Registered Retirement Savings Plan - Issues and Their Nuances
June 6, 2009
If you are a Canadian citizen then probably you as many Canadians, have already investing outside your Registered Retirement Savings Plan (RRSP). The truth is that very often it is a really wise step to make when you choose your investment and tax strategy considering that RRSP contribution limits cap the amount you can contribute to an RRSP. The obvious result is that your RRSP may not be sufficient to supply the total amount of money you need for the retirement lifestyle you want. It should be also pointed out that a mix of non-registered investments can make up the shortfall but it happens only in the case of full integration with your overall asset allocation and tax management plan. As a matter of fact, all investment income and realized capital gains earned outside an RRSP must be reported annually on your tax return. But, you should also know that it is possible for you to minimize or defer tax on that income through your choice of non-registered investments.
The other useful thing that is worth to be taken into consideration is that interest income receives no preferential tax treatment and thus is fully taxable. Dividend income receives tax preferred treatment in all provinces and territories, but the degree of tax relief is different all over the country. On the other hand, just 50 cents of every dollar of realized net capital gains is taxable and, due to the reason that capital gains are taxed usually only when you sell your investments, you have the opportunity to influence when you pay tax on those gains. It should be added that you can potentially defer capital gains taxes for years by choosing to sell these investments at a time when it’s most profitable for you.
It should be also pointed out that, if compared to interest income, investment income that is taxed as capital gains can provide a great profit to your returns on an after-tax basis. In fact, this is where the benefits of a tax-advantaged fund structure for your non-registered portfolio can provide big rewards.
Unlike mutual fund trusts, other mutual funds are treated as a single entity for tax purposes. It will be useful for you to remember that this feature allows you to change different share classes within the structure while deferring capital gains. It simply means that you have the opportunity to rebalance your portfolio without the need to worry about immediate tax consequences. Over time, it’s this potential tax deferral feature that allows you to accumulate more wealth than if you had to pay tax on your gains each time you change one fund to another. So, as you can see, investing within a tax-advantaged structure mutual funds makes it easier for you to access the proper tools in order to help you to make a wealth.
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Tags: retirement planning
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