Part 2 – Registered Accounts: Where to Save?

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We discussed tax efficiency in our last article and will continue here. 

When looking at tax efficiency, the proper use of registered accounts (RRSPs and TFSAs) to defer, shift, and shelter investments from taxes is a key piece of the puzzle and is often not fully understood or used. If you are a business owner, in a high-income tax bracket, or have a defined benefit or defined contribution pension plan, getting the balance right can have a significant impact on your lifetime tax liability and ultimately, your wealth as measured in after-tax dollars. 

Before we dig in, let us clarify some terminology:  

The first misconception we often hear, is that RRSPs and TFSAs are “investments”, or that the TFSA is a “savings accounts”, suggesting to some that GICs and interest-bearing securities should be held there. While this is not strictly speaking, incorrect, we believe a better understanding of these two important accounts is beneficial.

RRSPs and TFSAs are registered investment accounts with the Canada Revenue Agency and should be thought of as “buckets” for the sake of illustration and understanding. Registered buckets (accounts) are like non-registered buckets (accounts), also called “cash”, or “open” – they can all hold a broad range of investments inside of them. However, each bucket has different income tax rules, largely resulting from the complexity of our income tax system.     

The question of where to save and draw income from becomes one of selecting the right buckets to minimize your lifetime tax bill, given your mixture of income types, your desired level of income each year, your varying desire and ability to spend and earn, and keeping your options open to allow for uncertainty and changes to the plan. This easily leads to discussions about smoothing consumption over one’s lifetime, and the optimal use of debt to balance consumption, saving and investment across different life stages. These are good conversations to have and allow you to maximize the benefits of financial markets.

Taking this discussion further and highlighting some of the considerations for income and tax planning is outside of our scope, we recommend those interested consult a tax professional. 

Our next article in our ‘Turning Tax Pain into Personal Gain’ series explores the ins-and-outs of RRSPs and how they can be used strategically to improve tax efficiency.

Disclaimer

This information has been prepared by Dave Charlebois, Investment Advisor, and Stephen Gaskin, Associate Investment Advisor for Lighthouse Wealth Management, a division of iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. 

The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.

iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.

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