Many Canadian investors know there’s a 15% withholding tax on US dividends. You can avoid this costly withholding tax if you hold US dividend stocks inside your RRSP, as there is absolutely no tax levied inside that account due to a tax agreement between the two countries.
Therefore, it is generally recommended to hold US dividend paying stocks inside RRSPs.
Recently a reader reached out and asked this question:
“Given TFSA is completely tax free, both dividend income and withdrawals, isn’t it better to hold high growth US dividend paying stocks inside TFSA and just take the 15% withholding tax hit on dividends?”
A very intriguing and interesting – and important – question indeed. Given the nature of the TFSA – no taxes on dividends and withdrawals, does it make sense to hold US dividend stocks inside a TFSA for the long term?
Since I’m a self-proclaimed spreadsheet nerd, I decided to run a few scenarios.
Does it make sense to invest US dividend stocks in TFSA?
Before getting into the different scenarios, here are a few assumptions to go over.
First, I assumed that the starting value of the portfolio is $100,000 and the investor is enrolled in a DRIP in order to obtain additional shares. To keep the math simple, I assumed no additional investment other than the initial investment of $100,000.
I ran each scenario for 25 years to see how much the dividend portfolio and dividend income would grow over this period.
To allow for easy calculation, I set the starting share price at $50.
Scenario 1 Constant growth rate
We can consider scenario 1 as the baseline. I used an initial dividend yield of 4% and ran the scenario using an annual 5% share price growth rate and a 5% dividend payout increase rate.
The investment portfolio inside an RRSP would look like this:
| Year | Value | Shares | Share Price | Dividend $ @4% yield | Div income |
| 1 | $100,000.00 | 2000 | $50.00 | $2.00 | $4,000.00 |
| 2 | $109,200.00 | 2080 | $52.50 | $2.10 | $4,368.00 |
| 3 | $119,235.38 | 2163 | $55.13 | $2.21 | $4,769.42 |
| 4 | $130,174.93 | 2249 | $57.88 | $2.32 | $5,207.00 |
| 5 | $142,092.68 | 2338 | $60.78 | $2.43 | $5,683.71 |
| 6 | $155,132.02 | 2431 | $63.81 | $2.55 | $6,205.28 |
| 7 | $169,388.09 | 2528 | $67.00 | $2.68 | $6,775.52 |
| 8 | $184,963.35 | 2629 | $70.36 | $2.81 | $7,398.53 |
| 9 | $201,968.16 | 2734 | $73.87 | $2.95 | $8,078.73 |
| 10 | $220,521.31 | 2843 | $77.57 | $3.10 | $8,820.85 |
| 11 | $240,750.63 | 2956 | $81.44 | $3.26 | $9,630.03 |
| 12 | $262,879.16 | 3074 | $85.52 | $3.42 | $10,515.17 |
| 13 | $286,977.84 | 3196 | $89.79 | $3.59 | $11,479.11 |
| 14 | $313,300.60 | 3323 | $94.28 | $3.77 | $12,532.02 |
| 15 | $342,033.18 | 3455 | $99.00 | $3.96 | $13,681.33 |
| 16 | $373,479.45 | 3593 | $103.95 | $4.16 | $14,939.18 |
| 17 | $407,760.97 | 3736 | $109.14 | $4.37 | $16,310.44 |
| 18 | $445,224.56 | 3885 | $114.60 | $4.58 | $17,808.98 |
| 19 | $486,137.09 | 4040 | $120.33 | $4.81 | $19,445.48 |
| 20 | $530,785.89 | 4201 | $126.35 | $5.05 | $21,231.44 |
| 21 | $579,612.88 | 4369 | $132.66 | $5.31 | $23,184.52 |
| 22 | $632,831.40 | 4543 | $139.30 | $5.57 | $25,313.26 |
| 23 | $690,946.58 | 4724 | $146.26 | $5.85 | $27,637.86 |
| 24 | $754,366.23 | 4912 | $153.58 | $6.14 | $30,174.65 |
| 25 | $823,690.53 | 5108 | $161.25 | $6.45 | $32,947.62 |
At the end of 25 years, the RRSP portfolio has a value of $823,690.53 and generates a dividend income of $32,947.62 per year. Not bad for an initial investment of $100,000!
