Canadian Investing with Mr. Frugal Toque: Part Two

A Foreword from MMM:

toque Toque

Mr. Frugal Toque is back! After the success of his first article, people began requesting this second one almost immediately. Although it took him a while, I feel the result is very worthwhile.

My goal with sharing this Canadian information is to highlight a topic that is often overlooked: the expense ratio. Even here in the market-crazy US, people get tricked into buying front-loaded funds, back-loaded funds, actively-managed funds with multiple-percentage-point fees, whole life insurance, and other dubious investments. This persists even with Vanguard standing by to maintain the gold standard for low fees and no hype. And in other countries, fees are often even higher and awareness of their importance even lower.

As a perfect illustration, after I forced Mr. Toque to write this post for you, his research revealed that even his own retirement savings were in an overly costly fund. This new knowledge will allow him to retire earlier and wealthier. In his own words, “Duh! 0.5% of my money, here I come!

I wish the same for you, regardless of your country.

Canadian Retirement Investing with Mr. Frugal Toque – Part Deux

Previously, on Canadian Retirement Investing with Mr. Frugal Toque (see Part 1), we discussed the two major investment vehicles that are available for private individuals who do not have company or government pensions available to them.

Those were the RRSP and the TFSA. The key difference between those two vehicles is the way they are taxed. Anything you put in an RRSP doesn’t count as taxable income for that year. Instead, it gets taxed when you take it out – after it has accrued compounded investment gains without being taxed on the way. The TFSA is for after-tax income. It also grows untaxed and, furthermore, you pay no tax when you withdraw from it. But enough of the rehash, the real question is:

What To Buy Once You Have the Account

That’s not too hard a question, right? We all know that stock or bond index funds are the way to go unless you think you’re smarter than the stock market (Pro tip: you aren’t, although you can trick yourself into thinking so for surprisingly long periods of time.)

Novice Investment

When I started the investment game, I had no idea what I was doing. At the age of 21, I got a job with a salary. My father, a wise man who taught me to fear debt and spend only money that I had, instructed me to max out whatever pension contributions my company would give. At the time, Mr. Money Mustache and I worked for a Canadian company that kicked in 50 cents on the dollar up to 5% of our salaries. So we immediately set our pension contributions to 10% of our paycheques(1), randomly picked some funds based on things I’d heard about money(2), and happily took the 5% bonus.

This strategy served me well, and it would probably serve you well, too, so you shouldn’t be ashamed if you got your shit together well enough to get this far. You’d be ‘stashing 15% of your income before it even touched your bank account (automatic!) and you’d be set to retire in some 30 or 40 years. Good for you. At your next raise, you may as well raise your contribution to 13% so you’re at the legal limit (13% from you + 5% from the company = 18%).


But there is some chicanery here and you need to know about it. This game is rigged. Not quite “The Dabo table at Quark’s Bar” rigged, but so damn close you’d swear there’s a Ferengi hiding around a corner somewhere.

You see those mutual funds you’re buying? They have an MER – Management Expense Ratio. This is always shown as a percentage, and it’s the percentage of your money that someone at the bank takes in order to run the mutual fund. When I first set up an account and chose my funds, I paid no attention at all to the MER. I freely admit I didn’t know what I was doing. Once I found out, however, you can imagine my rage.

You see, the MER can run as high as 2.5%. Do you understand how bad that is?

Do you remember the 4% rule? We get that from the fact that the stock market tends to return at least 7% per year when averaged over long periods of time (like my planned 60 year retirement). We leave a generous 3% for inflation and market fluctuation and live off the 4% that’s left.

What happens if you let some jackass take 2.5%? Now you have to live off 1.5% So instead of needing $800k so you can live at $32k per year, you’re going to need to save up $2.13 million dollars.

Yeah. You mad, bro? You should be.

Intermediate Investment

So I did you some research and here’s what I came up with from the national banks in Canada. I could have made this chart larger by including every fund every bank had, but we’re principally concerned with low-cost funds that track Stock Indices and Bond Indices, so that’s what you’ll see here.

For example, from each bank I took the Stock Index fund with the broadest reach of Canadian stocks on the S&P TSX. Each of those funds has, in its definition, the words “S&P/TSX Capped Composite Index ” or something to a similar effect.

I examined the funds offered by the investing arms of the five major Canadian national banks. There are, naturally, other institutions through which you can invest and you should certainly look at your local options. This list will give you a place to start. (Please note that you should obviously consult the actual investment houses in question for their latest rates. The funds available and their MERs seem to be constantly changing and I’m totally not responsible for keeping this chart up to date).

Management Expense Ratios(3)

Fund TypeTD TrustScotiabankBank of Montreal (BMO)Royal BankCIBC
Stock Index Expense Ratio0.89%0.99%1.05%0.72%1.00%
Bond Index Expense Ratio0.83%0.84%1.59%1.22%1.25%

That’s pretty straightforward, isn’t it? If you want, you can calculate how many extra years you’re going to have work investing in a bond index fund at BMO vs one at Scotia Bank.

But even if you have a lot of your money where I have it, in Royal Bank’s Stock Index fund, you’re still losing 0.72% of your money to the MER. Instead of needing $800k to retire on, you’re still going to need $975k.

Expert Investment

Well, Canada, there are a couple more options for you, if you’re willing to put your toque on tight, ride your dogsled that extra kilometre and deal with a bit more hassle.

The first up on the menu is TD Canada Trust. This outfit offers Mutual Funds in something it calls an “e-series”. I talked to someone who uses them and determined there’s nothing tricky about investing in any of these “e-series” funds. You sign up for an RRSP or TFSA account with TD Canada Trust, select the “e-series” fund called “TD Canadian Index – e” and boom, you have a stock index tracking fund that only charges 0.33% MER. There’s also “Canadian Bond Index – e” at 0.55%

Great. I’ve now got my retirement requirement down to $872k.

And if you wanted to stop there, I wouldn’t blame you. You’re well ahead of the rest of the fools who are subscribing to any of the funds in that chart up there, and at least three wormhole jumps ahead of the idiots back in the Delta Quadrant who are taking payday loans to finance video game consoles.

But this isn’t the blog for just stopping at good enough. This is the blog where we tell you to turn off your car’s A/C and spray your face with a water bottle to save a dollar per driving hour on gasoline. So let’s talk ETFs – Exchange Traded Funds.

You can purchase ETFs on the open market, in which case you have to be careful with things like “turnover rates” which determine how often you need to pay capital gains tax on the increasing value of your funds. If, however, you purchase ETFs inside a TFSA or RRSP account, you obviously don’t have to worry about that.

The benefit of an ETF is an even lower expense ratio. Now that you can buy Vanguard funds here in Canada, there is no excuse for getting ripped off with excessive fees:
See their rates here : https://www.vanguardcanada.ca/individual/etfs/etfs.htm

MMM Note: Another benefit of looking at Vanguard ETFs is easy diversification. Putting all your investments into the relatively concentrated Canadian stock market could make for a volatile ride (Nortel and RIM shares, anyone?) In my own investments, these days I split new purchases evenly between US stocks (Vanguard’s VTSAX) and other major economies through their Total International Stock Index Fund (VTIAX). A bit of asset allocation at work here, and I also like the much higher dividend yield. Canadians might allocate to Canada, US, and International as well.

We’re looking at 0.12% to 0.15% for basic index funds. That’s great! We’re looking at getting the retirement fund down from that ridiculous $2.14M number to somewhere in the neighbourhood of $825k.

The downside to the ETF is, of course, that you need to purchase it through a brokerage, presumably at the bank where you have your direct investment RRSP or TFSA account.

As a quick aside, a standard way of investing in RRSPs in Canada is via direct deduction from your paycheque. When you set up such regular deductions, the bank is happy to waive any brokerage fees for your continuing business. So even if you’re just putting $100 in six different funds every two weeks, you’re not paying six brokerage fees. With ETFs, you are going to pay those brokerage fees, so you’re going to have to be a bit more careful with your investment schedule.

Some quick research (http://www.rbcdirectinvesting.com/commissions-fees.html) has shown that these fees are quite low in the current millennium, in the $10 range. Should you use this investment technique with every paycheque? Probably not. Even if you’re investing $600 every two weeks, a $10 brokerage fee is still 1.6% of your money. I would want to save a up a couple thousand in the account before making a purchase, so that the $10 brokerage fee is immediately cancelled out by the benefit you’re getting in lowered MER.

Update: As usual, the readers have one-upped us in the comments, and found a commission-free to buy ETFs – with Questrade – see this link for more details.



Was that as exciting to read as it was to write? I hope so. The overarching lesson here is that Canada is very friendly to all levels of investors, from the savvy MER bargain hunter to the DIY investment champion. What you do is, of course, your call based on your personal levels of confidence and the amount of time you’re willing to spend, but you at least know your basic options.


1 – Yeah, that’s how we spell it up here
2 – Well, that’s what I did. Mr. Money Mustache may have been more deliberate.
3 – President’s Choice, I’d love to include you, but I don’t know what the hell you’re doing. Your mutual funds are repackaged mixtures of CIBC’s mutual funds. A month ago, you were charging 2% or more. Now you’re down to 1.x% or so, but why won’t you let me buy straight up index funds?
4 – Royal Bank also offered an S&P TSX Capped Composite Index called the “RBC Jantzi Canadian Equity Fund” which charges 2.11%. Go ahead and compare them and see if you can tell me what you’re paying the extra 1.39% for.

Extra Information

As I said, these rates do change every now and then, so it’s not a bad idea to keep yourself informed.
Royal Bank: http://funds.rbcgam.com/investment-solutions/rbc-funds/index.html
Toronto Dominion: http://www.tdcanadatrust.com/products-services/investing/mutual-funds/td-mutual-funds.jsp#what-does-td-offer
ScotiaBank: http://www.scotiabank.com/ca/en/0,,796,00.html
BMO: http://www.etfs.bmo.com/bmo-etfs/glance?fundId=72048
CIBC: https://www.cibc.com/ca/mutual-funds/no-load-growth/can-index-fund.html
CIBC is a bit tricky here. I believe I had to click on the link to https://www.cibc.com/ca/mutual-funds/rprt-gvrnc.html and go to page 101 for the Index Fund, page 43 for the Bond Fund.

  • Jake Poysti December 15, 2013, 8:44 pm

    Great post Mr. Frugal Toque!

