Financial Housekeeping for Moving Abroad

The last couple weeks have been a whirlwind of selling of stuff, packing what's left, moving the packed things, saying "goodbye" to our awesome friends in Edmonton, and traveling. All this to say things have been busy.

We took a 10 day trip to visit our friends in Toronto. I've never been there before and it has a lot to offer. If you haven't been, go visit Niagara Falls (the Canadian side)! We also took in a Blue Jays game (where they stomped all over the Orioles), visited Barrie and the Flying Monkeys Brewery, and enjoyed the South Asia Festival.

While I admit Toronto is a cool city to visit, the traffic and sprawl are quite insane. Our friends were sharing prices for houses, semis, and condos in different areas of the city. My god, I don't know why anyone would ever buy there. It's a ticket to financial destruction! Not to mention poking your eyeballs out driving in endless gridlock traffic day-in and day-out. If you want to buy a house and enjoy your life with much shorter commutes, move to Calgary or Edmonton folks!

Currently we are in B.C. visiting family and friends on the west coast (where house prices and financial madness are no better than GTA). We go to B.C. twice a year on average, so this will be the less touristy part of our trip. In about a week we will be flying out of YVR en-route to Hanoi.

Daily Banking

Some of the things I've been working on between the traveling and busyness is arranging our banking accounts for our move. A few months ago I opened up a Tangerine account and shifted most of our banking to the orange folks. (I was with an Alberta credit union before.) Since Tangerine is all online and fees are low, we will be keeping this account when we are overseas.

I must say I've been very impressed with Tangerine—especially considering they are owned by a big bank (Scotia) and I otherwise try stay away from the oligarchs. Customer service over the phone has been great, the app is clean and a pleasure to use, and the process of setting up our bill payments and deposits is easy. If you are banking with the big guys and are paying monthly fees, you should seriously consider switching. If you do, a free way to say thanks to me is by using my Orange Key: 55884598S1. We will both get around $50 from Tangerine as a thank you. (You have to use the Orange Key in the sign-up process.) As an aside, thanks to everyone who used my Questrade referral code! It has paid several hundred dollars so far, helping cover the costs of webhosting this blog.

I've also opened up a Borderless account with Transferwise. This is another awesome application that will allow me to move money across linked accounts (including Tangerine) and change currencies for extremely low fees. I was hoping to get a Mastercard debit card from Transferwise sometime this year, but it seems they have quietly put that program on hold in Canada.

I anticipate my wife will be opening a local account in Vietnam for local spending (a portion of her salary is paid in Vietnamese dong). Whether or not we can move Vietnamese dong out of the country (via Transferwise), or another compatible currency like Euros or British pounds remains to be seen. I know there are problems with U.S. dollar transfers.

Investment Accounts

As I've mentioned in prior posts, my wife and I will become tax residents in Vietnam effective on the date we land in Hanoi. This is based on the Vietnam tax code and their tax agreement with Canada.

Our RRSPs look like they won't be a problem. We can continue to invest within our RRSP accounts (including Locked-in RRSPs/LIRAs) as we always have without any additional tax repercussions. Questrade allows full access for expats and non-residents. We won't make any new contributions to our RRSPs though; there won't be any income earned in Canada which we can deduct the contributions against. With no new contributions for a while, I don't need to worry about currency changes; in the coming weeks I will switch these over to U.S. dollar accounts.

Our pensions will be partly moved into LIRAs and partly paid out (the excess portion). Neither my wife nor I have received our pension packages yet, so I don't know what their impact will be on our new worth. However, I anticipate it will be relatively substantial and I will not be leaving the money in the pension plans.

The payout will be made to us as foreign residents so it will be subject to a flat 25 percent tax. This might seem high, but it is important to remember that we contributed in the 30.5 and 36 percent tax brackets. Even if we remained residents in Canada, the excess portion would be taxed as regular income less any RRSP contributions we made. It is highly likely that the payout would be taxed at rates higher than 25 percent.