In comparison, the investment portfolio inside a TFSA would look like this:
| Year | Value | Shares | Share Price | Dividend $ @ 4% yield | Div income | net div -15% withholding |
| 1 | $100,000.00 | 2000 | $50.00 | $2.00 | $4,000.00 | $3,400.00 |
| 2 | $108,570.00 | 2068 | $52.50 | $2.10 | $4,342.80 | $3,691.38 |
| 3 | $117,857.25 | 2138 | $55.13 | $2.21 | $4,714.29 | $4,007.15 |
| 4 | $127,917.56 | 2210 | $57.88 | $2.32 | $5,116.70 | $4,349.20 |
| 5 | $138,871.59 | 2285 | $60.78 | $2.43 | $5,554.86 | $4,721.63 |
| 6 | $150,728.85 | 2362 | $63.81 | $2.55 | $6,029.15 | $5,124.78 |
| 7 | $163,625.68 | 2442 | $67.00 | $2.68 | $6,545.03 | $5,563.27 |
| 8 | $177,646.43 | 2525 | $70.36 | $2.81 | $7,105.86 | $6,039.98 |
| 9 | $192,807.94 | 2610 | $73.87 | $2.95 | $7,712.32 | $6,555.47 |
| 10 | $209,274.18 | 2698 | $77.57 | $3.10 | $8,370.97 | $7,115.32 |
| 11 | $227,149.36 | 2789 | $81.44 | $3.26 | $9,085.97 | $7,723.08 |
| 12 | $246,545.42 | 2883 | $85.52 | $3.42 | $9,861.82 | $8,382.54 |
| 13 | $267,672.39 | 2981 | $89.79 | $3.59 | $10,706.90 | $9,100.86 |
| 14 | $290,578.53 | 3082 | $94.28 | $3.77 | $11,623.14 | $9,879.67 |
| 15 | $315,403.10 | 3186 | $99.00 | $3.96 | $12,616.12 | $10,723.71 |
| 16 | $342,399.47 | 3294 | $103.95 | $4.16 | $13,695.98 | $11,641.58 |
| 17 | $371,634.40 | 3405 | $109.14 | $4.37 | $14,865.38 | $12,635.57 |
| 18 | $403,395.22 | 3520 | $114.60 | $4.58 | $16,135.81 | $13,715.44 |
| 19 | $437,884.37 | 3639 | $120.33 | $4.81 | $17,515.37 | $14,888.07 |
| 20 | $475,319.33 | 3762 | $126.35 | $5.05 | $19,012.77 | $16,160.86 |
| 21 | $515,933.74 | 3889 | $132.66 | $5.31 | $20,637.35 | $17,541.75 |
| 22 | $560,117.78 | 4021 | $139.30 | $5.57 | $22,404.71 | $19,044.00 |
| 23 | $608,015.44 | 4157 | $146.26 | $5.85 | $24,320.62 | $20,672.52 |
| 24 | $660,070.46 | 4298 | $153.58 | $6.14 | $26,402.82 | $22,442.40 |
| 25 | $716,617.21 | 4444 | $161.25 | $6.45 | $28,664.69 | $24,364.99 |
At the end of 25 years, the TFSA portfolio has a value of $716,617.21 and generates a dividend income of $24,364.99 per year. The TFSA portfolio has a lower value and generates a lower dividend income compared to the RRSP portfolio because of the 15% withholding tax. This is a good example of why fees can take a hit on your overall return over time (hence we want to stay away from high fee mutual funds and index ETFs).
Using Wealthsimple’s tax calculator, I wanted to see the actual net income between RRSP and TFSA. Since there’s no tax on TFSA withdrawals, you’d get exactly $24,364.99 of dividends per year. On the other hand, RRSP withdrawals are taxed as working income.
- Total Income (RRSP): $32,947.62
- Total tax: $5,443.00
- Net income (RRSP): 27,504.62
In this scenario, you’d end up with more money in the RRSP.
Scenario 2
For scenario 2, I increased the share price return from 5% to 8% and kept the annual dividend growth rate at 5%. I also kept the initial dividend yield at 4%.
