Rumours of an increased capital gains tax were put to rest last week when the Liberals unveiled their second federal budget with no mention of a change to the inclusion rate. The scuttlebutt around capital gains, however, got me thinking about investing in a taxable or non-registered account.
There are several scenarios where investing in a non-registered account makes sense.
- To take advantage of the dividend tax credit
- When you’re borrowing funds to invest (ex. Smith Manoeuvre)
- When you’ve maxed-out your tax-sheltered accounts (RRSP, TFSA) and still have funds to invest
With that out of the way, I’m here to argue that most people under the age of 40, including me, will never need to invest in a non-registered account in their lifetime.
Heck, even seniors and retirees with healthy balances in their taxable trading accounts have been slowly shifting those assets into their TFSAs as contribution room grows.
The ability to save 18 percent of your income annually inside an RRSP, plus another $5,500 annually inside a TFSA (double that for couples), makes a non-registered investment account a luxury for the wealthy.
Anyone who was at least 18 in 2009 now has $52,000 or more in TFSA contribution room, and most people have more RRSP contribution room than they know what to do with.
Even with an extremely high savings rate it still makes sense to prioritize contributions to your RRSP, TFSA, RESP, and perhaps extra mortgage payments before investing in a non-registered account.
It was just this year that we got our savings back on track and started putting away $1,000 per month inside our TFSAs. At this rate it’ll take us until the year 2024 to catch up on all of our unused contribution room and fully fund both of our TFSAs.
Still, our journey to financial freedom will see our household net worth reach $1 million in the year I turn 41 (2020) and from there achieve financial independence by the time I turn 45.
Financial independence means a diversified balance sheet with a paid-for home and more than $600,000 saved inside our RRSPs and TFSAs, plus a workplace pension worth $350,000 and $100,000 saved for our kids’ post-secondary education.
All of this amounts to us living a comfortable, balanced life in which we have enough money saved so that someday soon I can quit employee life and focus on other endeavours.
We can do this, again quite comfortably, by maxing out contributions to our RRSPs and TFSAs every year. Outside of saving up a healthy emergency fund, what more do we need?
Do you invest in a taxable (non-registered) account?