    Since I might be the first one commenting on the post I wanted to say that I love the blog Mr. Money Mustache!
    I’ve been reading “in the shadows” since April or so – going through all the posts and trying to become a maximum Mustachian…

    I have a question. We recently sold our 2010 Ford Fusion and got us a used 2005 Prius – making a nice $5k in the process. And that’s on top of the emergency savings that we have. I have been reading the investment posts and opened an account with TD Ameritrade (they have 100 commission-free ETFs including about 10 Vanguard ETFs). Anyways, my question is at what rate should I be investing? I know that it doesn’t seem reasonable to dump it all in at once but what would a reasonable rate be? Sticking to only the recently earned $5k, dollar-cost averaging it at $200/mo would take 25 months to fully invest.
    I would greatly appreciate some advice from you MMM or fellow Mustachians!

    • Joe December 15, 2013, 11:07 pm

      Invest all $5k at once or maybe 50% now and 50% in 6 months. $5k is nothing in the grand scheme of things. It might seem like a lot to you now, but 10 years from now you’ll wonder what you’re agonizing about.
      When you’re young, you need to concentrate on increasing your saving rate. Of course, better ROI is good, but increasing your saving rate will most likely trump any incremental % gain.

      • Free Money Minute December 20, 2013, 12:53 pm

        I agree with Joe. When you are shooting for $800-900k or more, and it is quite a few years out, your best bet is to get it into the market (in index funds) as quickly as possible to take advantage of any market growth and dividends. Great Question.

    • Richard December 15, 2013, 11:20 pm

      Technically the only correct answer is to invest it all now. If you don’t know what will happen next month (hint: you don’t), you are most likely losing money by choosing cash or bonds over stocks. Now it is a fairly small amount so you’re not losing a lot and you might be more comfortable doing something different. Looking at it backwards will help clarify.

      If you had $5,000 invested in stocks from previous contributions, would you sell it all today and then just buy back in with $200/month? That is effectively what you have chosen so far. Instead it is best to think of what the ideal portfolio allocation is for you, and then implement that as soon as possible.

      Then after that set up automatic monthly transfers from your income to add more. $200/month would be a nice start. The best form of dollar-cost averaging is when you invest as much as you can every month (ie as early as possible), not when you delay investing what you already have.

      • Mr. Money Mustache December 16, 2013, 4:53 pm

        Thanks Richard – that is a great way of expressing the concept of “invest now rather than trying to dollar-cost-average a lump sum”.

        If you wouldn’t sell a block of investments today and trickle them back in, you probably shouldn’t hold cash and trickle that in.

        It helps to remember that even if you mis-time it and buy just before a crash, the recovery time from these is usually fairly short. And if you are earning income during the crash and continuing to invest, that cushions the psychological blow considerably too.

    • Mr. Frugal Toque December 16, 2013, 5:19 am

      It may not seem reasonable, but getting your money into the market is the best thing to do. All that is accomplished by investing it slowly is a chance for brokers to make more money off of you.

      The only exception is if you look at the market and see that it’s crazy high right (on a P-E basis, perhaps, or on the basis of every brokerage house telling you how great the market is and how it’s going to go up forever and ever).

      As you accumulate more money, however, you will want to invest it as you get, spreading your risk out in time. Remember: we’re in this for the long run.

      • Aaron December 16, 2013, 11:02 am

        I wouldn’t even worry about the exception. You don’t know how much higher it could go, thinking it is at a high and avoiding it because of such thoughts might mean you miss a further 20% gain or so. Not to mention any dividends that might be earned in that time frame.

        Jake, as everyone else has said you are young and just getting started so just invest, invest, invest (after you’ve made sure expenses are low as the article states).

    • This Life On Purpose December 16, 2013, 1:27 pm


      I’d have to disagree. I don’t think it is unreasonable to invest it all at once, in fact, that’s what I suggest you do.

      I’m no expert but there’s an article on Canadian Couch Potato that outlines exactly why:


      “Would you sell everything and go to cash now because markets are at an all-time high? If the answer is no, why would you prefer to keep your inheritance* in cash today rather than investing it?”

      *or any other windfall

      You can’t time the market, so your best bet is to become fully invested as soon as possible. As long as you are investing long-term in diversified low-cost index funds, you are better off with the lump sum investment.

      • Money Saving December 17, 2013, 6:41 am

        As Mr. Toque pointed out above, you really cannot beat the market. Dollar cost averaging if you have the money now is just a gamble that the market will go lower and you’ll come out ahead. It’s impossible to know what tomorrow will bring for the markets, so all other things being equal it is probably better to slap it all down now.

        That being said, some of the weak investment minded (myself included) like to spread it out a bit over time just because it makes us feel like we have more control over the situation.

    • theFIREstarter December 16, 2013, 3:57 pm

      All good (and correct) advice given above to you Jake but having recently started off myself in investing I know where you are coming from. It is quite a daunting thing to just lump 5K into an account all at once if that is all you have got!

      The flip side of the “It’s nothing in the grand scheme of things” reasoning is that it wouldn’t make too much difference then if you did put it in more slowly, at a rate you are more comfortable with. Maybe you could split the difference and put it in over say 5 months, at $1000 a month – then concentrate on savings to get even more money in there!

      Good luck with whatever you decide to do!

      • Jake Poysti December 17, 2013, 11:41 am

        Thanks for helping out guys!
        I guess I will be putting it in now instead of dollar-cost averaging. I’m glad I asked.
        I think what I will do instead of investing it in in one transaction (the money is already in the brokerage account) is invest it in chunks within the next month or two.
        As I mentioned, I’m using Vanguard funds on TD Ameritrade’s Commission-Free ETFs list so I could be buying 1 share at a time and will still pay no fees.. I guess since I’m just starting it feels like a lot of money to me, even though, you guys are right, it is a minuscule amount on my way to FI.

        • Wandering Whitehursts August 17, 2017, 12:19 am

          Four years in and the market is still on a tear. Probably happy you took everyone’s advice I imagine.

          I foolishly am toiling with the same issue. I have about $15,000 cash on hand I want to invest for my 1 year old’s college savings, but have been hesitant to pull the trigger with hopes of a strong market downturn first. Will it ever come? I don’t know. And if the market does tank the odds of me buying in as it bottoms out are essentially nil. So what’s keeping me from doing it? Some sort of irrational fear, I guess.

    • Dustin December 17, 2013, 11:14 am

      According to research done by Vanguard (https://pressroom.vanguard.com/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf) lump sum investing beats out dollar cost averaging two out of three times.

      So going by statistics it would be better to invest all of it at once. Your own situation may be different though.

      • Jake Poysti December 17, 2013, 6:54 pm

        Thanks Dustin for the link! I really enjoyed reading that white paper.

  • Mr. Grump December 15, 2013, 8:45 pm

    If your not careful MMM, Mr. Frugal Toque will be taking over your blog. Although the investment vehicles like RRSPs and TFSAs don’t apply to the Grump family it is interesting learning about other nations and their investment vehicles. It really adds perspective to the American way.

    I can’t wait until we get to the wealth building phase of Financial Independence after we shed some bad habits and PMI.

    Thanks for all the motivation and perspective your blog offers.

  • TorontoDeveloper December 15, 2013, 8:51 pm

    If you’re going the ETF route, Questrade does not charge any brokerage fees when you buy ETFs – only when you sell. Very compelling for anyone still building their ‘stache.

    They are a discount brokerage, so you’ll have less customer support than you would at a big bank, but for the thousands of dollars you’ll save over the long run, it’s probably worth it! Especially for us do-it-yourself mustachians1

    • Mr. Frugal Toque December 16, 2013, 5:23 am

      Wow. That does look great. This is the great part about writing Internet articles (and also the problem with them :-) Everything is subject to update.

      “Commission free ETFs”

      It looks like a good system, allowing you to invest cheaply in both RRSPs and TFSAs.

      I’ll have to investigate more!

      • Anthony December 16, 2013, 7:23 am

        Questrade all the way. Free ETF purchases, and maximum of $9.95 per trade when you sell. I’ve found their customer support to be fantastic actually. They have online chat support which is quite responsive/effective. They are rated as one of the best managed companies in Canada. Their purchasing interface has never let me down either.

        The alternative to Vanguard in Canada is iShares. iShares expense ratios on their ETFs tend to be marginally higher than Vanguard’s.

        • Richard December 16, 2013, 9:33 am

          BMO surprisingly has some good ETFs as well. I use ZCN because it has a good expense ratio and ZRE because it’s the type of index I want for that sector.

        • Christine December 16, 2013, 10:34 am

          iShares are great! And I love Questrade.. you get lower rates and get your independence back. Just use their platform to buy or sell whenever you please. Unlike managed funds where you must call your broker to do all that for you.. in a not very timely manner.

      • Neil December 18, 2013, 9:33 pm

        Yes, I love my Questrade. Even when I had to pay $10 for the ETF purchases, which I don’t anymore. That was when other “discount” brokerages like TD Waterhouse were charge $35 for the same self-service transaction.

        I’m impressed with the MERs you’re finding. I was pleased that my work RRSP (through Manulife) had MERs under 1%, but now I’m thinking I might have to juggle money around some more (I honestly hadn’t looked to closely at my ETFs at Questrade, just assumed they were adequately cheap).

        And I know it’s kind of sacrilege, but I have found (and it is backed by at least some research) that paying a bit more for active management can benefit in the small-cap sector. Small caps generally have higher returns over time to start with, as they’re higher risk (bigger downs in bad time, bigger ups in good times, but like the rest of the economy, more good times than bad), and active management can quite reliably exclude the worst performers, further increasing the small cap benefit.

      • koz January 9, 2014, 12:10 pm

        I am a little late to the party here.

        but i have been using scotia I-trade for my ETF investments.


        they give access for 50 commission free ETF’s (mainly I-Shares) and the number is slowly growing.
        One great tool for this account, is that i set one up for my 2.5 yr old daughter, from Grandparents sending her B-Day money, etc. With a $200 gift, i can simply diversify this into 3 separate ETF’s without spending a single dollar! (HXS – US. HXT – Cdn. CBO – Bonds)

        I have not tried to sell any investments since i opened the account (questrade apparently charges commissions on selling) until today.
        I was able to sell a $50 bond ETF for free as well!

        so MMM and Mr Toque, not sure if you would want to highlight that for your Canadian contingent, but there is a vehicle in Canada where you can buy and sell ETF”s for Free.

        So people who are interested in monthly investments, there are 3 tools out there to use. however, the message of ‘re-balance’ is sometimes lost. Scotia I-shares allows you to rebalance portfolio’s as well.

