold is $77,580; inflation will move it higher by the time you are eligible. The surtax is 15% on every dollar of income above the threshold, over the above your marginal rate.
If you believe you will be over that income level at age 65, then I suggest you draw down your RRSP first to avoid the clawback. If your income is unlikely to be that high, use your non-registered funds first, since they attract tax for any dividends, interest, or capital gains that you earn. Keep your TFSA until you absolutely need it. Any money withdrawn from it will not affect your old age security. – G.P.
If you have a money question for me, send it to gpape@rogers.com and write Fund Library Question on the subject line. I can’t promise a personal response, but I’ll answer as many as possible in this space.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
For more information on subscriptions to Gordon Pape’s newsletters, check the Building Wealth website.
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Notes and Disclaimer
© 2019 by The Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
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