There are plenty of opportunities for individuals that are looking to invest money in order to take advantage of cheap valuations on good quality provided by the current market environment. However, one of the dilemmas investors face is where to make that investment? What type of an account should your investment be held in?
The main distinction between types of accounts is registered versus non-registered. Many investors are wondering whether they should be making an investment into a Registered Retirement Savings Plan (RRSP) or a Tax Free Savings Account. Perhaps, instead of these registered accounts, an investor should just invest in a non-registered investment account. All three account types have their positives and negatives and each investor’s own specific situation will dictate which account is right for them.
A non-registered investment account can hold almost every type of investment. It is very flexible, as money can be deposited and withdrawn at any time without penalty. There are no limits as to how much an investor can deposit and the money invested can be used as part of either a long-term or short-term strategy. One of the downsides of this type of account is that an investor must pay tax on any money earned.
Registered Retirement Savings Plans (RRSPs) are very popular this time of year because the government allows investors the first 60 days of the year (2009) to make an investment that can be counted against taxes owed from the previous year (2008).
Individuals invest in RRSPs for many reasons — the number one advantage is that an investor can deduct their RRSP contributions from the amount of income earned that year, which is the best way to reduce the amount of taxes owed each year. Another major benefit to RRSPs is that the money grows tax sheltered. As your account rises in value, no taxes are paid on the gains. Therefore, an investor that contributes to their RRSP, experiences the concept of compounding rates of return without ongoing taxation.
There are a few disadvantages to investing in RRSPs. One is the amount an individual can contribute to their RRSP annually. The amount is based on 18% of your previous year’s income up to a certain maximum that increases annually (the 2008 maximum is $20,000). The maximum amount can be affected by company or government pension plans. The biggest negative to RRSPs is that when money is withdrawn (usually at retirement age), all money taken out counts as income to you in the year you withdrew it.
Tax Free Savings Accounts (TFSA), recently introduced by the government, became available in January 2009. Like RRSPs, there are no taxes paid on any of the money made from the account. An investor can purchase many different types of investments and the money grows tax sheltered, allowing for compounded rates of return. The two biggest issues with this plan are that an investor does not receive a tax deduction when contributing to the plan and there is a maximum of $5000 that can be deposited each year. The best attribute of this account is the flexibility with which investors can remove and deposit money into the account and not pay taxes. Whatever is removed from the account can be deposited back at a later date with no restrictions or penalties.
All three types of accounts have their own unique features. If an investor is looking at a longer term strategy and can use a tax deduction, investing in an RRSP would be the way to go. If you have already deposited the maximum amount possible into your RRSP, look at opening a Tax Free Savings account to tax shelter another $5000. If your time horizon is shorter and a tax deduction is not as important to you, a Tax Free Savings Account is a great account to set up to avoid paying tax. Anything above the $5000 limit should then be moved into a regular non-registered investment account. There are a lot of investment strategies that can be worked out using these three accounts. An investor should consult an investment advisor to make sure they are doing the right thing and that their money is invested where it should be.
If you have any questions regarding the above article or are looking for an investment advisor to help you with your portfolio, please send me an email at asmall@dundeesecurities.com. I will be glad to speak with you!
Allan Small is an Investment Advisor with Dundee Securities
Corporation, a DundeeWealth Inc. Company. This is not an official
publication of Dundee Securities and the author is not a Dundee
Securities analyst. The views expressed are those of the author alone,
and are not necessarily those of Dundee Securities or Metro.