The investment portfolio inside an RRSP looks like this:
| Year | Value | Shares | Share Price | Dividend $ @ 4% yield | Div income |
| 1 | $100,000.00 | 2000 | $50.00 | $2.00 | $4,000.00 |
| 2 | $112,320.00 | 2080 | $54.00 | $2.10 | $4,368.00 |
| 3 | $125,971.20 | 2160 | $58.32 | $2.21 | $4,762.80 |
| 4 | $141,150.73 | 2241 | $62.99 | $2.32 | $5,188.48 |
| 5 | $158,020.79 | 2323 | $68.02 | $2.43 | $5,647.24 |
| 6 | $176,760.17 | 2406 | $73.47 | $2.55 | $6,141.47 |
| 7 | $197,486.51 | 2489 | $79.34 | $2.68 | $6,671.00 |
| 8 | $220,483.49 | 2573 | $85.69 | $2.81 | $7,240.94 |
| 9 | $245,896.08 | 2657 | $92.55 | $2.95 | $7,851.20 |
| 10 | $273,963.58 | 2741 | $99.95 | $3.10 | $8,504.38 |
| 11 | $305,056.10 | 2826 | $107.95 | $3.26 | $9,206.51 |
| 12 | $339,370.06 | 2911 | $116.58 | $3.42 | $9,957.60 |
| 13 | $377,221.88 | 2996 | $125.91 | $3.59 | $10,760.77 |
| 14 | $418,958.04 | 3081 | $135.98 | $3.77 | $11,619.37 |
| 15 | $464,957.75 | 3166 | $146.86 | $3.96 | $12,536.93 |
| 16 | $515,636.09 | 3251 | $158.61 | $4.16 | $13,517.19 |
| 17 | $571,447.23 | 3336 | $171.30 | $4.37 | $14,564.14 |
| 18 | $632,888.09 | 3421 | $185.00 | $4.58 | $15,681.99 |
| 19 | $700,302.42 | 3505 | $199.80 | $4.81 | $16,870.40 |
| 20 | $774,452.56 | 3589 | $215.79 | $5.05 | $18,138.45 |
| 21 | $855,984.78 | 3673 | $233.05 | $5.31 | $19,491.12 |
| 22 | $945,353.97 | 3756 | $251.69 | $5.57 | $20,928.15 |
| 23 | $1,043,543.93 | 3839 | $271.83 | $5.85 | $22,460.15 |
| 24 | $1,151,100.45 | 3921 | $293.57 | $6.14 | $24,086.89 |
| 25 | $1,269,187.32 | 4003 | $317.06 | $6.45 | $25,820.15 |
At the end of 25 years, the RRSP portfolio would be worth $1,269,187.32, generating a dividend income of $25,820.15 per year.
On the other hand, the TFSA portfolio would look like this:
| Year | Value | Shares | Share Price | Dividend $ @ 4% yield | Div income | net div -15% withholding |
| 1 | $100,000.00 | 2000 | $50.00 | $2.00 | $4,000.00 | $3,400.00 |
| 2 | $111,672.00 | 2068 | $54.00 | $2.10 | $4,342.80 | $3,691.38 |
| 3 | $124,571.52 | 2136 | $58.32 | $2.21 | $4,709.88 | $4,003.40 |
| 4 | $138,820.26 | 2204 | $62.99 | $2.32 | $5,102.81 | $4,337.39 |
| 5 | $154,551.55 | 2272 | $68.02 | $2.43 | $5,523.26 | $4,694.77 |
| 6 | $171,984.85 | 2341 | $73.47 | $2.55 | $5,975.55 | $5,079.22 |
| 7 | $191,218.36 | 2410 | $79.34 | $2.68 | $6,459.26 | $5,490.37 |
| 8 | $212,428.52 | 2479 | $85.69 | $2.81 | $6,976.40 | $5,929.94 |
| 9 | $235,808.51 | 2548 | $92.55 | $2.95 | $7,529.11 | $6,399.75 |
| 10 | $261,569.76 | 2617 | $99.95 | $3.10 | $8,119.65 | $6,901.70 |
| 11 | $289,943.63 | 2686 | $107.95 | $3.26 | $8,750.42 | $7,437.86 |
| 12 | $321,066.69 | 2754 | $116.58 | $3.42 | $9,420.55 | $8,007.47 |
| 13 | $355,313.80 | 2822 | $125.91 | $3.59 | $10,135.81 | $8,615.44 |
| 14 | $392,985.63 | 2890 | $135.98 | $3.77 | $10,899.05 | $9,264.19 |
| 15 | $434,410.94 | 2958 | $146.86 | $3.96 | $11,713.28 | $9,956.28 |
| 16 | $479,790.58 | 3025 | $158.61 | $4.16 | $12,577.52 | $10,690.89 |
| 17 | $529,650.73 | 3092 | $171.30 | $4.37 | $13,498.90 | $11,474.06 |
| 18 | $584,232.85 | 3158 | $185.00 | $4.58 | $14,476.39 | $12,304.93 |
| 19 | $644,158.34 | 3224 | $199.80 | $4.81 | $15,517.88 | $13,190.20 |
| 20 | $709,932.82 | 3290 | $215.79 | $5.05 | $16,627.33 | $14,133.23 |
| 21 | $781,875.56 | 3355 | $233.05 | $5.31 | $17,803.63 | $15,133.08 |
| 22 | $860,533.87 | 3419 | $251.69 | $5.57 | $19,050.41 | $16,192.85 |
| 23 | $946,773.51 | 3483 | $271.83 | $5.85 | $20,377.37 | $17,320.76 |
| 24 | $1,041,010.50 | 3546 | $293.57 | $6.14 | $21,783.25 | $18,515.76 |
| 25 | $1,144,266.06 | 3609 | $317.06 | $6.45 | $23,278.77 | $19,786.96 |
At the end of 25 years, the TFSA portfolio would be worth $1,144,266.06 and generate a dividend income of $19,786.96 per year.
The net income looks like this:
- Total Income (RRSP): $25,820.15
- Total tax: $3,598
- Net income (RRSP): $22,222.15
The quick tax calculation determined that the RRSP would win for scenario 2.
