FOR CANADIANS
This thread is quite US focused so I figured it may be useful to cover the investment vehicles available to us as well as the best options for investing.
The general strategy is the same over the whole world so we're still going to be concentrating on index investing, just in slightly different ways. Your first step is to read the first post in this thread and then come back here.
BROKERAGES
For reasons I'll go into later, you want a brokerage that gives you the best deal on ETF trading.
A quick google will give you quite a few options for discount brokerages in Canada. Questrade is a good choice as is RBC Direct Investing. Mostly what you're going to want to do is look at their fees and decide which one will work out to be the cheapest for your style of trading. If you do infrequent large buys, then a flat fee may be best for you. On the other hand, Questrade only charges commission when you sell ETFs, so you can buy as many ETFs as you want for free. Questrade is probably the best choice overall, but just make sure to do your own research.
INVESTMENT VEHICLES
TFSA - TFSAs are nice things to have. Gains that you get inside a TFSA (capital gains/dividends) are not taxed, even when you withdraw them. At the time of this posting the annual contribution room is $5500/year. That dollar amount is set to increase in $500 increments in step with inflation so you can expect an increase to $6000/year probably sometime in the next 2-3 years. Any unused contribution room will roll over indefinitely which is one of the big advantages that we have over the American system.
RRSP - As opposed to TFSAs, RRSP contributions are tax deductible. No income within the account is taxed (capital gains, dividends, etc.). The 'downside' of RRSPs is the opposite of the TFSA. Any withdrawals are taxed as income at your current tax rate when you withdraw them. There are some exceptions to this such as the Home Buyer's Plan and the Lifelong Learning Plan, but you can read up on those on your own. The contribution limit is 18% of your income up to a maximum (currently around $26000 and increasing with inflation), with unused room rolling over, same as the TFSA. The general idea is to contribute to an RRSP during your prime earning years when you're in the highest tax bracket. You then withdraw during retirement when your income is lower thus paying a lower amount of tax then you would have.
You can look here for a good description of when you SHOULD contribute to your RRSP
http://www.theglobeandmail.com/glob...-rrsps-consider-other-options/article8916348/
IMPORTANT NOTE: You should realize that you can defer claiming your RRSP deductions for as long as you want. If you contribute $20,000 in 2016, but you think that your tax rate is going to go up significantly in 2017, you may wish to claim your deduction for 2017 instead. See here for further information
http://wheredoesallmymoneygo.com/deferring-your-rrsp-deductions-to-higher-income-years/
Less Important Note: If you are holding any US stocks directly, or own shares in a Canadian ETF that DIRECTLY holds US stocks, then you will probably want to hold them in an RRSP. There is a tax treaty between the US and Canada for registered accounts that means you will not get taxed by the US on dividends generated by stocks in your RRSP whereas you will get taxed if those stocks are anywhere else. It is for this reason that I would recommend holding XAW instead of VXC. The differences are relatively minor (10-15k) over 25+ years but worth doing if you're starting off.
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Obviously, the ideal situation is to max out your contributions to both your RRSP and TFSA to take advantage of the tax sheltering. This may be difficult for some people but I think it's a very good goal to aim for. After that you're going to be moving to taxable accounts.
If you are unable to max out both, my recommendation is to max out your TFSA first until your yearly income is putting you in a higher tax bracket than what you think you'll be in during retirement. Then you'll want to switch to maxing out your RRSP first to take advantage of the tax deductions. This can be tricky since you don't really have any idea what your tax rate or income is going to be when you're retired. You also have to consider that having a high enough income from RRSP withdrawals could make clawbacks happen on any Old Age benefits you may be entitled to.It's also worth noting that many institutions will charge a small annual fee for having an RRSP account. For example, Scotia iTrade will charge $100/year unless you have more than $25,000 in accounts with them.
Investment Vehicles in Retirement
TFSA - Once you're retired (or really any other time you feel like) you can withdraw however much you want from your TFSA, or nothing at all if you like. The brilliant thing about withdrawing from a TFSA is that it doesn't count as income. You can take out whatever money you want and still be eligible to get full Old Age Pension from the government. How great is that?
RRSP - At age 71 your RRSP is forcibly converted to an RRIF and you must remove a certain percentage per year. Luckily the new budget has changed this to only 5.28% now. This is good news as anything you withdraw from an RRIF is taxable income and if you have enough stashed in there the government is going to be taking some Old Age Pension clawbacks.
INVESTMENT OPTIONS
Refer to the first post in this thread for reasoning here. I'm going to be strictly sticking to the same index fund/bond strategy as Piecake. There are a couple differences for us Canadians.
First, we have very few mutual funds with a reasonable MER as compared to the states. This is why I was specifying that you should try and get into a brokerage with low ETF fees. My thinking aligns with Canadian Couch Potato so I'm going to be recommending his model portfolios for the simplest fire and (mostly) forget investment strategy.
Canadian Couch Potato Model Portfolios
Tangerine Investment Funds
I can see utility in the Tangerine one fund deal if you're supremely uninterested in investing, but that laziness will cost you over 4 times as much in fees. It's also, in my opinion, heavily overweighted in Canadian stocks. It's an unfortunate reality that Canada is very undiversified when compared to the US. Finance, Energy, and Materials make up an absolutely massive part of our market. Your portfolio is going to be having a bad time if something unfortunate happens in those sectors (
http://www.canadiancapitalist.com/sector-breakdown-of-diversified-portfolios/).
So, that's pretty much off the table.
TD e-series Funds
If you don't have a ton to contribute, this is a pretty good option. You'll have to make TD Direct Investing your brokerage as these funds are not available outside of TD.
Since this is based on mutual funds you don't have to worry about transaction fees since mutual funds are free to purchase and sell.
If you take a look at the actual model (
e-Series Model Portfoilios) you'll see five different styles of investing. I recommend going even beyond the aggressive style while you're still young (say below 30) and not getting any bonds. Then slowly phasing in more bonds as you get older. This is a very general strategy used for any kind of investing.
This option is great if you want to contribute a small amount into your investments every paycheck and you're up for rebalancing your portfolio yourself every year or so.
If that's the style of investing you're interested in, you'll do just fine sticking with these funds for your whole lifetime.
Vanguard ETFs
Vanguard is great and we have to be super thankful that they saw fit to come to Canada and they've slowly been giving us better and better options over the years. ETFs have the lowest management fees available and are thus the best option if you can handle doing very infrequent, but large, contributions. Most brokerages are going to charge you about $10 flat for every trade you make so you want to get as much use out of that 10 bucks as possible. You have to have a large amount of money in ETFs for the very low management fees to even out the costs of making trades which is why Couch Potato recommends having at least 50k before doing this option.
I wouldn't go that extreme as you can just do less transactions but you'll still want a good chunk.
He has a great spreadsheet that you can download from here
http://canadiancouchpotato.com/2012/07/30/comparing-the-costs-of-index-funds-and-etfs/ to compare whether you should go for ETFs or the e-series funds. Make sure you ignore the $100 fee that he's put on there if you don't have an RRSP or the fee has been waived by your brokerage.
I make the same recommendations as per bond allocation as the e-series fund above.
IMPORTANT NOTE: Note that you can be much more active in
purchasing ETFs if you use Questrade since all their ETF purchases are free. It's important to remember that if you
sell you will be charged the normal commission.
