With now that my Tax Free Savings Account (TFSA) is nearing its maximum capacity, I find myself debating whether I should start investing in my RRSP or Non-registered account.
Needless to say, the main difference between the RRSP and non-registered is that one is a tax sheltering vehicle while the other is not. Although the RRSP can allow me to grow my investments without being subjected to tax, I am still not totally convinced if it’s the best move. Here’s what I have found after doing further research:
Registered Retirement Savings Plan (RRSP)
The Cons of Investing in an RRSP
The only reason why I considered investing in a non-registered account in the first place was because to me the cons of an RRSP was simply too much for me to handle.
While it is nice to have your investments grow without being subjected to tax, there are actually two tax deductions upon withdrawal. The first of these two is a withdrawal tax (percentage depending on how much you withdraw) and the second is an income tax.
To reduce these taxes, many investors choose to contribute to their RRSP in the years where they expect to have a high income. The reasoning behind this is that when they do decide to withdraw (hopefully when they are in a lower tax bracket), the tax returns received will cover for a portion of the withholding tax.
Even with that scenario, a withdrawal may completely null the tax returns received, not to mention any additional bank fees. In fact, there may even be an amount owing (depending on how much you with withdraw). Additionally, any with withdrawal from the RRSP is interpreted as income which must be reported when tax season comes around.
This is the main reason why I doubted the RRSP. Investors are forced to not withdraw from it until retirement. Quite frankly, if the TFSA can keep up with my savings, I wouldn’t even have an RRSP account..
Personally, I do not like the idea of having my money trapped in an account where I can’t withdraw especially considering my plans for early retirement. Not saying that my goal is to liquidate all my assets, but I plan on having some disposable cash to venture into business investments.
The Pros of Investing in an RRSP
With that being said, an RRSP does have some up sides to it. It allows me invest in US equities (which I absolutely love) without being subjected to a withholding tax. Furthermore, the tax return at the end of each year allows me build capital for my investments at a much quicker rate.
Non-Registered Cash Accounts
On the other hand, the non-registered cash account allows for much more accessibility to cash for when I need it. Although similar to the TFSA, a non-registered cash account is subjected to tax on all interests, dividends and capital gains. From my research, I have calculated that an RRSP will outgrow the non-registered cash account, making it completely irrelevant at this point.
In fact, if having the comfort of mind in easy accessibility to my assets is what helps me sleep better at night, I always have the option of withdrawing from my TFSA. Of course, this would mean that I have to sell off all my investments and repurchase them when I re-contribute. That sounds like a hefty amount of commission fees and I am not a big fan of that!
In any case, the final verdict is to start investing in my RRSP seeing how I still have plenty of room in it. A non-registered cash account is completely irrelevant to me at this stage and should only be pursued after all my tax sheltering accounts have been maximized.
With that being said, I believe the key to wealth is to keep taxes to the minimal and a non-registered cash account would only be contradicting that.
Once I have my RRSP maximized, I will most like use the home buyer’s plan to withdraw my funds to start investing in real estate. Paying back my RRSP will delay opening a non-registered account further until I find a better way to shelter my money from taxes. By that time, I will probably minimize taxes by investing my surplus cash in my business.
That’s all I have for now! How do you feel about taxable investment accounts?
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