  • Marcelina December 15, 2013, 9:18 pm

    Thank you for the straight up goods Mr. Frugal Toque
    – from a reader in Calgary.

  • Eric December 15, 2013, 9:21 pm

    Hey Mr. Toque, fellow Canadian here.

    If I were to invest in some ETF’s what do you think of QUESTrade and their free ETF buying deal? Apparently you only pay their 4.99 fee when you sell. (http://www.questrade.com/trading/services/free_etf)

    If you’re living off your investments are you better off paying to buy or paying to sell?

    On a side note, I gave myself a nice face punch today. I’m living on the east coast at present, and we just got hit with a huge storm. I had to take three loads through the ice and snow down very icy steps with garbage and compost to take out the garbage for the collection in the morning. And the bin was frozen into the snow bank. So I was cursing my misfortune. When I realized, what am I complaining about. This is pretty luxurious, I’ve got my own personal trash chaperone (the city garbage trucks), I don’t even have to haul it to the dump myself. I’m really living the high-life here. And the extra effort to get the bin free of the snow bank is really just a no cost trip to the gym to work on deadlifts. The gifts just kept piling up. It’s amazing what an attitude change can do to a situation.

    • Mr. Frugal Toque December 16, 2013, 5:25 am

      Paying to buy or sell is a zero-sum game, I would think, if all things were equal.

      Most people, however, probably invest in tiny amounts throughout the year (regular paycheque deductions anyone?).

      When you’re retired, however, you should be able to withdraw money in larger sums.

      Speaking for myself, I’d want to pay the $4.95 on extraction, but you should do your own math for your own situation.

  • Patty December 15, 2013, 9:23 pm

    Thank you so much Mr. Frugal Toque for addressing the financial needs of Canadians. I enjoyed part 1 as well.
    I have to be very honest though in that I find investing information somewhat akin to reading a technical manual! I have been trying to educate myself and get past the urge to just let someone do it for me (and also take more of my money).
    Even though your post is laying it out in a straightforward manner, I am still feeling less than confident about taking charge of my investments in the way you are describing, in order to avoid the high MERs.
    Am I alone?

    • Marcelina December 15, 2013, 10:27 pm

      You are not alone. I feel the same way.

    • Mr. Frugal Toque December 16, 2013, 5:28 am

      You’re not alone.

      Moving that amount of money around *should* make you nervous. That’s a perfectly rational reaction to the magnitude of what you’re doing and it’s going to make you pay attention and take a good look around.

      But if ETFs make you nervous, you should know that index-based mutual funds, over the long term, are very widely used as a reliable retirement tool. Ask around with people you know and you’ll see how easy and relaxed they are on the subject.

      Good luck!

  • Aussie expat December 15, 2013, 10:58 pm

    I would LOVE to see something like this for Australians. I know quite a few of them read MMM. We are Americans living in Australia for 5 years and I still find this market confusing!

    • The Watchman December 16, 2013, 10:08 pm

      For Australians, I think the cheapest MER index fund is an ETF offered by State Street Global Advisors called SPDR S&P/ASX 200, with a 0.29% MER (Full disclosure: I own some – happy to hear if there’s a lower MER one out there). As it’s an ETF, you also have to take into account brokerage fees; I think Vanguard offers a 0.35% MER index fund that does not involve brokerage fees.

      Also, I wonder if anyone has any thoughts about how global diversification is less applicable to Australians especially on equities, because Australians receive franking credits on dividends paid out of Australian sourced taxed profits (ie. we get underlying tax credits for company tax paid, and are truly not double taxed), whereas we’re double taxed on dividends paid from non-Australian sourced taxed profits.

      For temporary Australians (e.g. short or long term expats) wouldn’t the exchange rate risk weigh more heavily than anything else? If you’re saving very high levels of your income and by definition plan on spending it in the far future, and that future involves US dollars, exchange rate movements may significantly reduce the value of your savings. Although they could also significantly increase the value as well, this is risk that you are not being rewarded for (e.g. through a higher rate of return). Perhaps you’re better off holding Aussie dollar denominated savings only to the extent that they will be used on your projected expat expenses, and keeping the remainder in the currency that you’ll use in the future.

  • Joe December 15, 2013, 11:09 pm

    Good luck neighbors. I didn’t do too well with my first investments either. I went with the fund with the best recent performance in my 401k and that didn’t work out too well. Now I concentrate on paying less fee and I’m much more comfortable with this strategy for my retirement fund.

    • Mr. Frugal Toque December 16, 2013, 5:16 am


      In Canada, it seems that brokers (at least mutual fund brokers) are required to tell you that “past performance does not correlate with future performance.”

      This is very, very true, not just something that they have to say.

  • Richard December 15, 2013, 11:14 pm

    You missed an excellent option – ING Direct’s index funds. More advanced investors usually look down on them because of the 1% expense ratio but that’s in line with many of the options you presented and not a big deal for smaller portfolios. ING doesn’t have individual funds for each index. Instead you choose one of 4 risk categories, and buy just that fund. It’s an excellent way to start an indexed portfolio with all the advantages of a mutual fund structure and no need to actually use more than one fund.

    On the other extreme, Questrade opens up some interesting options for ETFs. It it one of the cheapest brokers for buying ETFs – in fact it is generally free to buy them. For beginner investors, Vanguard’s Canadian funds offer some good options. For those with larger portfolios the american Vanguard ETFs are excellent, but Questrade charges a 2% currency conversion fee every time you buy them. I avoid this by trading in DLR/DLR.U to do the conversion. Amazingly, since it is an ETF this should only cost $5 + 0.2% of the amount. So depending on how you use it Questrade can either give you the most expensive or the cheapest currency conversion.

    • Mr. Frugal Toque December 16, 2013, 5:33 am

      While I agree with the Questrade idea, for the braver among us, I can’t go with ING Direct for their mutual funds. Just like PC, they’re a wonderful banking institution (low-to-no fees, etc.), but all of their mutual funds are in the 1% or more MER.

      Click on “Mutual Fund Comparison Tool”

      I just can’t accept that use of my retirement money.

      • Richard December 16, 2013, 9:12 am

        For someone who is uncertain about starting to invest, ING has a lot of advantages. They won’t try to constantly push high-cost funds at you like every other bank, and they don’t hide their Streetwise funds behind the back door like the TD e-Series funds. I’m not sure what the quality of support and advice is like since I have never contacted them about their funds but that alone might be worth the extra cost compared to the RBC index fund at 0.72%.

        It would be great if the expenses were less than 1% but that is still cheaper than chasing hot active managers (or worse – things like gold), delaying investing because of uncertainty, or choosing a bad asset allocation based on emotions. All of those are common mistakes among the type of people who will learn something from this post, and they are all eliminated by choosing the Streetwise funds.

        If nothing else it’s a good place to start while doing the research on more advanced options. And on a small portfolio the absolute cost of that fee is not very much.

        • Mr. Frugal Toque December 16, 2013, 9:52 am

          Are you saying that instead of paying TD 0.35% (after filling out a form), you’re willing to pay ING more than 1% on their mutual funds because they’re nice enough not to try to push 2% funds on you?

          There are plenty of reliable index funds with low MERs. I don’t see the need to leave any money in a 1% MER fund, even as a holding place while you find better funds.

          We’re trying to avoid the “common mistakes” here and the biggest mistake is stumbling into the rip-off area of high MER mutual funds. Avoid that and you’re most of the way there.

          With a 0.35% MER, a person who lives on $32k will require $876k in savings. (a 3.65% withdrawal rate)
          With a 1.07% MER, you need a 2.93% withdrawal rate, which means you need $1.09M. That means saving an extra $215k in order to retire.

          How many extra years of work are you doing because ING is nice enough not to push even higher MER funds?

          • Richard December 16, 2013, 10:32 am

            To put it in more common terms for this blog I’m saying that someone who cuts back from 3 trucks, an ATV, and a motorcycle to just one car is moving in the right direction even if they really should be biking more. That’s what ING is. Most people can grow to the next level in time but even the few who never do are doing better than they were before.

            If someone isn’t ready for any of the better options (just look at some of the comments on this page for example) then ING is their best choice by definition. And for a new investor the extra cost can be less than $100/year which is a small price to pay considering that ING is the only institution in Canada that both encourages people to use index funds and makes it extremely easy to use them.

            An investor who starts with ING is most likely going to be behaving in the right way from day 1. When they switch to lower-cost options later it is more likely that they will continue with the right behavior. Investor behavior is a risk as big or bigger than MERs and it’s rare to see a good solution for that outside of the best advisors. Those who jump into something that’s beyond their current knowledge are likely going to lose far more than $100/year.

            • Mr. Frugal Toque December 16, 2013, 9:18 pm

              Ah, I see what you mean.
              You’re not really recommending them. But as a novice investor, as I was back in 1998, it’s not a bad place to start. At least you’re saving, probably using regular deductions, and you’re not getting completely ripped off.
              Fair enough.

          • Emily December 14, 2015, 6:28 pm

            I’ve been reading through the posts and this is the best yet! I openly admit I have no idea about this investing stuff and recently let a RBC advisor do it all for me. I’d never heard of MER before and going back through the stack of papers I was given the MER I am paying is 1.84%!!!!!! Holy shit!! I like the sound of the low MER at TD but is it too late to put the money there? Would transferring the money to TD be a bad move at this point? The money was invested about 6 months ago and has since lost about 2%. Would that be the MER they charged!? Panic attack happening over here. Any input would be great!

            • Mr. Money Mustache December 14, 2015, 8:59 pm

              Hi Emily – yes, the sooner you switch over from that ripoff high-fee account, the better. The “lost” money is mostly just due to a temporary decline in stock prices during this time. You’ll get it back in the coming years as it keeps growing along with the world economy.

  • jd December 15, 2013, 11:29 pm

    Readers who would like a more detailed introduction to investing may want to pick up a copy of the book “Millionaire Teacher”. The book shares much of Mr. Toque’s investing philosophy, and also includes a section on index investing in several countries.

    • Richard December 16, 2013, 8:42 am

      Yes. I’ve done a lot of research for my investments and I agree with everything in the Millionaire Teacher. Just reading and following that book will put anyone ahead of the majority of the country.

    • HealthyWealthyExpat December 16, 2013, 8:59 am

      Yes, the Millionaire Teacher is an excellent book for those starting out in index investing, and not just for Canadians. The author, Andrew Hallam, lives in Singapore and has a lot of info on his website about expat investing using index funds. In fact, I believe he is currently writing a book on it. He also writes regularly for The Globe and Mail and you can view his model ETF portfolio on the GlobeInvestor site.

