What's the safest, most tax-efficient way for Jim to invest $500,000?

What’s the safest, most tax-efficient way for Jim to invest $500,000?

Try paying down debt

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Q: I have $500,000 coming to me soon from a property sale and am looking for the best fixed-income product to invest in. I have no immediate use for these funds but I’m hoping it can be tax efficient too. Any suggestions?

—Jim

A: Fixed income is tough these days Jim, which I’m sure is why you asked the question. Are you looking for safe fixed income or risky fixed income? I’ll guess safe, but let’s work down the list.

Consider a Guaranteed Income Certificate (GIC) as your benchmark for a safe fixed-income investment. You can get a 5 yr. GIC yielding around 3.5%. Assume that if you invest in something with a higher return your taking on more risk.

GICs are CDIC insured up to $100,000/account type meaning that if the GIC issuer goes under you will not lose your $100,000. If you’re going the GIC route you may want to spread your money around so that your maturity balances will remain under the $100,000. The issue with GICs is that you can’t cash them in whenever you want, and the interest is fully taxable.

Another safe, tax efficient investment is to pay down debt. If you owe money at 3%, then paying it down is like earning 3% after tax; it’s just like a TFSA.

Your next step up would be a bond or a bond fund. I personally think a bond fund would outperform a GIC over 5 years, but there’s no guarantee. With a bond fund you can cash it in at any time and the gain is often a combination of interest and capital gain so it is a little more tax efficient than a GIC. Consider a corporate class bond fund that aims to pay out everything as a capital gain.

There are higher risk bond funds such as a “high-income fund”, aka junk bonds. I like to joke that the investment industry couldn’t sell the “junk bond fund” so they renamed it the “high-income fund” and everyone wanted it. Hey, there is nothing wrong with high-income funds and they have done well, just know what you’re buying.

It’s been suggested that “good quality companies that pay dividends” are alternative to fixed income products. It does sound better than buy “a crappy company that pays dividends”, but really, what’s a good company, and how do you know if it will remain a good company? It’s still a stock and you’re taking a chance.

A client came to me a number of years ago with a stock that had a value of about $10/share. As the share price slowly declined she’d smile and remind me that she was still getting the dividend. Today the share price is about $1.25. Funny, she’s not feeling the dividend love.

If you want to try a riskier fixed income you could look to a Mortgage Investment Corp., or MIC which MoneySense wrote about a few years ago. These structures offer steady returns at much higher yields than traditional fixed income investments.

Finally, consider your money’s purpose. If it’s to buy another property in the near term then be safe and don’t worry about how much you can make on the $500,000. If you’re not sure when you’re going to use the money consider investing for a longer term, but before you do, look at your other assets and think about how you might deal with things if there is a dip when you need the money.

Allan Norman, M.Sc., CFP, CIM, is a financial planner with Atlantis Financial Inc. in Barrie, Ontario. 

This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning and insurance services through Atlantis Financial Inc.

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