Unfortunately Vietnam doesn't recognize TFSAs as being tax free. I'm not sure if or when we would return to Canada as residents, so at the end of the month I will be moving money out of our TFSAs and into our regular investment account. This means we will be shifting more money from investing in Dual Momentum towards trend investing.

I'm looking forward to this move as it will play a key part in improving our overall capital efficiency. In our regular investment account I would love to get to 90 percent bonds (mostly short-term). I'm not precisely sure how this will look as I'm trying to find the best ways to allocate capital with tools like options and futures. But I do believe it will be doable while being tax efficient.

Taxes

In order to legally leave Canada, we will be paying a sizeable tax bill. All of our assets will be deemed disposed on the day we leave and taxed at their current fair value. This means some capital gains taxes will be owing. But I suppose that's the price to pay for moving to a much lower tax jurisdiction where our taxes should be much lower going forward. Pay now, save a lot more later.

As mentioned above, we'll also be paying taxes on pension payouts. This would happen inevitably with quitting our jobs, but the costs will add up nonetheless. With RRSPs, time will be on our side. We can keep them indefinitely and let them grow, or withdraw them at a 25 percent tax at any time once we are out of Canada. For now I'll keep them in place, mindful that any gains are effectively subject to a 25 percent tax while I make up my mind.

Taxes in Vietnam will be much lower than in Canada. Particularly on investment income and returns. Using UCITS funds (mainly listed in London), we can buy bond funds and have a low 15 percent withholding tax on interest income while also eliminating estate tax exposure. In Vietnam our tax rate on the interest income will be just 5 percent. The only other investment tax we need to worry about is effectively a sell-side transaction tax of 0.1 percent on equities and publicly traded instruments.

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Using a Tax Free Savings Account (TFSA) in Retirement

The Tax Free Savings Account is still a relatively new way to save in Canada. It was introduced by the Conservatives in 2009 as tax-advantaged account unique from the RRSP.

Modeled after the Roth IRA in the U.S.A. and the (much better) ISA in the U.K., a TFSA allows you to contribute after-tax money to an account up to a specified annual limit that increases every few years with inflation. Unused room is carried forward indefinitely.

Once the money is in a TFSA account, you can invest in anything from stocks and ETFs to GICs. Or you can open a simple bank savings account in a TFSA format that earns pitiful interest.

Although the name can be confusing, the TFSA is a flexible account structure, not just a place to park your money at the bank for 0.6% interest. To invest in ETFs and stocks, you should open a self-directed TFSA with a brokerage like Questrade.

All of the investment returns earned within the account are completely exempt from all Canadian taxes, including standard income tax and investment taxes such as dividend taxes and capital gains taxes. Wisely invested, a TFSA should grow into a million dollar account over a lifetime.

As long as you are careful not to double contribute, money can be withdrawn from your TFSA account at any time without penalty. This makes the TFSA an ultimate investment account in terms of flexibility!

Withdrawals from a TFSA are not even reported on your tax return. It is as if you earned nothing at all! The benefits of this should not be understated.

TFSA Statistics

Right now the vast majority of Canadians are wasting the value of this awesome tax advantaged account.

To explain, here are some statistics on TFSAs straight from the CRA.

Canadians with TFSA Accounts:  12,731,020 (about one-half of adult Canadians)
Canadians who Maximized their TFSA:  1,249,900
Average Unused TFSA Room:  $24,191.99
Average Account Value per Holder:  $15,205.96

Even the wealthiest Canadians, those individuals earning over $250,000 per year, are ignoring the power of TFSAs. Of these wealthy Canadians who even bothered to open a TFSA, the average account value lingers around $30,560.

If you were over the age of 18 in 2009 when TFSAs were introduced, there is no reason why you shouldn't have $60,000 or more in your TFSA right now. That is $5,000 contributed every year returning 6% per year. (We have been in a bull market after all...)