  • Mrs EconoWiser December 15, 2013, 11:51 pm

    Great post Mr Frugal Toque! There are a lot of similarities to be found in your article for us European investors. I’m doing a thorough research on the topic (investing with Vanguard for Europeans) right now and I am very happy to see that I have reached the same conclusions so far. We’ll start investing with Vanguard as of January.
    However, there are two things I am struggling with and I was wondering whether those would apply to Canadian investors as well. I would love to know your view on these.
    First up: currency risk. Do you invest with American Vanguard funds in Canadian dollars or American? With both options there’s the matter of currency risk. What’s your take on that?
    Second: taxes. Dividends paid by American Vanguard funds are taxed in the U.S. but also in Canada, right? How to you go about this withholding tax? Do you fill in a W-8BEN form and reclaim the dividend withholding tax so that you have eliminated double taxation?

    These are the two topics that I am struggling with right now. Living in Europe we’ll eventually need euros for our early retirement. Then there’s the double taxation issue which could be detrimental to one’s TER.

    • jd December 16, 2013, 1:10 am

      In a retirement (RRSP) account, there is no withholding tax on dividends from US corporations/funds. Canadian taxes may have to be paid when the money is eventually withdrawn from the RRSP.

      In a regular taxable account, the W-8BEN reduces the withholding tax on US dividends to 15%. The dividends would be taxed as regular income in Canada, but the tax withheld by the US can be claimed as a tax credit in Canada. So there’s not really any double-taxation there.

      It gets more complicated when funds hold shares in companies based in other countries, as the tax withheld by those countries may not be recoverable.

      • Helen_in_Toronto December 21, 2013, 10:27 am

        About taxes: Can someone explain exactly what the W-8BEN form does? Reduce US withholding tax from 30% to 15%? Then can one claim the remaining 15% withholding tax as a dividend tax credit?

        It was just yesterday I mentioned this topic to my RBC-DS advisor, and he said, getting great dividend from great US companies in my Open portfolio (non-RSP) is worth paying a mere 15% withholding fee/tax. I’m confused. I am looking at a W-8BEN form I filled for my Open account, but I still don’t get it. Some gurus say never put US stocks or ETF’s in a non-registered account. Is this because all proceeds/dividends would be treated as if they are interest income, and taxed at the regular rates?

    • Richard December 16, 2013, 8:41 am

      On the first point, if you’re comparing the Canadian and American funds that are based on the same index there is no difference in currency risk. In one case you’re using US dollars to buy a fund that owns US (or international stocks) and the other case you’re using Canadian dollars to buy a fund that converts them to US dollars and buys the same stocks.

      The actual currency risk tends to average out given two conditions: (1) you are making regular monthly additions or withdrawals, not just moving a big amount on one day and (2) you do this over a period of a decade or two. In that case there is very little currency risk and it actually gives you more diversification to protect you. Advanced investors will keep anywhere from 60 – 90% of their portfolio outside of Canada because the Canadian market is too small and concentrated. if you want Euros you could keep a fairly large part in the European market since it is bigger and better diversified. Personally I think the US market is the highest-quality one but Europe is not far behind.

    • HealthyWealthyExpat December 16, 2013, 9:07 am

      As you mentioned, you are probably going to retire in Europe, so best to keep your funds in Euros. In addition, if you change your money into USD, you will lose on the exchange rate going both ways, effectively making your MER much higher. We currently live overseas, but invest in Canadian dollars, as that is the most likely place we will spend at least 6 months of the year when we take early retirement in a few years. I also don’t trust the long-term viability of the USD with all the money printing going on these days.

      • Mrs EconoWiser December 16, 2013, 10:33 am

        Hi HealthyWealthyExpat, (and congratulations on all three bits of your name, cool!) That’s exactly what I was thinking as well. I don’t really see us fiddling around with U.S. dollars all the time. We’re thinking of going for the Vanguard FTSE All-World ETF at 0.25% TER. It covers the U.S. 52%, Greater Europe 27.50% and Greater Asia 20.5%. This will do the trick for our asset allocation and low fees, won’t it? The fund is valuated in euros and dividends are paid out in euros as well.
        We could also add Vanguard FTSE Developed Europe ETF at 0.15% TER, Vanguard Emerging Markets at 0.45% or Vanguard S&P500 ETF at 0.09%.
        However, we now feel that only throwing ‘stash at All-World is the easiest way to go and we won’t ever have to think about asset allocation. The FTSE index algorithms will be doing that for us.

  • blue mutant December 15, 2013, 11:58 pm

    This has been addressed on jcollinish but at lot of times, a company administered plan may not even have appropriately low MER fund vailable. For instance though TD administers my company plan, I can’t buy e series funds and the lowest MER available is .89. I have a separate TD account for e series and intend to gradually transfer from the.89 to the.5. Very annoying to be required to take that extra step.

  • jd December 16, 2013, 12:27 am

    I agree that there is nothing tricky about the TD e-series funds, once you have the account set up. Getting the account opened tends to be a PITA though. Unless the process is changed, you need to first open a regular TD mutual funds account at a branch by filling out a pile of paperwork while the “advisor” tries to sell you a bunch of high-MER funds. (The advisors in the branches don’t seem to know anything about e-series.) After the account is opened, you send in a form to convert the regular mutual funds account to an “e-series” account. (The regular account doesn’t have access to the e-series funds.) When the form has been processed, you can finally buy the funds online.

    The e-series funds can also be purchased in a TD Waterhouse brokerage account. There is less hassle to open that account, but administration fees may apply depending on the type and size of the account.

    • HealthyWealthyExpat December 16, 2013, 9:10 am

      And if you open up the TD Waterhouse account, you may as well buy the Vanguard funds and save even more!

  • LL December 16, 2013, 3:17 am

    Thanks for the clear picture on the direct impact expense ratios have on the 4% withdrawal rate. I hadn’t thought of it that way. Now I’m mad, bro!

    Add a little French swearing and call it a MERde, for Management Expense Ratio dubiously expended.

  • Mike December 16, 2013, 6:50 am

    Whilst I accept that on average index funds may be cheaper over the long term than actively managed funds, and that most of us will never beat the market, I do question whether it’s therefore obvious to choose index funds. There are plenty of research sites with free analysis out there, and if an actively managed fund has consistently beaten the market over 1 month, 3 months, 6 months, 1 year, 3 years, 5 years, or even 10 years, sometimes by a factor of tens or even hundreds of percentage points, surely these are financially a much better bet than saving fees of say one percentage point on the index fund? I use the word bet – nothing is certain, of course. A fund manager with a much better track record than his peers over years and years is worth paying the extra MER for if he repays his fees many time over, surely? There are many dud funds, sure, but you can tell that from the free research.

    For example, my modest portfolio of 2 UK smaller companies funds has risen 45% in the last year, whereas the FTSE small cap index is only up 32%. This is just one investment sector – there are dozens of funds in each of all the major investment sectors that seem to consistently out-perform their index, and which therefore seem financially worth investing with and paying the MER. Although on principle I would like to shun firms charging large fees, as they make me more money than the alternative then I continue to pay.

    Any thoughts? I’d hate to think I’m missing something really obvious.

    • Mr. Money Mustache December 16, 2013, 8:00 am

      Hey Mike – that’s the common misconception that keeps actively managed funds in business.

      When we look at past overperformance, we tend to attribute it to managerial ability and assume it will continue.

      However, with the benefit of hindsight, the history of this trend has been thoroughly investigated. It turns out that past performance is no indication of future performance in a mutual fund, and managers all revert to the norm.

      The biggest indicator of future returns? How low the MER, aka the fees, are. So Index funds win.

      • James December 17, 2013, 2:12 pm

        Is it really simply a misconception and everybody invested in high MERs is a sucker down to the last? Is it that cut and dry when you look at the stats? Should 100% of people move away from actively managed funds and to index funds? Does there exist an expert that could reply to your post forcing you to say “Yes, but…” ?

        • Jimmie Jo December 17, 2013, 9:41 pm

          The aggregate performance of all investors is, by definition, the same as the market. Yes, some managers get better results, but the stats I’ve seen are consistent with the null hypothesis: the difference in results is random. I’d need to see a very small p-value to change my mind. Even then, I’d still stick with index funds unless I know I can reliably pick a better manager in advance.

    • Richard December 16, 2013, 9:04 am

      I only use index funds, but I do believe active managers can outperform. There are two issues with pursuing that. First you need to work for it. If you’re using funds I take it you don’t have time to research individual stocks. But you still need to research managers. I think there are more managers than stocks. After choosing one you need to follow them to make sure they are still doing the right things, and find another manager if they leave the fund. Typically when active managers do outperform it’s not by a lot – it might be 1% per year after fees over the long term. If you start with a $50,000 portfolio that difference will give you an extra $9600 after 10 years. But if you skipped the research and used that time to do a bit of freelance work or sell stuff you don’t need so you can invest an extra $1000 per year, you would have an extra $13800 after 10 years while still using an index fund. In a lot of cases that research is simply low-paid work.

      The second problem is that there is more risk. The index has hundreds of stocks covering most of the market, so the only way an active manager can get a different result is to have a much smaller number of stocks that is less diversified. This increases the chance they will have a loss you can’t recover from. Just look at Bill Miller – he beat the S&P 500 for 15 years. However if you measure his fund’s return from January 2006 to today, it has underperformed with a gap of 61% in the total return. In other words if you started with $100,000 in 2006 you would have an extra $61,000 today for choosing the index over the brilliant fund manager. I work hard and take a lot of risks to maximize the amount I can put in my portfolio so the last thing I want is for a manager to make a mistake that jeopardizes it. I just want steady and reasonable returns. If you have a lot of free time, no way to earn more or reduce your spending, and a strong interest in finance then you might feel differently.

      The way indexes behave is different from most investments. A single stock might lose 90% of its value and never recover, but that doesn’t happen with a broad index in a well-developed country (except in cases where the stock market has disappeared entirely). Indexes are more likely than other investments to recover their losses, given enough time. That makes them a great hands-off investment and that’s worth slightly lower returns (though it is very rare to find someone who can consistently beat the index).

      • Walt December 16, 2013, 9:47 pm

        Actively-managed funds historically underperform broad indices by 2-3%. Even if some outperform, there’s no way to identify them beforehand. Those that outperform in one decade underperform in the next. Nothing beats low expense ratio index funds.

        Burton Malkiel covers all this in “A Random Walk Down Wall Street.”