Scenario 3
For scenario 3, I changed the growth rates a bit. The share price would grow at a rate of 5% a year while dividends would grow at 7% a year.
The RRSP portfolio looks like this:
| Year | Value | Shares | Share Price | Dividend $ @ 4% yield | Div income |
| 1 | $100,000.00 | 2000 | $50.00 | $2.00 | $4,000.00 |
| 2 | $109,200.00 | 2080 | $52.50 | $2.14 | $4,451.20 |
| 3 | $119,290.50 | 2164 | $55.13 | $2.29 | $4,955.13 |
| 4 | $130,406.46 | 2253 | $57.88 | $2.45 | $5,520.04 |
| 5 | $142,700.43 | 2348 | $60.78 | $2.62 | $6,155.50 |
| 6 | $156,280.68 | 2449 | $63.81 | $2.81 | $6,869.70 |
| 7 | $171,264.22 | 2556 | $67.00 | $3.00 | $7,671.73 |
| 8 | $187,847.91 | 2670 | $70.36 | $3.21 | $8,574.87 |
| 9 | $206,178.91 | 2791 | $73.87 | $3.44 | $9,590.92 |
| 10 | $226,493.92 | 2920 | $77.57 | $3.68 | $10,736.60 |
| 11 | $249,057.99 | 3058 | $81.44 | $3.93 | $12,031.10 |
| 12 | $274,081.88 | 3205 | $85.52 | $4.21 | $13,492.10 |
| 13 | $301,883.45 | 3362 | $89.79 | $4.50 | $15,143.74 |
| 14 | $332,817.07 | 3530 | $94.28 | $4.82 | $17,013.51 |
| 15 | $367,277.31 | 3710 | $99.00 | $5.16 | $19,132.72 |
| 16 | $405,702.83 | 3903 | $103.95 | $5.52 | $21,537.00 |
| 17 | $448,580.73 | 4110 | $109.14 | $5.90 | $24,266.79 |
| 18 | $496,451.17 | 4332 | $114.60 | $6.32 | $27,367.97 |
| 19 | $549,912.49 | 4570 | $120.33 | $6.76 | $30,892.58 |
| 20 | $609,753.08 | 4826 | $126.35 | $7.23 | $34,906.72 |
| 21 | $676,856.24 | 5102 | $132.66 | $7.74 | $39,486.26 |
| 22 | $752,070.60 | 5399 | $139.30 | $8.28 | $44,709.79 |
| 23 | $836,478.30 | 5719 | $146.26 | $8.86 | $50,674.94 |
| 24 | $931,439.58 | 6065 | $153.58 | $9.48 | $57,502.63 |
| 25 | $1,038,320.93 | 6439 | $161.25 | $10.14 | $65,321.94 |
The TFSA portfolio looks like this:
| Year | Value | Shares | Share Price | Dividend $ @ 4% yield | Div income | net div -15% withholding |
| 1 | $100,000.00 | 2000 | $50.00 | $2.00 | $4,000.00 | $3,400.00 |
| 2 | $108,570.00 | 2068 | $52.50 | $2.14 | $4,425.52 | $3,761.69 |
| 3 | $117,912.38 | 2139 | $55.13 | $2.29 | $4,897.88 | $4,163.20 |
| 4 | $128,149.09 | 2214 | $57.88 | $2.45 | $5,424.49 | $4,610.82 |
| 5 | $139,357.79 | 2293 | $60.78 | $2.62 | $6,011.31 | $5,109.61 |
| 6 | $151,686.06 | 2377 | $63.81 | $2.81 | $6,667.73 | $5,667.57 |
| 7 | $165,166.79 | 2465 | $67.00 | $3.00 | $7,398.60 | $6,288.81 |
| 8 | $179,968.14 | 2558 | $70.36 | $3.21 | $8,215.18 | $6,982.90 |
| 9 | $196,279.96 | 2657 | $73.87 | $3.44 | $9,130.44 | $7,760.88 |
| 10 | $214,238.43 | 2762 | $77.57 | $3.68 | $10,155.65 | $8,632.30 |
| 11 | $233,990.71 | 2873 | $81.44 | $3.93 | $11,303.25 | $9,607.76 |
| 12 | $255,695.73 | 2990 | $85.52 | $4.21 | $12,587.01 | $10,698.96 |
| 13 | $279,704.62 | 3115 | $89.79 | $4.50 | $14,031.15 | $11,926.48 |
| 14 | $306,135.14 | 3247 | $94.28 | $4.82 | $15,649.53 | $13,302.10 |
| 15 | $335,400.41 | 3388 | $99.00 | $5.16 | $17,472.15 | $14,851.33 |
| 16 | $367,762.39 | 3538 | $103.95 | $5.52 | $19,522.91 | $16,594.47 |
| 17 | $403,504.37 | 3697 | $109.14 | $5.90 | $21,828.30 | $18,554.05 |
| 18 | $443,047.14 | 3866 | $114.60 | $6.32 | $24,423.96 | $20,760.37 |
| 19 | $486,979.40 | 4047 | $120.33 | $6.76 | $27,357.17 | $23,253.60 |
| 20 | $535,713.44 | 4240 | $126.35 | $7.23 | $30,668.15 | $26,067.93 |
| 21 | $589,828.08 | 4446 | $132.66 | $7.74 | $34,409.23 | $29,247.85 |
| 22 | $649,965.07 | 4666 | $139.30 | $8.28 | $38,639.73 | $32,843.77 |
| 23 | $716,835.14 | 4901 | $146.26 | $8.86 | $43,426.80 | $36,912.78 |
| 24 | $791,378.10 | 5153 | $153.58 | $9.48 | $48,855.90 | $41,527.52 |
| 25 | $874,485.85 | 5423 | $161.25 | $10.14 | $55,014.89 | $46,762.66 |
The RRSP portfolio generates a dividend income of $65,321.94 per year while the TFSA portfolio generates a dividend income of $46,762.66.