Best Use for TFSAs

The TFSA should be used for one thing, and one thing only. Retirement savings! But as I will clarify later, a specific kind of retirement savings.

Any suggestion that TFSAs can be used to save for a new car, buy a house, buy new furniture or a new TV, vacations, or anything else should be dutifully ignored and even scorned.

Anyone who depletes a TFSA while they are young to buy something is a complete idiot! And count me in that category since I did exactly that with my ~$20,000 TFSA in 2011 when I bought a house.

Thanks to aggressive saving after realizing my idiocy and good investment returns, my TFSA and my wife's TFSA are both back in the $70,000 range.

The problem with making early withdrawals from your TFSA is that you lose the investment returns on the withdrawn money.

Plus, if you let the contribution room get away from you, it can become nearly impossible to catch up on your contributions.

If you take just $15,000 out of your TFSA to buy a house when you are 25, you will be $155,000 poorer at 65 years old. That's a wasted potential tax-free investment gain of $140,000.

A TFSA for Retirement

The TFSA account should be used in conjunction with an RRSP (or pension) to save for retirement. When carefully done, you can achieve amazing wealth with extremely low tax liabilities in retirement.

$1,000,000

Source: PortfolioVisualizer.com

If you would have saved just $5,500 a year ($458 per month) for the past 30 years, you would have seen your account grow to $1,000,000.

Returns since 1987 were good, but there's absolutely no reason to believe this won't happen again over the next 30 years. Your TFSA can be worth some real serious money if you invest assertively.

If you get past the constant drama of the naysayers, there is truly no better time financially to be a young saver in Canada! Ignore the mourning of those disappearing crappy workplace pension plans, the TFSA in your own hands is a much better tool.

A TFSA offers fantastic flexibility, affluence, and freedom from taxes. Three things a workplace pension cannot give you.

Effective Use of a TFSA in Retirement

In your retirement savings strategy, your TFSA will form just one component of your total retirement income.

First, there will be the fully taxable income which you cannot control to any significant degree. This includes things like government benefits and workplace pensions.

You may be surprised that this annual income is likely to be $15,000 per person, or more. If you have a larger RRSP or a workplace pension, it can be significantly higher.

By their design, the minimum seniors income after all government benefits is likely to cover the basic costs of living if you have a paid-off residence. A combined annual income of $30,000 should pay for things like utilities, food, a vehicle, and basic entertainment.

Also, after seniors tax deductions, an income of $15,000 per person will be completely tax-free in nearly every province. It may actually qualify you for additional benefits in some provinces.

A TFSA can be perfectly paired on top of this foundation of basic income to keep you completely tax-free in retirement and fully eligible for every government benefit that is accessible to you.

TFSAs should be used as a highly tax efficient way to pay for the extras, especially lump sum expenditures, without jeopardizing your benefits.

TFSAs are a very tax efficient way to pay for things like home renovations, large vacations, new vehicles, or other high cost items.

If you have a larger TFSA, one worth approximately $1,000,000, you can live a truly luxurious tax-free retirement. We know that an account this size can afford annual withdrawals of $40,000 to $50,000 a year.

If both partners in a relationship have large TFSAs, a tax-free investment income of $80,000 to $100,000 a year plus government benefits of $30,000 is a very real and foreseeable scenario for high saving Canadians.

One issue is there already have been discussions about using TFSA values when determining qualification for low income benefits.

It is all but certain sometime in the next decade or two, as TFSA values expand, TFSAs will be considered when applying for benefits. There is a reason why the CRA is tracking this stuff.

Although total net worth and lifetime tax-adjusted net worth may not necessarily be the highest when using a TFSA compared to a RRSP, the TFSA forms a very important part of your retirement savings options.

The flexibility and ease of use of TFSA's are unmatched!

Comments & Questions

All comments are moderated before being posted for public viewing. Please don't send in multiple comments if yours doesn't appear right away. It can take up to 24 hours before comments are posted.

Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.