No More RRSP Room? No Problem

Here’s where to save when you’ve maxed out your RRSPs.

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Nicholas Cheung was a teenager in the 1980s when he opened his first registered retirement savings plan (RRSP). Most people his age were blowing their money on junk food and going out. “I had a job working at my father’s drugstore every Saturday, and decided to invest,” says the now 46-year-old chartered professional accountant from Toronto. “I had learned about the rule of 72 – divide 72 by the annual rate of return to see how many years it will take to double your investment – so I knew the significance of starting young.”

If you’ve maxed out your RRSPs and your TFSA and still have money to invest, then consider opening a non-registered account. However, investments in these accounts get taxed, so it’s important to know which securities to keep inside them.

Since his part-time income at the time was low, he had limited allowable RRSP contribution room, though he always saved to his max. He bought guaranteed investment certificates (GICs) and Canada Savings Bonds, which offered attractive double-digit returns in the late 1980s. Impressively, Cheung has continued maxing out his RRSP, even as his annual contribution room has grown. With more money to save, he’s now using a variety of accounts, such as a TFSA and non-registered options. “I look for other opportunities to invest in a more tax efficient manner,” he says.

While few Canadians start as young as Cheung, many people with high incomes do invest to the RRSP limit, which is $26,230 for 2018, often year after year. Yet, a number of them still have more money to save. Where should you put your money when your RRSP is at capacity? Here are some ideas.

Max out your TFSA

Tax-free savings accounts (TFSAs) should be most Canadians’ Plan B, says Todd Sigurdson, Director, Tax and Estate Planning at IG Wealth Management. Investment earnings and growth inside a TFSA is completely tax free. And, the contribution room is now fairly significant, he adds. Anyone who was 18 or older in 2009, has lived in Canada since that time and has never contributed to a TFSA has a total of $63,500 of TFSA contribution room. As of January 1, Canadians can contribute $6,000 per year, up from $5,500.

Invest in other registered accounts

The RRSP isn’t the only registered account where money can grow tax free. Parents or grandparents can invest extra funds in a registered education savings plan (RESP) to save for a child’s education. Like an RRSP, an RESP is tax-deferred. Unlike the RRSP, though, the government will chip in 20 percent of a contribution up to a maximum of $500 per year. “The grant is free money and anyone saving for a child’s education should be taking advantage of it,” says Sigurdson.

Similarly, for individuals who are disabled or have disabled children, registered disability savings plans (RDSPs) offer grants and bonds, while any income earned in them gets taxed only when it’s withdrawn.

Make use of non-registered accounts

If you’ve maxed out your RRSP and your TFSA and still have money to invest, then consider opening a non-registered account. However, investments in these accounts get taxed, so it’s important to know which securities to keep inside them.

Typically, you’ll want to hold fixed-income investments, such as bonds, in RRSPs and TFSAs. Why? Because income generated from these investments get taxed at one’s marginal rate, which can be more than 50 percent in some provinces.

Stocks, mutual funds and other equities should be held in non-registered accounts, as capital gains – the money made off a sale of a stock – and dividend income are taxed favourably. “Earnings from fixed-income investments are fully taxable, so you want the tax-sheltered growth,” says Sigurdson. “But only 50 percent of capital gains are taxed and dividend income provides a dividend tax credit.”

Get creative with other investments

Other tax-efficient investments include some life insurance policies, as the proceeds go to the beneficiary tax-free upon the policyholder’s death. “When you think about how you’re going to pass along your wealth to the next generation, it can really help shape how you structure your investments,” says Cheung.

And while it’s not an investment per se, paying down debt — especially higher-interest credit card debt – is also a wise thing for investors to do. “If the interest rate on that credit card is 18 percent or higher, pay that down. it’s hard to find an investment that can give you those kinds of returns,” says Sigurdson.

Of course, these types of planning decisions are good ones to have. It means you’ve been saving diligently and have even more to sock away. Remember to consider taxes, plan for your future needs and just try things out. Cheung’s been saving in a variety of vehicles for years and will continue to use multiple accounts for as long as he has the funds. “I invest in an RRSP, but I have a lot of options after that,” he says.

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