Non-registered accounts: saving beyond RRSPs and TFSAs

With a good income, sound financial management, and a little luck, you will eventually exceed the usefulness of the TFSA, RRSP, and even the RESP. That’s when you have to turn to non-registered accounts. While non-registered accounts do not offer the same direct and very attractive tax advantages as registered accounts, they do allow for greater freedom of investment and disbursement.

What is the difference between registered and non-registered accounts?

Programs such as RRSPs and TFSAs are designed to encourage Canadians to save by offering benefits that are clearly beneficial to almost everyone. But beyond a certain amount of savings, the government considers you to have saved enough for their liking! Basically, they’re telling you that you’re rich enough to pay more taxes.

Note that in 2021, the RRSP contribution limit is 18% of income (or $27,830) and the TFSA contribution limit is $6,000.

Since they are not subject to strict rules (minimum and maximum age, limit, deadline, etc.), non-registered accounts allow greater flexibility for withdrawals in particular.

So, how do you optimize your non-registered account investments?

It is important to understand that at this level of savings and investment, strategies must be increasingly personalized. In fact, regardless of income level, “1 size fits all” approaches are never a good idea in financial management.

That being said, there are some broad principles that apply to many situations.

Interest is expensive!

We’re not talking about credit card interest, we’re talking about the tax bill for interest income. Since interest is taxed at the marginal rate, it’s generally a good idea to leave investments that generate this type of income in your RRSP or TFSA.

Capital gains are your best friend

The profit you make on the sale of an investment is your capital gain. When it comes time to do your taxes, only 50% of the sum of the profits and losses on the sale of your investments is taxed.

In other words, your net capital gains are taxed at 50%.

If you earned more than $150,473 in 2020, interest income of 1000$ would have cost you about $501 in taxes (marginal rate at 50.147%), while the same amount in capital gains would have cost you almost $251.

T Series, with their tax-efficient distributions, are also among the tools available to investors, particularly retirees, who want to optimize the tax efficiency of their non-registered investments.

To learn more about the different types of income and class funds, see our article “The 3 types of investment income: a practical guide to saving taxes“.

Need advice on non-registered accounts? Contact one of our advisors to find the solution for you!