Running through the tax calculator we found that $15,120 goes to taxes, resulting in a net income from RRSP of $50,201.94. Once again RRSP wins over TFSA in this scenario.
Scenario 4 High growth rates
For fun, I decided to use perhaps unreasonable growth rates for share price and dividend growth at 15% and 20% respectively. I reduce the initial yield to 1% to mimic a low yield high dividend growth stock.
The investment portfolio inside an RRSP looks like this:
| Year | Value | Shares | Share Price | Dividend $ @ 1% yield | Div income |
| 1 | $100,000.00 | 2000 | $50.00 | $0.50 | $1,000.00 |
| 2 | $116,150.00 | 2020 | $57.50 | $0.60 | $1,212.00 |
| 3 | $134,961.13 | 2041 | $66.13 | $0.72 | $1,469.52 |
| 4 | $156,878.26 | 2063 | $76.04 | $0.86 | $1,782.43 |
| 5 | $182,421.35 | 2086 | $87.45 | $1.04 | $2,162.76 |
| 6 | $212,198.18 | 2110 | $100.57 | $1.24 | $2,625.18 |
| 7 | $247,034.89 | 2136 | $115.65 | $1.49 | $3,189.03 |
| 8 | $287,681.15 | 2163 | $133.00 | $1.79 | $3,875.21 |
| 9 | $335,268.91 | 2192 | $152.95 | $2.15 | $4,712.60 |
| 10 | $390,836.06 | 2222 | $175.89 | $2.58 | $5,732.52 |
| 11 | $455,934.36 | 2254 | $202.28 | $3.10 | $6,978.09 |
| 12 | $532,233.58 | 2288 | $232.62 | $3.72 | $8,500.02 |
| 13 | $621,699.06 | 2324 | $267.51 | $4.46 | $10,360.51 |
| 14 | $726,644.22 | 2362 | $307.64 | $5.35 | $12,635.90 |
| 15 | $850,146.05 | 2403 | $353.79 | $6.42 | $15,426.28 |
| 16 | $995,162.64 | 2446 | $406.85 | $7.70 | $18,842.79 |
| 17 | $1,165,959.56 | 2492 | $467.88 | $9.24 | $23,036.58 |
| 18 | $1,367,218.59 | 2541 | $538.06 | $11.09 | $28,187.45 |
| 19 | $1,604,477.56 | 2593 | $618.77 | $13.31 | $34,517.15 |
| 20 | $1,884,286.57 | 2648 | $711.59 | $15.97 | $42,299.15 |
| 21 | $2,215,210.84 | 2707 | $818.33 | $19.17 | $51,889.94 |
| 22 | $2,606,780.24 | 2770 | $941.08 | $23.00 | $63,717.09 |
| 23 | $3,070,307.18 | 2837 | $1,082.24 | $27.60 | $78,309.92 |
| 24 | $3,620,462.50 | 2909 | $1,244.57 | $33.12 | $96,356.80 |
| 25 | $4,273,738.81 | 2986 | $1,431.26 | $39.75 | $118,688.79 |
So, at the end of 25 years, the RRSP portfolio has a value of $4,273,738.81 and generates a dividend income of $118,688.79 per year. Wow, talk about the magic of compounding by enrolling in dividend reinvestment plans!
