It’s generally a good idea to max out the available contribution room inside your RRSP and TFSA first before moving on to other investment opportunities. Those “other” opportunities may include accelerating your mortgage payments if you own a home, or buying a rental property, or opening a non-registered (taxable) investment account.
It’s a topic I get asked about frequently, so I thought I’d share my answer below. This question comes from a reader named Allen, who focuses more specifically on opening a non-registered account to invest. Take it away, Allen:
“Good day Mr. Engen,
I’m a regular reader of your weekly newsletter and have noticed that you use VEQT across your TFSA and RRSP accounts. I’m wondering what to do when those two accounts are maxed out. I rent, have no kids and no debt. So I see nothing to do with my money besides investing it.
Is it worth it to open a taxable account and start investing my ‘extra’ money, or is there something more valuable to do with those savings?
Also, if I go the taxable account route do I have to pay tax every single year the money is invested, and added — presuming the returns are positive — or is it only when I sell the securities inside the taxable account?”
Hi Allen, congrats on maxing out your RRSP and TFSA! Besides encouraging you to spend a bit more, I think it does make sense for you to open a non-registered investment account.
It’s all about creating a priority sequence for your savings. Priority one might be to max out your RRSP for the year, priority two is to max out your TFSA, and then if you don’t have a priority three (this could be extra mortgage payments if you had a mortgage, or money for travel, or furniture, or a new car, something more short-term in nature) then investing in a non-registered account makes logical sense.
Investing in a non-registered (taxable) account does typically create some taxable income for you. If you invest in ETFs then you’d likely receive quarterly distributions of dividends and/or interest.
For example, VGRO pays quarterly distributions of about 15 cents per unit. Here’s what that looked like in 2020:
This income is taxable to you. Using a quick example, if you had 1,000 units of VGRO then you’d receive about 60 cents per unit from the distributions each year. That’s $600 will be made up of eligible dividends, capital gains, interest, foreign income, and return of capital. You’ll receive a T3 slip from your financial institution at tax time breaking this down for you.
VEQT pays an annual distribution rather than paying it quarterly. Same idea applies, although since it doesn’t hold bonds the income would all come from Canadian and foreign dividends, plus some return of capital.
Finally, there are some ETFs that don’t pay any distributions. These are called “swap-based” or synthetic ETFs.
Horizons is famous for these and they have an all-in-one ETF called HGRO that uses this structure. Basically they don’t hold the underlying stocks directly but they use a counter-party (BMO, National Bank) to hold the securities and receive the dividends directly. The counter-party then “swaps” the total return over to Horizons.
The premise is that investing in HGRO won’t attract any annual investment income – it’s all deferred capital gains until you sell the ETF. This could be attractive if you’re in a high tax bracket now versus when you plan to sell.
But there are risks associated with these types of swap-based ETFs, including regulatory (the federal government could disallow this structure in the future). Horizons’ all-in-one ETFs are also not as diversified as traditional asset allocation ETFs from Vanguard, iShares, and BMO.
Allen, I invest in a non-registered account, it’s just inside my corporation rather than on my personal side. I hold VEQT in that account, just like I do in my registered accounts. It’s perfectly sensible to hold the same investment across all account types.
Finally, an off-the-beaten path answer to your initial question is to consider the Coast FIRE approach to savings.
I spent several years catching up on unused RRSP and TFSA room so my savings rate was abnormally high throughout my late 30s and into my 40s.
Now that I’ve maxed out my RRSP and TFSA, and got a good start on my corporate investing account, my plan is to dial down my savings rate in the future so I can work less and/or spend more on travel.
Life’s not about accumulating the biggest pile of money. We need to identify a purpose for our money so we can design the type of lifestyle that we truly desire.
This Week’s Recap:
This week we kicked-off the first of a three-part retirement series by author Mike Drak – this one on designing your ideal retirement lifestyle.
Over on Young & Thrifty I wrote about the best all-in-one ETFs in Canada.
I also reviewed the CIBC Investor’s Edge platform.
Promo of the Week:
American Express is going all out again with sign-up bonuses and perks that rival their best offers ever from this summer.
The American Express Platinum Card is offering a welcome bonus of 80,000 Membership Rewards points when you charge $6,000 in purchases to your card within the first three months.
Here’s why you might want to pay a $699 fee to hold the Amex Platinum Card:
- Get a $200 annual travel credit
- Earn 3 points per dollar spent on dining
- Earn 2 points per dollar spent on travel
- Transfer points 1:1 to several frequent flyer and loyalty programs, including Aeroplan)
Not only that, you’ll get free airport lounge access, a $100 NEXUS card statement credit, plus gold status at Hilton, Marriott, and Radisson hotels.
Alternatively, you can try my new favourite – the American Express Aeroplan Reserve Card. With this card you can earn up to 90,000 Aeroplan miles plus a Buddy Pass for an eligible round-trip flight within North America.
Here’s how it works:
Earn 30,000 Aeroplan points and a bonus Buddy Pass after spending $3,000 in purchases within the first 3 months.
Plus, earn 5,000 Aeroplan points for each monthly billing period in which you spend $1,000 in purchases on your Card for the first twelve months. That could add up to 60,000 Aeroplan points.
American Express says this is worth up to $2,900 or more in value within your first year! All of this for an annual fee of $599.
Our friends at Credit Card Genius launched Genius Cash earlier this year and are giving away $10,000 cash or a Tesla Model 3.
A Wealth of Common Sense blogger Ben Carlson addresses the buy now, pay later phenomenon.
Rich Dad, Poor Dad author and noted investing seminar scammer Robert Kiyosaki predicted a giant market crash in October. This lines up with at least eight other “predictions” he made over the past 10 years. The problem is that even a broken clock is right twice a day.
Professor Moshe Milevsky explains why the 4% rule is too simplistic for modern retirement planning:
“There’s something odd about a rule that’s one-dimensional, Mr. Milevsky said. Four per cent regardless of tomorrow? I think decumulation plans must be multidimensional.”
Here’s Millionaire Teacher Andrew Hallam on how to beat the investment returns of almost everyone you know.
The Evidence Based Investor explains why the outcome of your investment decisions should be based more on evidence than on speculation, superstition or guesswork.
Gen Y Money breaks down the locked in retirement account and decodes the LIRA vs. RRSP rules.
Why retirees should start planning now to age in place if they want to avoid living in a seniors’ home.
Michael James on Money reviews The Deficit Myth by Stephanie Kelton.
Finally, just a terrific interview in The New Yorker with Rick Steves about holding onto your travel dreams.
“For me, Europe is the wading pool for world exploration. My favorite countries may be elsewhere. I like Indonesia and India and Japan and Central America just as much when it comes to travel, but I’ve got a calling in life. And that is to inspire Americans to venture beyond Orlando. The practical goal is to get people who have been to Disney World four or five times to try Portugal. It won’t bite you.”
Who isn’t dreaming of a trip to Europe after reading that?
Have a great weekend, everyone!