    • Kevin December 16, 2013, 2:01 pm

      Additionally, you have to be careful with the funds that appear to have consistently beaten the market over those periods because:
      1) They often exclude their fees from those calculations
      2) The investment companies often close poorly performing funds and roll the assets into top performing funds. That’s like you picking 10 stocks and each year for 10 years rolling the funds from the worst performing fund into the best performing fund. Then at the end of 10 years, when you only have the best performing stock remaining, pretending that all of the money you initially invested was in that stock.
      3) They often pick timeframes for marketing their funds that make the funds look really good… Why do they pick 7 year performance to highlight that fund? Because in hindsight 7 years gave them the best advantage over the index.

      Only 20% of active funds beat passive funds and most of these are different every year. Check out JL Collins stock series at: http://jlcollinsnh.com/stock-series/

      Anyone who tells you different has been sold by someone to their detriment or is trying to sell you to your detriment.

      Don’t pick an individual stock or an actively managed fund unless you know something about the company or sector that the general public doesn’t.

  • RAR December 16, 2013, 7:14 am

    Great post. I’d like to mention that the Canadian Couch Potato (canadiancouchpotato.com) is an excellent, comprehensive, straightforward and clear source of information on cost-effective sensible investing for Canadians. I’m pretty confident that readers of this blog will find it really useful.

    • Alex December 16, 2013, 8:38 am

      Agreed! I read Canadian Couch Potato almost as obsessively as I read MMM. If you’re a Canadian MMM reader with even a marginal interest in investing, you should also be a CCP reader.

      If nothing else, check out their Model Portfolios. All the benefits of extensive research, and none of the work!

  • Potato December 16, 2013, 7:47 am

    Great post, small correction/clarification: TD e-series are great, especially for smaller investors where it may not make sense to pay commissions for ETFs (and also for the added simplicity). However, you can’t just sign up for a TD Canada Trust account and buy them: you have to convert your mutual funds account by mailing in a special form or (my preferred suggestion) set up a TD Waterhouse discount brokerage account (which lets you buy them without having to sit down in front of a salescritter who will try to talk you out of DIY). FYI (and if you’ll forgive the self-link), my TD e-series FAQ is here.

  • Kenoryn December 16, 2013, 8:36 am

    The Jantzi index is supposed to represent companies with a “higher standard of social and environmental performance”. So that’s pretty cool, but I don’t see why it should come with a higher MER. It’s not like RBC is evaluating the companies or anything. Pretty sure that is done by Jantzi Research.

    • Richard December 16, 2013, 9:39 am

      RBC likely has to pay Jantzi Research to use that particular portfolio. But in general there are a lot of things that don’t make sense with that fund.

  • Michael James December 16, 2013, 8:41 am

    When it comes to saving up a few $600 contributions before spending $10 on a commission, I agree that it’s a good idea to avoid wasting 1.6% of your money. However, you’re mistaken when you say that the $10 commission cancels out the benefit of lowering the MER by 1.6%. The MER is charged every year on the same pot of money. A savings of 1.6% per year compounds to a savings of 33% after 25 years. Wasting 1.6% of each contribution on commissions will never amount to a loss of more than 1.6% of your total savings. It is this confusion that makes so many people insensitive to the devastating effect of high MERs.

    • Neo December 17, 2013, 6:16 am


      Exactly. There’s the opportunity cost of the money that didn’t get to compound for all those years that was taken out as a fee and the longer the term the more devastating it is to your stash.

      A fee differential of 2% over 30yrs would cost you 45% of your end balance. Over 60yrs its 70%.

      Do fees matter , you better believe it.

  • Josie December 16, 2013, 8:57 am

    I see a lot of references here to the couch potato plan if you are a Canadian who is investing. canadiancouchpotato.com

    However, the philosophy is a 50/50 stock/bond split no matter what your age (and heavily weighted to canadian equities).

    Surely in my 30s this is anti-mustachian? And MMM has stated previously that america is the place to invest in. This is where my confusion originates, what to buy.

    BTW, I’m in the process of de-leveraging from my 2% personal financial planner to a self-directed brokerage account.

    And since nobody else has mentioned it, Virtual Brokers was the company I picked. They came recommended and were the lowest fees in the business.

    • Mr. Money Mustache December 16, 2013, 9:28 am

      I wouldn’t be so bold as to say that “America is the place to invest” – especially as a Canadian myself. But I would say that buying into only a single smaller-capitalization market like Canada might not be the best strategy.

      I remember when Nortel made up more than 40% of the valuation of the TSX 60 index – meaning if you were buying a cap-weighted fund in the late ’90s, you were getting 40% Nortel. This company soon crashed and burned and is not even part of the listing anymore, taking that 40% with it. Research in Motion (now Blackberry) had a similar rise and retreat. This is a normal and healthy part of business, but excessive-concentration effects like that are nicely diluted in larger stock exchanges like the S&P 500, or better yet the “All US / All world” strategy outlined in my note.

      • LeBarbu December 16, 2013, 10:16 am

        A good way to achieve diversification for Canadians (where the stock market is quite small and, concentrated in Financials (5 large Banks) and Resourses is to include REIT. My own portfolio is 20% Canadian short term bonds (VSB), 20% Canadian stock index (ZCN), 10% Canadian REIT (ZRE), 25% US stock (VTI) and 25% International stock (VXUS). The average MER of this is about 0.2% and using some index funds from RBC for my regular contributions, I only make 2-4 transactions/year to buy ETF.

    • LeBarbu December 16, 2013, 11:28 am

      Josie, the split stock/bond is up to you (your age, your risk aversion, your experience as self investor etc) but remember that most of the markets returns about the same on the long run, espacialy in recent years. The home bias sometime make more sense than trying to grab some return elsewhere. The currency risk is real and you always have to think where your’re gonna spend your money later. If your saving rate is high and you don’t need this money for the next 10-20 years, you could go 100% stock (including some REIT) and up to 50-60% US-International. Don’t forget to use Norbert-Gambit for currency conversion and you’re on the good path.

    • Kevin Kane December 17, 2013, 11:53 am

      “the philosophy is a 50/50 stock/bond split.”

      Actually I’ve told Dan at CCP that I’m invested 100% in equities and he has no problem with that because:
      1) I can tolerate the risk and
      2) My investment horizon is indefinitely long.

      Dan knows that there isn’t a single asset allocation that works for everyone.

  • LeBarbu December 16, 2013, 9:05 am

    In my opinion, the best blogs about investment for Canadians are Canadian Couch Potato (by Dan Bortolotti) and Canadian Capitalist (by Ram Balakrishnan). They have differents approaches but finish with quite similar way to invest with low cost and diversified portfolio wich include Bonds, REIT, Canadian, US, International stock

  • Aaron Hall December 16, 2013, 9:13 am

    For people contemplating how to deal with ETF buying commisions (excluding questtrade) when making regular contributions I might suggest the following system. Have your regular contributions go toward the purchase of TD eseries funds. When your eseries portfolio reaches a certain value threshold (when the MER exceeds the cost to purchase equivalent index tracking ETFs) you rebalance by liquidating your position and repurchasing the appropriate ETFs. (also facilitates portfolio rebalancing) This keeps you in the market at all times, rather than waiting to accumulate enough savings to reduce the hit on the buying commision for the ETF. In essence you would have two parralel portfolios – One made of TD e series and another of low MER ETFs with each tracking the same indexes. One is for short term purchasing – to stay in the market and avoid commisions, the other is for long-term sweet glorious compounding.

    I would also suggest this approach in the initial stash accumulation phase. Relatively low MERs don’t eat returns as much as commisions on a fairly small portfolio. It might be worthwhile to use the eseries funds exclusively until your portfolio is over a certian threshhold (many say $50,000 – which opens up lower commisions at many discount brokerages).

    If this is all too overwhelming initially. A good partial solution may be to look at ING streetwise funds which are about as simple as you can get in terms of complexity – but at the cost of a slightly higher MER. I know a good many people who simply divert part of their paycheque to the purchase of Canada Savings Bonds… ING streetwise funds might be a good babystep to consider.

  • Matt December 16, 2013, 9:34 am

    Great to see more about Canadian investing. 1 month ago I just happened to open an RBC direct investing account with the intent of starting my own investing. I had also come up with the very same conclusion about buying a different ETF every few months. Would love to see some more basic investing tips like this as I a am a complete beginner.


  • leo December 16, 2013, 9:35 am

    Thanks for the Questrade link… I am following that up so far it is exactly what I am looking for!!!

  • Matt C December 16, 2013, 9:59 am

    Hi, I just wanted to mention that it is critical to take tax considerations into account when holding non-Canadian market ETFs.

    For example: Which S&P500 EFT is better to hold in an RRSP, the US Vanguard ETF (traded on a US market) or the Canadian Vanguard ETF (traded on a Canadian market)?

    The US market ETF as the Canadian market ETF is subject to the US withholding tax of 15%, reducing the performance by ~15%.

    Make sure you do your research before you buy international, wherever you may live.

    • Mr. Money Mustache December 16, 2013, 11:49 am

      I wouldn’t have guessed this – anyone else able to verify or discuss this effect?

      • Greg December 16, 2013, 12:55 pm

        Here’s an example of what Matt was discussing.


        My colleague was told the precise opposite by his financial advisor (i.e. hold Canadian-listed US ETFs in an RRSP), so now I’m confused.

        Finiki agrees with CCP, but I’m surprised at how difficult it is to find verifiable information for this:


        (section on Foreign Withholding Taxes)

        • Greg December 16, 2013, 1:29 pm

          Here are some other things I’ve learned in 2013:

          The IRS & Canada Revenue Agency have a tax treaty for RRSPs but not TFSAs, so US investments should either go into an RRSP or into an unregistered account (to claim the dividend tax credit). Putting US equities into a TFSA is the worst of both worlds: you could get hit with a 15% withholding tax and not be able claim the tax credit.

          Canadian Bonds should either go into an RRSP or a TFSA. Bond interest is fully taxable as income and therefore bonds should never go into an unregistered account.

          Canadian equities can go into an RRSP or TFSA to avoid capital gain taxes, but because Canadian capital gains & dividends both receive favourable tax treatment, it’s not a bad idea to put Canadian equities in an unregistered account.

          So a diversified portfolio might look like:

          US equities in an RRSP

          Canadian bonds in a TFSA

          International equities in RRSP or TFSA.

          Canadian equities in an unregistered account, unless you still have room in an RRSP or TFSA.

