RRSPs and other investments work better together
Both registered and non-registered investments have a role to play in helping you meet your goals. Saving for retirement may be your most important goal, but it's probably not the only reason you're investing. Some of your goals are likely to be shorter-term, such as buying a car or taking a family vacation.
When your registered and non-registered investments work together effectively, your whole portfolio becomes stronger – helping you to realize your goals. Here's how.
Inside a registered plan – such as a Registered Retirement Savings Plan or Registered Education Savings Plan – investment earnings accumulate tax-free. Upon withdrawal, they are fully taxable at your marginal rate, just like employment income. Outside of registered plans, the tax treatment depends upon the type of investment income that is generated:
- Interest. This type of income is fully taxed every year.
- Dividends. Those from Canadian corporations (but not foreign companies) qualify for a tax credit that substantially reduces the tax due.
- Capital gains. These are realized, or become due, when you sell or transfer an investment for more than you paid for it. Only 50% of the increase in value of the investment is taxable. In addition, capital losses can be used to offset taxable capital gains.
- Return of capital. These distributions, which essentially give back a portion of your initial investment, are not taxable. They are subtracted from the asset's adjusted cost base, resulting in a higher capital gain (or a lower capital loss) when the asset is eventually sold or transferred.
Here are some strategies that could help make your registered and non-registered assets work together effectively.
Allocate wisely. When you have both registered and non-registered assets, it may be more efficient to hold high-taxed investments that generate interest income inside your RRSP, where they can be fully sheltered. Investments that generate tax-preferred dividends, capital gains, and return of capital may be better suited to your non-registered account. Inside an RRSP, the tax benefits don't apply.
Buy and hold. Capital gains are taxable only when realized. By adopting a buy-and-hold approach with your non-registered equities, you can defer taxation for years and even time the sale so that it falls in a year when you have little other income. Of course, buy-and-sell decisions should never be based solely on the tax implications.
Professional advice can help you build a portfolio that maximizes the benefits of both registered and non-registered investments.