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Topic: Wealth Management

Investor Toolkit: How to achieve a double win—and avoid a double loss—in your RSSP

Income Investing

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a beginning or experienced investor, these weekly updates are designed to give you specific investment advice. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.

Today’s tip: “Your investments gain doubly in your RRSP, but if you lose you take a double loss, so don’t use it as a place to find out if you have a talent for stock trading.”

Registered Retirement Savings Plans or RRSPs are a little like other investment accounts, except for their tax treatment. You can put up to 18% of the previous year’s earned income, maximum $24,930 for 2015, into an RRSP, and deduct it from your taxable income. (The limit is lower for pension plan members.) You only pay taxes on your RRSP investment, and the investment income it earns, when you make withdrawals from your RRSP.

You might think of investment gains in an RRSP as a double profit. Instead of paying up to 50% of your profit to the government in taxes and keeping 50% to work for you, you keep 100% of your profit working for you, until you take it out.

If you lose money in an RRSP, however, you have a double loss. You lose your money, and you lose the opportunity to have that money grow in a tax-deferred environment for years, if not decades, until you take it out.

That’s why successful investors put only their safest investments in RRSPs. If they indulge in penny stocks, stock options or short-term trading, they do so outside their RRSPs. That way, they avoid the double loss. And they can use any losses they do suffer to offset taxable capital gains.


Finding a financial advisor you can trust

Successful retirement planning begins with faith in your investment plans. Many investors say that finding an advisor they can trust is one of their biggest problems. Too often, they’ve had advisors who apply the wrong rules to their investments, frequently for reasons of self-interest.

Many of our portfolio clients tell us they chose us to manage their investments because they feel a deep sense of trust in our investment capabilities. Obviously they have confidence in the gains we have achieved, both in our newsletter recommendations and our portfolio management results. But they also feel an extra sense of trust due to the way we set up the business, to eliminate conflicts of interest, which ensures that our clients get our unbiased recommendations with no fear of hidden costs. This sets us apart from most investment services: you can find out more without any obligation.

If you hire us to manage your investments, we tailor your portfolio to your own unique situation—your specific goals, your temperament, your financial situation. We work for your convenience, not ours.

You are in very secure hands. We have an outstanding team of experts. They contribute an enormous amount of time and research to our Successful Investor Wealth Management service. But I personally approve every transaction in every portfolio. If you’d like to know more, call us toll free at 1-888-292-0296, or drop us an email.

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Inside and outside an RRSP—the worst-case scenario

As an example let’s contrast two outcomes for an investor in the 50% tax bracket who invests $10,000 in an RRSP, and $10,000 outside an RRSP.

Here’s the result when the investment is placed within an RRSP. The amount invested earns 10% yearly and rises from $10,000 this year to $67,275 in 2033. After withdrawing the money and paying 50% tax at that time, the investor still has $33,637.50.

Here’s what happens with the same investment outside an RRSP. The investor pays 50% tax to start on his $10,000, and invests the remaining $5,000 at 10% a year. Since he’s paying 50% taxes on the investment income every year, the value of his investment only grows to $13,265 by 2033 — only 39.4% of the after-tax $33,637.50 value of his RRSP investment.

This is a “worst-case scenario”. It only applies to GIC or bond investments. Stocks and mutual funds enjoy some tax shelter outside an RRSP, since tax rates are lower on capital gains and dividends than on GIC interest. But the principle is the same. Your money grows faster if you put it in an RRSP, and pay taxes later rather than now.

Coming up Next

Tomorrow we examine a U.S. stock that gets a big boost from low oil prices.

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