The TFSA portfolio would look like this:
| Year | Value | Shares | Share Price | Dividend $ @ 1% yield | Div income | net div -15% withholding |
| 1 | $100,000.00 | 2000 | $50.00 | $0.50 | $1,000.00 | $850.00 |
| 2 | $115,977.50 | 2017 | $57.50 | $0.60 | $1,210.20 | $1,028.67 |
| 3 | $134,498.25 | 2034 | $66.13 | $0.72 | $1,464.48 | $1,244.81 |
| 4 | $156,041.78 | 2052 | $76.04 | $0.86 | $1,772.93 | $1,506.99 |
| 5 | $181,109.60 | 2071 | $87.45 | $1.04 | $2,147.21 | $1,825.13 |
| 6 | $210,287.39 | 2091 | $100.57 | $1.24 | $2,601.54 | $2,211.31 |
| 7 | $244,259.22 | 2112 | $115.65 | $1.49 | $3,153.20 | $2,680.22 |
| 8 | $283,957.12 | 2135 | $133.00 | $1.79 | $3,825.05 | $3,251.29 |
| 9 | $330,221.52 | 2159 | $152.95 | $2.15 | $4,641.65 | $3,945.40 |
| 10 | $384,152.09 | 2184 | $175.89 | $2.58 | $5,634.48 | $4,789.31 |
| 11 | $447,236.41 | 2211 | $202.28 | $3.10 | $6,844.96 | $5,818.22 |
| 12 | $520,835.22 | 2239 | $232.62 | $3.72 | $8,317.98 | $7,070.28 |
| 13 | $606,985.87 | 2269 | $267.51 | $4.46 | $10,115.32 | $8,598.02 |
| 14 | $707,878.22 | 2301 | $307.64 | $5.35 | $12,309.57 | $10,463.13 |
| 15 | $826,088.65 | 2335 | $353.79 | $6.42 | $14,989.75 | $12,741.29 |
| 16 | $964,648.66 | 2371 | $406.85 | $7.70 | $18,265.02 | $15,525.27 |
| 17 | $1,127,125.43 | 2409 | $467.88 | $9.24 | $22,269.31 | $18,928.91 |
| 18 | $1,317,716.78 | 2449 | $538.06 | $11.09 | $27,166.89 | $23,091.86 |
| 19 | $1,541,362.75 | 2491 | $618.77 | $13.31 | $33,159.36 | $28,185.46 |
| 20 | $1,804,588.64 | 2536 | $711.59 | $15.97 | $40,510.06 | $34,433.55 |
| 21 | $2,114,556.63 | 2584 | $818.33 | $19.17 | $49,532.18 | $42,102.35 |
| 22 | $2,479,735.00 | 2635 | $941.08 | $23.00 | $60,611.75 | $51,519.98 |
| 23 | $2,910,136.06 | 2689 | $1,082.24 | $27.60 | $74,224.66 | $63,090.96 |
| 24 | $3,418,841.70 | 2747 | $1,244.57 | $33.12 | $90,990.77 | $77,342.15 |
| 25 | $4,020,406.00 | 2809 | $1,431.26 | $39.75 | $111,653.32 | $94,905.32 |
At the end of 25 years, the TFSA portfolio for scenario 3 would worth $4,020,406, generating $94,905.32 per year, definitely enough for someone to live off dividends.
Interestingly, unlike the previous scenarios, TFSA wins when we take income tax into consideration.
- Total Income (RRSP): $118,688.79
- Total tax: $32,395
- Net income (RRSP): $86,293.79
In other words, for the TFSA to win over the RRSP, the investment portfolio would need to generate A LOT of income. I would also argue that scenario 4 isn’t realistic due to the very high growth rates I used.
So does this help us conclude that it is always best to invest US dividend paying stocks inside an RRSP? Well, not exactly, because we aren’t considering selling the principal and doing any withdrawals from the portfolio.
What happens if we were to withdraw 4% from both RRSP and TFSA portfolios on top of the dividend income?
RRSP vs. TFSA – 4% withdrawals plus dividend income
Thanks to the spreadsheet and tax calculator, it is easy to compare the different scenarios with a 4% withdrawal plus dividend income
Here’s the summary for the four scenarios.
| Scenario 1 | Scenario 2 | Scenario 3 | Scenario 4 | |
| RRSP value | $823,690.53 | $1,269,187.32 | $1,038,320.93 | $4,273,738.81 |
| TFSA value | $716,617.21 | $1,144,266.06 | $874,485.85 | $4,020,406.00 |
| RRSP income @ 4% withdrawal | $32,947.62 | $50,767.49 | $41,532.84 | $170,949.55 |
| TFSA income @ 4% withdrawal | $28,664.69 | $45,770.64 | $34,979.43 | $160,816.24 |
| RRSP withdrawal + div amount | $65,895.24 | $76,587.64 | $106,854.78 | $289,638.35 |
| TFSA withdrawal + div net income | $53,029.67 | $65,557.60 | $81,742.09 | $255,721.56 |
| RRSP withdrawal + div net income | $50,613.00 | $58,291.00 | $78,991.00 | $175,804.00 |
| Who wins | TFSA | TFSA | TFSA | TFSA |
What’s interesting is that the TFSA comes out ahead of the RRSP in all four scenarios. I was not expecting this at all. I would have thought that RRSP would come out ahead in scenarios 1 and 2 when the income resulting from the 4% withdrawal is relatively low.