          A very important point to remember, though, is that these tax considerations often amount to 0.30% per year or less. So reducing spending, increasing monthly investments, and getting a low MER are the most important things. I wouldn’t mention these tax considerations to a novice investor because it’ll just confuse and discourage them. The points listed above are only for those people that are determined to optimize every dollar of investment.

          • My Own Advisor December 17, 2013, 7:13 pm

            Excellent points Greg.

            I prefer to invest this way:

            US equities in an RRSP
            Canadian bonds in RRSP.
            International equities in RRSP.

            Canadian stocks or ETFs in TFSA.
            Canadian dividend paying stocks non-registered.

            • Dunny December 25, 2013, 12:17 am

              My own approach is:

              RRSP — US and Int’l equities (to avoid calculating FX gains/losses, and full taxation of US and foreign dividends), REITS and trust units (to avoid calculating income versus return of capital), Canadian dividend stocks (to avoid dividend gross-up which affects OA and age credit clawback), bonds (although I don’t have any now)

              TFSA — Canadian growth and dividend stocks in attempt to have the highest gains in this account as none of it is ever taxable

              Taxable account — Canadian growth stocks (tax is only payable on gains — plus you can net against losses from previous years — when you sell the stock thus avoiding aforementioned OA and age credit clawbacks), some Canadian dividend stocks (not ideal as the tax is payable immediately and the dividend gross-up affects OA and age credits)

      • Mrs EconoWiser December 16, 2013, 1:21 pm

        I (Netherlands) looked into this as well. You need to fill in a W-8BEN form http://www.irs.gov/pub/irs-pdf/fw8ben.pdf in order to reclaim 15% withholding tax from the U.S. That way you’ll avoid double taxation. It’s also referred to as the dividend leakage. Turns out most investors don’t know about this and do not reclaim withholding tax. So, contact your country’s tax department and ask them about this. It also depends whether your country has a tax treaty with, in this case, the U.S. The Netherlands and the U.S. have this treaty. So dividend taxes are reclaimed back and forth.

        I am still investigating this matter. If I may be so bold, here’s a link to a blog post of mine on the topic: http://econowiser.wordpress.com/2013/12/08/index-investing-with-dollars-for-europeans/

        However, I am working on a complete version and might tweek some bits and bobs.

      • My Own Advisor December 17, 2013, 7:11 pm

        Great post!!

        As for the tax implications, here goes:

        You should know that foreign dividends are taxed at your marginal rate. With U.S. listed ETFs the Internal Revenue Service will take a 15% withholding tax on all dividends received. The other key point is that Canada has tax treaties with the US and many other countries that have agreed to waive withholding taxes on U.S. stocks or U.S. ETFs in registered retirement accounts like RRSPs, RRIFs and Locked-In Retirement Accounts (LIRAs). TFSAs don’t apply to this Treaty.
        In a TFSA you must pay 15% withholding taxes on a U.S. ETF like VTI (or a U.S. stock for that matter) and you cannot claim a credit for this.

        Read more at http://www.myownadvisor.ca/indexing/


        • HealthyWealthyExpat December 18, 2013, 9:47 am

          And if you’re a Canadian who is non-resident for tax purposes and live in a country that does not have a tax treaty with the US, you pay 30% tax on the dividends on US stocks and only 15% on Canadian stocks. Of course, we do have the benefit of no capital gains taxes on either, so can’t complain too much;-)

  • PeachFuzzStacher December 16, 2013, 11:12 am

    I think the Ferengi were written as the embodiment of sleazy, greedy, unnecessary businessmen, out for profit as any cost.

    I enjoyed your comparison of fund managers to them!

  • Greg December 16, 2013, 12:50 pm

    MERs, unfortunately, can get a lot higher than 2.50%. Here’s an example of a fund with a 3.37% MER. The 10-year Rate of Return was 3.76%.


    If your company RRSP plan has few choices, and high MERs like this, investigate whether or not you can transfer money into another institution. Once per year I’m allowed to transfer 25% of my company RRSP balance into a TD account (or any other financial institution). Although it’s a lot of paperwork, it should save me thousands of dollars in the long-run.

  • Bobwerner December 16, 2013, 1:12 pm

    IMO diversification should include several other factors including talents, gardens, skills, hard assets, understanding, things and relationships than just stocks and bonds.

    Stocks and bonds are a fun and easy way to invest. yet “past returns are no guarantee of future returns.” Please encourage people to understand that stocks, companies, stock markets, bonds, etc. have been known to go to zero at some time. (In fact, historically, every financial system has failed at sometime) Since MMM readers are concerned about the long term, it would be wise to gaze into the crystal ball and see what the future holds.

    It would seem prudent to base all stock and bond assumptions conservatively and assume an annual return in the negative numbers of say minus 4% on average. (I know, that makes us all very unhappy!)

    One could extrapolate from the last 500 years of data that it would be prudent to also encourage a significant portion of investments in gold or other hard assests that have both a function and thousands of years of outliving every currency ever while never going to zero in value.

    • Mr. Money Mustache December 16, 2013, 4:47 pm

      Interesting ideas there, Bob. There is a risk in overly conservative assumptions – perhaps a much bigger risk than optimistic ones: you save too much and never let yourself retire. Regardless of what happened in the thousands of years of humanity’s financial history, we only have to pay the bills for a few decades of retirement.

      25 times your annual spending, plus some flexibility and a friendly personality that allows you to get along with other people, is plenty.

  • This Life On Purpose December 16, 2013, 1:34 pm

    Mr. Frugal Toque,

    Thanks for the great post, I always like to hear a Canadian perspective on investing.

    I’m interested in hearing your thought on holding US-listed ETFs in US funds such as VTI. Do you think it is worth the lower MER cost if you perform a Norbert Gambit to lower your conversion costs?

    • Mr. Frugal Toque December 16, 2013, 5:19 pm

      My current philosophy is based on keeping my investments in the same country and currency as the place I live. This has served me well, because I coincidentally adopted it a few years before that whole “sub prime” thing and saved myself a bit o’ destruction in those years.
      While I could make a killing by picking a country that does better than mine in the currency market, I have long considered it a form of gambling – betting on one country over another – when I really have no special knowledge.
      When you stay in your own nation, your go and down with it but take neither lottery winnings nor collapse.
      Mind you, I’ve seen enough learned people commenting to the effect that a diverse international portfolio is a good idea that I may have to start looking into it.

  • Yin Yang December 16, 2013, 2:39 pm

    I have a fairly large proportion of my net worth invested in mutual funds. The “problem” is that the majority of them have performed exceptionally well over a fairly long period of time, outpacing the markets in most cases, and providing a healthy dividend to boot. So I have substantial growth and income through mutual funds, at least as good or better than the overall market has returned on average in the last 5 years. Maybe it’s luck. Maybe I have good advisors. So, how do I take a leap of faith and bail on them to jump strictly into ETF index funds? I’m tempted to leave well enough alone, and continue to monitor the performance of these funds vs similar ETFs. The money I have invested in ETFs has not grown as much, relatively speaking. Contrary to popular belief, there are some stellar mutual funds out there, notwithstanding their MERs. Sometimes, it pays to have good management and advice. Nevertheless, the point is well taken, and if I were just starting out, I would wait until I had accumulated at least $100K, open an online brokerage account, and allocate my assets among the myriad of versatile low MER ETFs that are out there. That’s what I currently do with a chunk of my portfolio.

    • Leo December 16, 2013, 2:42 pm

      Is 100k required? I was thinking of going with questrade for free etf buys and make regular monthly purchases.

      • Greg December 16, 2013, 2:59 pm

        Questrade has an inactivity fee of $19.95 per quarter if you have less than $5,000 and no transactions during a quarter.

        Since you’re planning to make regular monthly contributions, go for it! Their no-fee ETF purcahses are a great deal for you.

        Waiting until you have $100,000 to buy ETFs seems a bit cautious, even if you’re not with Questrade.

        • Bicyclist4life December 17, 2013, 6:40 am

          I would study the companies that sell ETF funds before you decide on a brokerage company. If you like vanguard funds, then open an account through them. Then all of your purchases and sells will be free with the low management fees. If you purchase an ETF with another company and it isn’t free through them, then you have a charge. With enough money in their account, the charge is only $7.00 per trade.

          Other online brokerage companies offer free ETF purchases for a variety of ETFs sponsored by different companies. If you want to diversify the ETFs in terms of the company who manages them, I would research those. I think ScottTrade and Schwab are some of the lower priced brokerage companies out there.

    • B Irvine December 16, 2013, 6:50 pm

      Run a phantom portfolio of various etf’s vs mf. Then decide for yourself what you want to do.

    • Mark A. December 17, 2013, 5:01 am

      Yin, That’s great you’ve chosen well and there are a few manged funds that seem to crush year after year. On any normal distribution there will, by definition, be outliers. Every managed fund is still subject to reversion to the mean increasingly over time due to fee risk, manager risk, investment style/fad risk and the many other risks of playing in the casino. Stellar funds eventually underperform and then the tendency is for once-lucky and over-confident shareholders to bail in search of other outliers, mistaking their prior luck with skill and encountering all of the attendant risks of managed funds above. They themselves revert to the mean (or worse) in that process. I’ve been investing for 20 years and, with the exception of Vanguard, the whole industry starts to look like a massive, nearly criminal cheese grater aiming to shave off your net worth in little slivers. I hope you continue to have a different experience but that’s why many of us choose instead to actually own the casino itself!

    • skarabrae December 17, 2013, 12:22 pm

      If you walk into the casino and win 5 times in a row, do you:
      1. continue to play, or
      2. take the money and run.

      Many fund managers can outperform the market for 5 years. Very good managers can outperform it for up to 15 years or so. But one common thing you’ll notice about them: they got out at the top. If they didn’t, they took some huge hits before wising up.

      If you have done a good job or had good luck picking funds with winning managers, that is fantastic. How much money are you willing to bet their winning streak will continue until you retire?

      Also, have your funds returned better than the index benchmark *plus* the MER? If they’ve exceeded the index by less than their MER, they haven’t actually exceeded the index for you, net of cost.

      However, do not take the word of me, a random stranger on the internet for this. Vanguard (who may be a bit biased towards the index funds, ahem), has done some number crunching with pie charts and footnotes that covers this in way more detail: https://pressroom.vanguard.com/nonindexed/7.5.2013_The_bumpy_road_to_outperformance.pdf

  • stagleton December 17, 2013, 1:22 am

    This article freaked me out. I am furious at my broker; too bad he’s family. I like the idea of families sticking together like how all the immigrants seem to do it in my old town, but seems like us Waspy Caucasians have lost our edge.

