Taking the non-registered route to retirement security
With its tax-saving benefits, the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA) are the foundation of retirement savings for most Canadians. This, however, does not preclude the role of non-registered invesments in your financial strategy as you are limited in the amount you can contribute to an RRSP or a TFSA. Additionally, recent changes in tax laws have made it more attractive to hold certain types of investments outside of those investment vehicles.
RRSP and TFSA limits
Federally imposed contribution limits restrict the amount you can contribute to a tax-deferred RRSP. Generally speaking, the dollar maximum—18 per cent of your previous year's income to a maximum of $21,000 for 2009—is reached at an annual earned income in excess of $116,667. Once your earned income exceeds that level, your RRSP may not supply you with the income you need to maintain your desired lifestyle. Contribution limits apply to the TFSA as well – Canadians aged 18 and over can contribute a maximum of $5,000 dollars, an amount that is expected to be adjusted periodically for inflation in the future.
"Your savings plan for retirement should be directed by what you feel your future retirement needs are going to be—not by the maximum limit the government sets," says Myron Knodel, CA and Director, Tax & Estate Planning in Advanced Financial Planning Support at Investors Group. "Non-registered savings can help you do that."
Tax effective savings
Outside a registered plan, however, investment income is subject to tax on an annual basis. Planning your investment choices carefully, to minimize the effect of taxation, is instrumental to maximize returns. Remember, unless you are using a leveraging strategy, generally your RRSP and TFSA contributions should be maxed-out, before investing money into non-registered assets.
Interest income earned outside of an RRSP or TFSA must be included in taxable income on the accrual basis in the year earned and is taxed at your marginal tax rate.
Capital gains. Outside an RRSP or TFSA, one-half of every dollar in capital gains you realize is subject to income tax. In addition, capital gains are taxed only when they're realized. By following a buy-and-hold approach, you may be able to defer taxes for many years and time the sale to take place in a low taxation year.
Dividends. Dividends paid to shareholders by Canadian companies qualify for the federal Dividend Tax Credit, which reduces taxes payable. This treatment applies to Canadian dividends earned through mutual fund shares or units as well as dividends paid directly to you.
Real estate related income. Real estate that produces income also offers tax advantages. Capital Cost Allowance (CCA), or depreciation, can be claimed against the rental income generated. This preferred treatment also applies to income earned indirectly through a real property mutual fund.
Benefits down the road
There are two important longer term benefits to saving outside a registered plan. First, drawing on your non-registered savings allows you to let your registered investments compound, tax-deferred (or tax-free), as long as possible. "You're not required to collapse your RRSP until the end of the year in which you turn age 71," advises Knodel. "And if you convert your RRSP to a Retirement Income Fund (RRIF), you can continue to defer much of the tax by withdrawing only the minimum amount each year." Second, money withdrawn from a non-registered account gives rise to a tax implication only to the extent that capital gains are realized when converting the account to cash. "As a result, it will not have as direct an effect on your tax and income-linked government benefits, such as Old Age Security," adds Knodel.
Talk to your Investors Group Consultant to get the full details of non-registered saving in the context of your personal retirement plans.
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This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
© Copyright 2007, Investors Group. All rights reserved. Do not reproduce without the express written consent of Investors Group.
