Q: After I max out my RRSP and TFSA contributions, what can I invest in?—Dale
A: Congratulations on maxing out your RRSP and TFSA, Dale. Statistics show that there’s a lot of unused RRSP and TFSA room in Canada, so maxing yours out is no small feat.
Depending on your situation, there are a few other options you should consider for your savings.
Are you debt-free? If not, I’d consider paying down your remaining debt (including the mortgage) before investing. Debt repayment is an investment with a guaranteed return and that return will rise as interest rates increase. Plus your non-registered investment income is taxable, meaning you keep less of your returns compared to those in your RRSP and TFSA.
Do you have kids? Consider maxing out their RESPs to help save for their post-secondary education costs. Depending on your financial situation, if they’re over the age of 18, you might even consider making contributions to their TFSA accounts. Just remember, that money becomes their money. Kids’ TFSAs aren’t a place for you to grow your own savings tax-free and take them back in the future.
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Beyond that, non-registered investing means you need to be cognizant of the tax implications of your investments. When evaluating your investment options you need to consider investment criteria primarily and tax on your investment returns secondarily.
If you’re married and your spouse is in a lower tax bracket, you might consider saving in your spouse’s name, Dale. If he or she has earnings of their own, they should save while you pay the family expenses with your earnings. If you’re a one-income family, you might consider a spousal loan to your spouse at the Canada Revenue Agency’s prescribed interest rate (currently 1%) so that they can invest your savings in a tax sheltered account and have it taxed in their own name. Simply gifting money to your spouse won’t cut it as the income gets attributed back to you and taxed on your tax return.
Depending on your income level and source, choosing investments that yield Canadian dividends can result in tax-efficient (maybe even tax-free) income. If your income is below $85,000 and you live in Ontario, Canadian dividends will be the lowest taxed source of non-registered investment income, followed by capital gains and then foreign dividends and interest. With income over $85,000, capital gains income leapfrogs Canadian dividends for the least taxed source of investment income.
You can buy the same investments—and more—outside your RRSP and TFSA as you can inside these accounts. In other words, all the same mutual funds, ETFs, stocks, bonds and GICs are still options.
Other tax-efficient options that you might consider, Dale, include corporate class mutual funds or ETFs that result in less tax than their traditional counterparts, flow-through shares, life insurance products or direct real estate investment. Some, all or none of these might be good choices for you.
How you invest your savings should be a holistic exercise. I’d be inclined to consider your next steps based on when you might need to access your savings, your tax profile, your family situation, your estate plan and your risk tolerance.
Beyond that, make sure you don’t look at your investments in isolation. Always consider where the best place is to hold which investment within the context of your whole investment portfolio. Don’t make the mistake of looking at your asset allocation by account. Look at it overall and then put investments in the best accounts relative to your overall portfolio to maximize your returns and your net worth.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products.