The buts… Some things to consider
Is holding US dividend stocks inside RRPs to avoid the 15% withholding tax the wrong recommendation? Before we jump to this conclusion, let’s step back and consider a few factors.
- I started with an initial investment of $100,000. It may not be realistic that someone would just have $100k in their TFSA contribution room.
- Considering the TFSA contribution room is around $6,500 a year and the RRSP contribution room is usually larger, you can invest more money inside an RRSP than TFSA.
- For all 4 scenarios, the calculations were extremely simplistic in the sense that I used constant rates for share price and dividend growth. In the real world, it is nearly impossible to expect the exact same growth rates over 25 years. Bull and bear markets will come and go during the 25-year period.
- Dripping additional shares played a huge role in the growth of the portfolio value and dividend income. If the investor can’t drip at all, the differences between TFSA and RRSP may be smaller.
- Finally, I did not consider the potential tax reduction as a result of contributing money to an RRSP. If you get a tax refund as a result of RRSP contributions and invest that money, the RRSP may win over TFSA over a course of 25 years.
Summary – Does it make sense to invest US dividend stocks in a TFSA?
Does it make sense to invest US dividend stocks in TFSA? Well, I think there are so many different factors to consider, it’s really difficult to have a firm conclusion. For most Canadians, for the most part, it makes sense to hold US dividend stocks in an RRSP to avoid the 15% withholding tax.
If you believe you have found the next multi-bagger US dividend paying stock and it will continue to increase dividend payout at an impressive rate, it may make sense to hold this dividend paying stock inside your TFSA for the long term, assuming you have a meaningful contribution room. Otherwise, the RRSP probably makes more sense due to the higher contribution amount (assuming you’re making more than $36,112 per year).
For those Canadians that have a very sizable RRSP already, investing US dividend stocks in the TFSA makes a lot of sense as a way to reduce the potential withdrawal tax implications. These Canadians may also want to consider early withdrawals to reduce the RRSP portfolio over time.
One important thing to remember, if you’re wondering whether it’s better to hold US dividend stocks in the TFSA or the RRSP, you’re probably doing quite well with your investment already. This is a good problem to have.
For most people, I think the general recommendation of holding US dividend stocks in an RRSP makes a lot of sense.
Keep it simple. Happy investing everyone!
I really enjoyed this post, thank-you. It’s the most informative on the internet for this conversation. I have 30 dividend stocks in my TSFA portfolio, ranging between 2.5-5% in weighed allocation. I have 6 US dividend stocks out of the 30, with a US weighted allocation between 18-20% of my overall portfolio. I think for all of the reasons mentioned above, having 20% of my TSFA allocation exposed to the US markets is responsible. All 6 have increased Dividends on an annual basis for 35+ years as well, and the 3 year forecast for stock growth is all north of 10% annually. (Hard to make that claim for my CAD dividend stocks). So yes, I am giving up the 15% hit in dividends, BUT, I am exposing my portfolio to a different market, and that market tends to grow better over time. It’s a well diversified strategy. I plan on living off my RRSPs from 55-70. I will have about 1.2m in RRSPs. When I am 70, my TSFA will have compounded to about 1m, with about 50k in annual dividends. I don’t need to touch the capital, but when i do it will be 100% tax free. All good problems to have.
Thank you Stephen. Growth is important and investing in TFSA allows you to harvest that growth tax free. 🙂
There’s one thing to note, someone who is in the lower tax bracket. Maxing out the TFSA should be priority over the RRSP and in that scenario, I prefer someone having some US holding or at the very least some US exposure through ETF’s, bite the 15%, but at least you get the growth from the US (or international market if you buy an ETF like XEQT) in the TFSA than not at all.
In my situation, my tax accountant told me that there’s not many advantages in prioritizing the RRSP over TFSA for the income I make. So in that situation, I prefer maximizing the TFSA and invest in the US market in the TFSA even though I’ll have to bite the bullet with the 15% tax. FYI, I hold 2 US holdings in my TFSA, AMZN and VGG (Basically VIG ETF, but in CAD currency).
That’s a very good point on TFSA is great for someone in the lower tac bracket.
Hey out of curiosity, If i have a pension when i retire would it make more sense to utilize dividends in my TSFA as when withdrawn they will not be added to my personal income during retirement?
Yes, always try utilize TFSA for tax reasons.
Hi
Does the withholding tax apply to US dividend etfs in CDN dollar as well? and can you suggest some US dividend etfs? Also what if you are receiving dividendss from international companies (non US) ? What are the tax implications?
