Our team receives regular queries from clients about whether they should be using registered or non-registered (open) accounts to save for retirement. Of course, every situation is unique but here are some guidelines that we provide.
RRSPs and other “registered” accounts such as pension plans offer special tax advantages, like a tax deduction, but may come with contribution limits and a maturity deadline. Earnings on investments held in “open” accounts, on the other hand, are taxable but may be eligible for preferential tax treatment and some tax deferral – with no contribution limits or maturity deadlines.
With this in mind, RRSPs may be valuable for people who:
expect to be in a lower tax bracket at retirement, as contributions earn tax deductions at a high tax rate today while withdrawals are eventually taxed at a lower rate
expect to be in the same or even higher tax bracket in retirement but can benefit from many years of tax-deferred compounding. Tip: contributions can be made today and deductions claimed in a future year when you can earn a bigger tax deduction
plan to reinvest the tax refund into an RRSP or open account, or use the extra cash to pay down non-deductible debt such as a mortgage
hold mostly fixed income investments
actively trade equities
have a spouse or common law partner with whom to split income (and tax) in retirement
Open accounts may be appropriate for those who:
have maximized savings in registered accounts and can benefit from the low tax rates applied to capital gains and dividends in an open account
have a high tolerance for risk and can maximize tax deferral by holding a diversified portfolio of growth-oriented equities that generate mostly capital gains
expect to be in a low tax bracket throughout their life, as they could pay little or no tax on earnings in an open account
Generally, a combination of accounts (including TFSAs) makes sense for most people as it lets you maximize tax efficiency and flexibility when drawing a retirement income. We can help you weigh your personal options and structure each account as part of a comprehensive plan for best results. Give us a call.
