Today I’ll be talking about how I plan my investments – in which account do I put which investment? I’m pretty new to the stock market, so I actually only currently have a TFSA set up for investing, but just applied today for a non-registered account to make investments from. Out of the three different Canadian accounts (TFSA, RRSP & non-registered), there are different strategies one may employ based on the different tax sheltering effects each account holds; which can add up to A LOT of money remaining in your pocket, instead of the government’s, over your investment career!
Let’s start with the Tax-Free Savings Account (TFSA), my all-time favourite. Investments you make in a TFSA will not be taxed on capital gains at all whether you invest in Canadian or US equities. Dividends you receive from Canadian equities will not be taxed, however there is a withholding tax on US equities (30% unless you fill out an IRS form to reduce it to 15%). In this case, my favourite thing to do with a TFSA is to invest in income-generating assets, stocks with good dividends, that, ideally, increase consistently over time. However, I am a big fan of real-estate investment trusts (REITs), and my TFSA is composed primarily of these, as you can see on my Portfolio page. These provide me with high-yield and (so far) some good capital gains. I prefer these for myself because of my limited contribution room as a 21 year old. I’d rather invest in some high-yield income assets that are relatively safe and have decent room for appreciation.
Investments in my Registered Retirement Savings Plan (RRSP) will not be taxed for as long as they remain in the account, but once they are withdrawn they are subject to full taxation. I’m sure you can see why I like the TFSA so much more. What is great about the RRSP though is, your US equities’ dividends do not have US withholding tax on them in this account! Therefore, your US dividends can grow tax-sheltered until you withdraw them (and there are ways you can use these tax-sheltered dividends to make you more money as your RRSP grows). Because of this reason, I plan to place all of my US income-generating equities in this account, so that my US dividend income will not be taxed and I can use it to invest further. I would play it safer with my RRSP and invest in proven US blue-chip dividend-growth stocks.
With a non-registered account, you have no tax shelter whatsoever. Personally, I would use this account for even more passive income generation (obviously), but I’m not so happy with being taxed on my dividend income and capital gains (in Canada we’re only taxed on half of our gain though). Although this is the place where I’d probably put a little bit more speculation since it’s not an account I’m dedicating to retirement. Canada also offers a dividend tax credit. In here, I would probably put more REITs and more dividend-growing stocks, probably Canadian, however.