Why I Am Not Optimized For Taxes Today…

Optimizing investing for taxes is important, and an obsession for some. However, it’s not always about minimizing how much taxes you pay, but how much you end up with overall.

It’s another anology to playing offense vs playing defense. Investing to only focus on not paying taxes is defense. When you think offense, paying taxes is the price you pay to earn more.

I actually pay more taxes annually today due to my overall investing strategy, but there is logic to the madness and my portfolio is more performant for it.

The Account Strategies

For the longest time, I had all my accounts focused on high dividend growth stocks. However, as I approach 50 and I strategize for FIRE (Financial Independence Retire Early), I have swapped one account towards income investing.

Let’s review the strategies for clarity. If you aren’t really aware of your annual rate of return, check the performance section of your broker and you should have it.

Here is the annual rate of retutn for my portfolio as an example. My performance number and expectations is grounded on these numbers, and those tracked with my portfolio tracker.

High Dividend Growth Stock Strategy

This strategy focuses on dividend paying stocks with usually 10 years of dividend increases with around 10% annual dividend growth rate. Those companies tend to have a lower yield (i.e. it excludes, banks, utilities, and REITs).

Total return expectation is over 10% in the form of annual ROR. My good US holdings have close to 20% ROR for example.

Dividend Income Stock Strategy

This strategy focuses on dividend stocks with a yield around 4% that is stable and offers a dividend growth of 6%. I also focus on stocks with 10 years of dividend growth with the exception of the banks.

Total return expectation is under 10% and close to 8% in the form of annual ROR.

Dividend Growth vs Dividend Yield

You know this table if you follow me. I really like this table as a way to view a portfolio.

The Tax Considerations

My retirement portfolio consists of the RRSP, TFSA and taxable account for my myself and my wife. That’s a total of 6 accounts.

The RRSP and TFSA both follow the high dividend growth strategy while the taxable account follows the divident income stock strategy.

From a tax perspective, I pay no taxes today when investing in my RRSP and TFSA but I pay tax on the dividend income earned in my taxable account.

I could avoid a lot of the dividend tax in my taxable account by swapping the strategy as I would swap the 4% yield for the 1% yield investment, but I won’t do it as it would interfer with my long term goals.

For the record, I am very aware of this, and here is my logic. You are very welcome to disagree but note that my decision is grounded in numbers based on my ROR.

1. RRSP tax is about withdrawals. It doesn’t matter how the money is made. Once you withdraw, you pay regular tax as income. The goal for this account is to grow the account as big as possible.

   To do that, you need high total return and therefore it uses the high dividend growth stock strategy. My withdrawal plan is not figured out yet but it’s easy to switch it to dividend income stocks. I would probably switch to covered call ETFs in this account following the work I am doing in my corp account.

   My RRSP, as opposed to my spouse, is nearly all in USD. Today, I could swap it all and profit from the exchange rate but that would be shortsighted …

2. The TFSA is about no taxes whatsoever. Until I am actively withdrawing from this account to pay bills, this account has to be as big as possible. I aim for $1M, so I have to be aggressive to reach that without any crazy investments (i.e. no crypto). As such, it also focuses on a high dividend growth stock strategy.

   A dividend income strategy would cap the total return and require more years. While I could save on taxes, the tax savings doesn’t offset the growth I would miss. Same deal here, covered call ETFs over simple dividend stocks and it’s income time.

3. The non-registered account tax consideration is broad as it covers everything. In general, you try to avoid it. The thing is, for a while I thought I could swap from a high dividend growth stock strategy to dividend income stock strategy over a few months when I am ready since it’s just about selling one stock and buying another.

   The reality is that you might not find the yield you want from the companies you want to hold overnight and the markets might be in various state. When I realized that, I decided I wanted to build my $50K dividend account now. That also meant paying taxes on dividend now.

   Once you stop earning a regular income, you can then start avoiding taxes on the $50K, but you also need to think about the RRSP/RRIF withdrawals.

I won’t be able to avoid taxes, and the game isn’t about avoiding taxes either, but to be ahead overall. I find some investors are so obsessed with not paying taxes, they lose sight of the reasons why they invest which is to make money.

The same logic applies to why I am holding US high growth dividend stocks in my TFSA. I pay US witholding taxes (15%) on the dividends in my TFSA but it’s nothing compared to the money I make from those stocks.

You can see my TFSA progress below. This year is a step back, but it’s a long game.

Retirement Income Strategy

In order to reach FIRE, I want to be in a position to earn dividends for free from my taxable account and supplement it from my $1M TFSA

Will I achieve that? Maybe? Maybe not? However, I am working towards that. That’s the plan. As CFO for the family, that’s the financial plan in place and the investment strategies are geared towards that.

I intend to use RRSP income to fill up the TFSA annually at some point. Depending on the size of our TFSA, the RRSP withdrawal strategy will be adjusted.

It’s possible that for the first 10 years, I deplete my RRSP in order to let my TFSA grow to the $1M mark. Imagine being able to withdraw $50K from my TFSA tax-free and earn $50K in dividend tax-free from my taxable account.

The performance of my accounts play a significant role here. Pay attention to the ROR as that’s what helps me plot the course. I currently earn $15K in dividends from the RBC account alone; 30% of the way towards $50K.

• RBC: Dividend Income Stocks
• RBC-S: Covered Call Income Account
• Computershare: Dividend Income Stocks
• Others: High Dividend Growth Stocks