That’s a complicated question as it depends on how the ETFs are constructed. Please see here for more info – https://www.tawcan.com/dividend-tax-drags-foreign-withholding-taxes/
For safety I have TFSA and RRSP all in US$ . It’s like having a US$ printing press churning out US$. There is so much diversification in US and world wide stocks to hold US$ for growth and dividends.
For long run the US$ will be dominant . In addition the C$ will likely not do as well as US$.
For non registered I have mostly C$ dividend payers .
Honestly , safe Canadian stocks that I invest are limited to financials, insurance, telecoms , energy , NTR and BAM.
Interesting that you have TFSA and RRSP all in US$. 🙂
Well, to be clear XAW, or any other Canadian domiciled ETF that invests in US equities that pay a dividend will always be impacted by the 15% withholding tax on US dividends since US dividends paid to the ETF are automatically subjected to the 15% withholding tax. It doesn’t matter if I own XAW in my RSP or my TFSA – the result will be identical.
Another opportunity is to compare say holding VOO in your RSP or your TFSA. I think this is a more interesting comparison.. CAGR of VOO is 12.33% since Oct 2010 and today’s yield is 1.6%. I’d like to see how Bob’s chart plays out with those numbers.
Interestingly enough though, if one decided buying VOO for their RSP wasn’t worth the trouble (US dollars / Norbert’s gambit….etc.) and they decided to buy VFV instead (which, just like XAW is automatically subject to the 15% withholding fee) they would actually do better. Since Dec 2012 CAGR for VOO: 13.05% VFV: 16.05%
How can this be when VFV only holds VOO and VFV is subject to the 15% withholding fee? – well the answer is the Canadian dollar has not done well over that period so VFV has benefited from the weaker Canadian dollar.
Mostly, the point of my comment is that it isn’t enough to only measure the effect of the 15% withholding tax. It’s also relevant to know that Canadian domiciled ETFs behave the same either way, and also the dollar exchange rate may (and has) played a much larger role in overall total returns.
And, as Bob pointed out, you have to know the tax implications of using your RSP to avoid the 15% withholding tax.
Hi James,
Good point. As pointed out in the post, there are a lot of complicated details, especially when we start dealing with ETFs and how the funds are constructed. This point is supposed to provide a simplistic analysis.
Different focus with RRIF for both myself & husband. Now I contemplate the best way to move Msoft from our RRIF to TFSA via short term in our joint non-registered. I recently bought some Cad bank stock in TFSA, I’ll be moving these stocks to our joint N/R this fall. This will leave room for sizable stock move from each RRIF to joint N/R by Dec 15, then in Jan move allowed amount in kind to each TFSA. Confused yet?? Most of the stocks in our RRIFs are CAD dividend stocks aiming to our joint account. We’re in our 70’s and planning to make it another 20 years. I remind myself to be cautious. Thanks for all your contributions – enjoyable reads.
Makes sense to move RRIF/RRSP into TFSA, that’s what we are planning to do eventually too. Too bad TFSA contribution room is limited. 🙂
Thanks so much for taking the time to do this analysis and break it down for all to understand. I always find your blog interesting and informative even if the topic doesn’t relate to me specifically. Please keep writing and giving us something to think about!
You’re very welcome Debbie.
This is an amazing post. I was surprised to see the results of the various scenarios. This does open my eyes to the differences between RRSP and TFSA.
Thanks for doing all the calculations and posting this very engaging post.
You’re welcome.
Hi Bob
That was simply amazing!! I really enjoyed all the scenarios and updates. I know everyone preaches that one should invest US stocks only in RRSP but its not always possible and as you have pointed out sometimes it may make sense to invest in TFSA.
I have one more question for you – how about the same scenario for investing in non-registered account (other than RRSP/TFSA).
Thanks
Thank you Raj. I like doing this quantitative analysis.
TFSA typically would win over non-registered accounts but the contribution room is a consideration (TFSA has a limit while non-registered doesn’t).
LOL so there is no clear answer on having my TFSA almost all full of XAW then …. great post Bob, thanks for putting the work into this.
Hi Chris,
Yea, no clear cut answer unfortunately.
Interesting analysis, Bob. I was kind of wondering the same thing about holding US dividend paying stocks in the TFSA and appreciate you taking the time to run the different scenarios. You’ve basically confirmed what my gut was telling me and that is that while you may save on the 15% withholding tax inside an RRSP, the fact that all the growth will eventually get taxed when you pull it out (since it’s only tax deferred), you’re better off holding growth investments (even at modest growth rates) in the TFSA where neither the dividend nor the capital gains get taxed when you withdraw it.
I’ve only recently come across your blog and have been enjoying reading through you past posts. Keep up the great work.
Hi Ming,
Yes, I learned a lot with this analysis too. The thing to keep in mind is that TFSA typically has a lower contribution room than RRSP.