    • Mr. Frugal Toque December 17, 2013, 7:04 am

      Just to be thorough, I decided to go through my own accounts.
      It turns out I had just over $600 in an “RBC Asian Equity Fund” that was charging 2.27% MER while earning 0.8%
      You think *you’re* furious … :-)

      • Josie December 17, 2013, 8:12 am

        How many separate funds are you investing in? I was hoping to get away with about 3-4.

        • Mr. Frugal Toque December 20, 2013, 1:09 pm

          There are a whole bunch, it turns out, once I went over our collective investments (mine along with Mrs. Toque’s).
          Most of them, chosen over a decade ago when I didn’t know what I was doing, are still sitting there quietly earning 7-8% interest since they are (mostly) index funds of one sort or another (global bond, canadian bond, int’l equity, global index, canadian index, canadian large cap index etc.)
          Yes, you can definitely get away with fewer funds.
          I would think a couple of index funds from your own country, then a couple of internationals would do it.
          As it is, I have to clear out a couple of “index” funds that turned out to be nonsense.

      • Money Saving December 18, 2013, 6:58 am

        How crap! 2.27%?!?!?!? That’s highway robbery!!

  • Brian December 17, 2013, 10:16 am

    I don’t know how it would work inside a Canadian retirement plan, but my Vanguard brokerage account does not charge me any commission when I buy Vanguard ETFs.

  • jhonadward December 17, 2013, 12:06 pm

    Good Keep on ! :)
    http://DoUKnow.com/contest is the place where they give away $500 every week 2 one of their members! Sign up for free and enjoy!
    You would just need to make a video of 30 second that you can easily make from your cell phone and then upload that video to this website. Ask your friends to give votes to your video. as many votes you will get more will be chances to win. This contest is weekly basis so you can try this every week.. :)

  • Marc December 18, 2013, 2:26 am

    Greetings from Spain here.

    I have been working in the US for 5-6 years, and left some 401 (k) money there in an S&P 500 0.2% expense ratio. Can’t get lower than that in the 20 funds my institution offers.

    Now living in Spain and have discovered this great website (and read every post + the stock series + the mad fientist etc).

    Does any reader in Spain know about low index funds / plan de pension (retirement plan) over there ? the market here for tax advantage retirement accounts is a rip-off with 2.5% maximum expense ratio (split into 2 elements, commission de custodia and management fee) by law, but any US index tracking fund hits this ER, save for the ING Direct which is at 1.25% (half of it, but still miles away from Vanguard funds…).

    For non tax-advantage savings, buying US ETFs at low ER is my favorite option, but it is not possible for plan de pension (unless mistaken).

    Thanks for any input from Spanish reader.
    Cheers and keep up the good work MMM.

  • DPeeling December 18, 2013, 4:47 am

    Mr Money Moustache/Mr. Frugal Toque,

    Awesome article. I really liked it.

    I’m in the process of ripping apart my current investments (ie. emergency fund in dead end GICs, slow growth mutual funds with high fees).

    I just opened a TD spousal mutual fund account IOT purchase e-series funds and was wondering if you had comments on how I’ve allocated my funds to them.

    Looking at Mr. Money Moustache’s old article about investment (www.mrmoneymustache.com/2012/02/17/book-review-the-intelligent-asset-allocator/), one way to go about it is to put 25% each in US S&P500, US Small Cap, Foreign Equity and Short-term bonds.

    Being Canadian, I made the following decisions:

    35% in US Index-e (US S&P 500 Index)
    30% in Canadian Bond Index-e (DEX Universe Bond Index)
    22.5% in International Index-e (MSCI EAFE Index)
    12.5% in Canadian Index-e (S&P/TSX Composite Index)

    The numbers may seem a bit odd but there is some reason. I’ve started by investing $200/month and, since I wanted to limit my exposure to the small Canadian market, I bought the smallest monthly amount I could ($25/month).
    I’m buying 35% of US equity because they are the biggest market in the world. However, this leaves me with over 50% foreign equity. Do you think this is too much of a currency risk?
    The 30% in a Canadian bond index fund is because I’m still a little risk averse.

    Thanks. Keep the articles coming.

    • LeBarbu December 18, 2013, 9:03 am

      DPeeling, you say you’re risk averse but still put a lot of money subject to the US and foreign markets. I understand you invest in Index funds (seems to be TD E-series). You do not have real currencies risk because your still 100% CAD. On the other hand, those fund will “swing” with the market variations + currencies variation. I know, the Canadian market is “small” and poorly diversified but returns about the same as other markets in the world on the long run. It would be “safer” to go with 25% in each of the funds you have now and the return will be the same. The other improvement you can achieve is to re-balance when it goes out of balance or simply invest in the lagging fund each time you can to keep that 25% in every fund.

  • Carolyn December 18, 2013, 4:54 pm

    This is awesome – can’t get enough of the Star Trek: DS9 references and badassity in the same article, you’re killing me with happiness.

    You also prompted me to look up the expense ratios in the Vanguard/other index/ETF funds, and to invest some more this morning. I’m a graduate student in chemistry in Seattle, so I’ve a way to go to FI. But I’d like to be there before baby-making, we’ll see…

  • Karl December 18, 2013, 6:24 pm

    Great article. Although it isn’t directly relevant as I am in Australia, investing and generating a higher ROI is really something I need to sit down, learn more about and take action.

    Right now I have all my savings in a high interest online savings account which yields around 3.5% ROI on average. It was easy and quick to set up, calculates daily, doesn’t penalise you if you have to take some money out, and pays out monthly. But I know I could be getting a lot more with just a bit more effort and research.

    This is especially important as I am taking 9 months off work next year to do some travelling and seek out new finance generating opportunities (read: work from home/on the road).

    It would be great if there’s an easy to read and informative finance blog/website for an Australian audience to put me on the right track.

  • Roger H December 19, 2013, 5:05 am

    Thanks Mr FT,

    I consider myself well read in these matters, but until reading your article it never really hit home how much 1% actually means. Those greedy SOBs -taking 25% of my profit. Doesn’t seem right!

  • smallCAPcanuck December 19, 2013, 8:04 am

    Great CanCon, Mr. Frugal Toque! I’m a fellow Canadian, very conservative, low-risk taker kind of gal, and my head was spinning a bit with the talk about all the financially-spiked acronyms. I didn’t see any reference to something that is dear to my heart: the Saskatchewan Pension Plan, http://www.saskpension.com. After looking at the easy ways to invest (eg. the ING funds), and being dismayed by the pathetic returns (negative returns??) after extracting their MER, I read an article about the SPP, and began investing with them. I don’t know much about the investing world, but they just posted a YTD return of 12.25% on their Balanced fund, with an MER of about 1%. Any Canadian can invest with them, as long as you have RRSP contribution room, and you can start receiving payments at age 55, so it strikes me that even if you don’t need the money at that point, you can always plow it back into the TFSA. or you can contribute longer than that, if your ‘stache isn’t where it needs to be. What’s your opinion? I find the SPP often gets overlooked as an option to big bank RRSP investments.

  • Binary Michael December 19, 2013, 12:58 pm

    Mr. Frugal Toque,

    Awesome post as always for us Canadians! Being new to all this, one thing in particular i’ve been wondering about, is what if there is no form of index fund available from your employer? Just your standard MF packages? Anything we should be looking at in regards to mutual fund types? Just lowest MER or anything specific to look for in diversity?

    • Mr. Frugal Toque December 20, 2013, 1:12 pm

      It is unfortunate when your employer offers you a kick-in but doesn’t offer good funds.
      Generally speaking, you want the one that looks the most like an index fund. This *usually* means you start with the lowest MER funds.
      Often, however, what you’re stuck with are a bunch of 1.x% funds that have names like “Long term growth” or “2025 retirement” or something vague like that.
      At that point, you want to look inside, as you say, and see what they invest in, looking again for indexing to your local stock market.
      In that situation, your best bet is only use that employer plan for the funds you have to in order to get the corporate kick in. The rest of your money gets invested directly in lower MER funds.

  • mysticaltyger December 19, 2013, 4:17 pm

    This post really made me appreciate America. We have a much larger menu of funds to choose from and lower fees as well.

    I don’t knock index funds but I am not as much of an index purist as MMM & Mr. Toque…Heck, some of Vanguard’s actively managed funds are cheaper than all (or most) of Canada’s index funds!

    Fund families like Doge & Cox also charge low fees. They charge .52% for their market beating Doge & Cox Stock fund, .53% for their Balanced Fund (which has also beaten the S&P 500 Index over the last 20 years)… and ~.65% for their Global & International Stock funds.

  • Ben December 19, 2013, 4:17 pm

    Well I am not sure the best approach for what I am about to say because it would seem as if I am in the minority but here it goes. I am more then happy to pay fees, tips, and wages to anyone who does a job well done. Having said that I am in a actively managed investment account that I (myself) have recently done a net of fees performance review on. In this review I decided to compare my account to the S&P 500 Total Return Index (S&P 500) performance that I pulled and verified from multiple locations (Bloomberg, Morningstar, ect.) and was very pleased by the outcome. *Please note that I am also assuming the reinvestment of dividends. I have had this account since 2000 and have not had any additions to this account so the comparison is much easier. The outcome is that my account has grown 149.88% and the S&P has grown 45.27% (and that’s net of fees on my actively managed account and no fees on the S&P). I chose to go with the investment strategy because I have found that limiting the loss in the account goes way farther than capitalizing on 100% of the gain (which I happen to do quite often anyways). Simply noting that it takes more than a 10% gain to make up for a 10% loss is a quick example. The correlation that I like to make most is to that of winning baseball games. They are typically won by base hits (and not giving up runs) not by swinging for the fences at every pitch,which is what a 100% equity position like the S&P does. I think my advice would be to shop around for advisors and talk a lot about strategy and philosophy. If you find one great maybe you can get the same results I have but if not then I would agree that, if ones is to invest on their own, then the above recommendations make great sense. Also please know that I spent a lot of time frustrated at the fact that most advisors out there aren’t worth their weight.
    I like frugality but sometimes you get what you pay for. BTW I am a frequent reader and this is the first thing I have disagreed with. Well that and I don’t ride a bike to work. Ha

    • Evan Lynch December 22, 2013, 3:20 am

      I like indexing in principle, and am mostly invested in index funds myself. However, I’m also reluctant to give up my one remaining actively managed fund, the T Rowe Price Capital Appreciation Fund. It has a management fee of 0.73%, not horrendous for actively managed funds.

      I’m doing some serious looking at my actively managed funds lately, and have already gotten rid of my most expensive one, that used to cost me 0.87% when I had it as an investment. I switched that one into the Vanguard Total Stock fund, so this actively managed fund I mentioned previously is now my highest expense ratio fund. I would never invest with a fund that charges more than 1% as I think that’s too expensive, personally.

      The fund does a pretty good job of following the market in positive years in my experience. Where it really shines is the down years, at least during the 8 years I’ve been invested. Back in 2008, when the US Market as a whole went down 30%, this fund only went down 15%. Having that kind of downside protection is very much part of their strategy and something that I feel would pay off over the long haul.

      I feel like having something like this fund that does better than the general market is worth having to lower the overall volatility of my investments. On the other hand, if that’s something I might be able to get with a cheaper fund elsewhere, that would certainly be worth considering.

  • Ray December 19, 2013, 6:37 pm

    Thanks again for providing the Canadian Perspective on investing. I’m enjoying reading this and MMM’s other posts.

    You mentioned in Part One that you can’t find anything regarding ‘early withdrawal’ penalties in Canada, except the fact that you shouldn’t withdraw from your RRSP the same year you have work income.

    But i just read that there is a withholding tax if you take money out of your RRSP before you retire, listed in the article below and on RBC’s website.


    I’m confused….how does the government or bank know when you retire. As mustachians, we’re going to be retirement much earlier than everyone else. Some might even choose to ‘retire’ but still work part time or casually….
    Could you further elaborate? This may have already been discussed above but I didn’t have it in me to sift through all the comments. Based on this…it seems that you shouldn’t take money out of your RRSP until you ‘truly’ retire, or convert it to an RRIF early…

    And sorry if this is a stupid question….i’m a new college grad and new to this whole investing thing…some advice would be lovely

    • Mr. Frugal Toque December 21, 2013, 9:48 pm

      It’s important to understand here what is meant by “withholding tax”.
      This is an amount of money sent to the government as payment toward your tax liability.
      The money that gets sent to the government this way is not necessarily the correct amount of money. For example, take salaried employees.
      Our employers are required to do this with our salaries but our payroll departments are often mistaken and we end up over or under paying.
      In the case of RRSPs, yes, there is a withholding tax upon withdrawal, but this is basically a guess on the bank/government’s part. If you keep your RRSP withdrawals (and other income) low enough, you should get some of all of this back in March.

      • Brett February 26, 2014, 9:00 am

        I see so much competing information about this out there on the internet. Do you have a good source that the withholding tax is an estimate of your marginal tax rate, and not an amount that you pay over and above your marginal tax rate. (Obviously it seems unreasonable to have to pay tax twice on RRSP withdrawls, but I’m one of those hyper-careful super-researchers before making purchase (i.e Mustaschian I suppose?)

    • Sandi December 23, 2013, 4:41 am

      Hi Ray,

      The “withholding tax” misunderstanding is pretty common. When you save money in an RRSP, you don’t pay any tax on the money you contribute (generally this means that you pay tax on it when you earn it, and receive a refund equal to the amount of tax paid on the contribution at the end of the year). When you withdraw money from an RRSP, you then have to pay taxes on it (because it’s tax-deferred, not tax-free)

      The institution that holds your RRSP withholds a percentage of your withdrawal and sends it to the tax man, and then – again, at the end of the year – you settle up with them and end up paying your marginal tax rate on that withdrawal. That “withholding tax” is tiered, so if you withdraw less than $5K, 10% is withheld. Between $5K and $15K, 20% is withheld, and above $15K, 30% is withheld.

      This is what you need to remember: it’s not a penalty, it’s taxes that you never paid that are now due because you withdrew money from a tax-shelter. That’s all. The same is true when you convert your RRSP into a RRIF – money withdrawn is now taxable (although the withholding rule then only applies if you withdraw more than the minimum).

      Hope that helps.

      • Brett February 26, 2014, 9:05 am

        So when you say “and then – again, at the end of the year – you settle up with them” it means you adjust the tax paid on all of your income, including the RRSP withdrawal to whatever your marginal tax rate is? (So for example, if 30% was withheld on an RRSP withdrawl, and my marginal tax rate during that year 30%, I wouldn’t won’t pay any additional tax on my RRSP income at tax time right?)

        • Sandi February 27, 2014, 3:29 am

          Exactly so, Brett – it’s designed so that you transfer taxable income
          from your higher earning/higher marginal tax rate years to your lower earning/lower marginal tax rate years (and tax-deferred growth, too, of course).

  • Mark D December 20, 2013, 2:06 am

    Just wondering how come my post / rave on about my finances / really long question wasn’t approved.
    No harm just wondering why???

    • Mr. Money Mustache December 20, 2013, 9:42 pm

      Hey Mark – posting this response here for others to see too.

      Really long comments and stories unrelated to the post at hand don’t generally work well in a busy comment section like this one. You could try posting your question in the forum, however, and discussing it with others in the same boat: http://www.mrmoneymustache.com/forum/

  • Bullseye December 20, 2013, 5:30 am

    An option to reduce total MER cost even more for Canadians…skip the ETF for your Canadian allocation, and just buy a basket of the largest stocks that make up the TSX. 0% MER on those, just the miniscule one time cost. This makes sense because the Canadian market is so thin, it’s quite easy to replicate the index. You’d need to have a large enough portfolio ($50k+) for it make sense, and you’d lose some rebalancing benefit.

    This is what I do, hold individual stocks in Canada, then Vanguard or other ETF’s for everything outside Canada. I also hold ETF’s in Canada for things like bonds, preferreds, and REIT’s.

  • Helen_in_Toronto December 21, 2013, 10:42 am

    Reqgarding: Bullseye December 20, 2013 at 5:30 am #

    For the Canadian market It makes sense to buy all or the top 10 actual individual stocks that make up the TSX/S&P index, and then you pay no MER’s ever. Assuming the strategy is “buy and hold” for the long term, then you can also set up a DRIP program to re-invest dividends and buy more shares in those companies. This is what the IDIOT MILLIONAIRE advises.

  • Stephen December 27, 2013, 1:04 pm

    Thanks for the article Mr. Frugal Toque. I currently contribute to both a company RRSP (that matches a % of my contributions as you describe in your article) as well as a personal RRSP outside of work with RBC. The funds in my company RRSP have higher expense ratios than the Index Funds in my personal RRSP; I have limited selection of funds in my company RRSP so have tried to select funds with lowest expense ratios. Do you have any general tips or suggestions on how to best manage a company AND personal RRSP to maximize total returns?

  • Rhonda December 27, 2013, 9:55 pm

    I have read this entire section & have learned so much from it. My question is this….my employer provides a decent retirement income (Cdn Govt)through our pension plan. My FA has suggested I no longer contribute to RRSP’s because this will entail a clawback by the government when I retire because I’ll have too much income to qualify for the maximum amount of CPP & OAS. In place, she’s suggested several mutual funds (which I will be going over very soon), for investments outside RRSP.
    My question…it seems that MMM’ians promote putting maximum into RRSP’s/TFSA’s at this point. I’m 43, with about $50K in investments. I plan to retire at 59, which brings me “early retirment” status at work. (not full pension). I was with a purely selfish FP for a while who lost me a good amount, & with this “new” FP, she’s said not to invest in RRSP’s anymore…so how do I accumulate my million? Outside RRSP? I’m guessing Index funds!!
    Thanks everyone for great posts!!

    • kozak January 10, 2014, 12:13 pm


      Your current FP is a little out in left field (maybe).
      2 rules of thumb or jobs with FP.
      1 – How to set your financial portfolio (investments vehicles: non-reg, TFSA, RRSP and RESP) and with what mix of assets. which country equities, fixed income and then cash.
      2 – what specifically to buy and put into those vehicles as investments.

      Your FP is missing a little on ‘1’, or you are not providing enough info.
      If you plan to have a huge nest egg, in a non-registered account (example: over a Million) or you have a good company defined Pension plan with work (expect 50k+/year). Then i completely agree with her, that RRSP’s are not the way to go. the reason, why save 40% tax now, only to pay 40% tax upon withdrawal? There is no net win, outside of tax incentives, within this RRSP vehicle.

      However, if you don’t have a large non-reg nest egg, nor pension and if you have only $25,000 or less to invest each year…its a really tough sell to not put a large chuck into your RRSP. because as you retire and then withdrawl you will have received 40% back when you put it in, and only pay 10-25% upon withdrawal. Big win.

      FYI: I believe the first $5500 should always be fed in the TFSA, unless you have a company matching RRSP program. then company matching program first, then TSFA, then RRSP, then Non-registered. This is for Private industry, non-pensioned workers.

      TFSA you control 100%, the cdn personal Tax rates when you are 70 years old, you can not.

      • kozak January 10, 2014, 12:20 pm

        i just re-read Rhonda first line (sorry). You are in Cdn Gov’t. your FP is correct, RRSP should not be contributed into. as long as the gov’t does not cut the pension program that you are working in between now and when you are 80….you are solid Gold.

        However, still save something. Detroit and other cities in the US are setting a interesting precedent in North America of curbing those Golden plater public pensions.
        And if you are 40 today, another 40+ years is a long time to assume nothing will ever change.

        So for you:
        1 – TFSA ($5500)
        2 – Non-registered.

        the reason she is recommending that, is that you now control your withdraw amounts and thus taxes upon retirement. with an RRSP, you are forced to withdraw according to RRIF parameters. so with a solid pension income, you will received no Tax benefit (may even pay more than received) and lose flexibility and control of withdrawal rate.

  • Joy December 28, 2013, 12:23 am

    For Questrade, The selling commision is paid every time there is a trasaction. When selling, if you have partial fill, say 2 fills, then you pay 2x$4.95. If you have a large number of ETFs you need to sell then it really adds up. That is the only thing that makes me concerened since I will have a lot of ETFs by the time I retire. Your thoughts?

  • Krishanu January 17, 2014, 3:05 pm

    ” …that kicked in 50 cents on the dollar up to 5% of our salaries. So we immediately set our pension contributions to 10% of our paycheques …” and then “You’d be ‘stashing 15% of your income before it even touched your bank ..”
    50 cents on the dollar for 5%, is equal to 2.5%. So a combined contribution of (10+2.5) 12.5% and not 15%. Right?

    I know, this might come across as nitpicking but to me this was a glaring overlook.


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