Beyond Your RRSP

Think outside the box. That's a common phrase in the business world these days. It means expanding your thinking in new directions to achieve new success - and it can work for the average investor, too. Here's how: Think of your Registered Retirement Savings Plan (RRSP) as your primary investment 'box'. Yes, your RRSP is a terrific destination for your retirement savings dollars -- the tax-reducing, income-building power of an RRSP should make it the top retirement planning priority for the majority of Canadians.

But your RRSP is also a 'box' because the government boxes you in with certain limitations. For starters, your total annual RRSP contribution is currently capped. In addition, legislation restricts the foreign property content of the investments in your RRSP to just 30 per cent of the plan's book value.

The solution is that, once, you've maximized your RRSP contribution, you should think and act outside the RRSP box by maintaining a well-chosen portfolio of non-registered investments that are free from the restrictions imposed on your registered plan.

While it's true non-registered investments don't enjoy the same tax-sheltering of your RRSP, you can select investments that complement those in your registered plan and minimize your yearly tax bite while maximizing long-term after tax returns:

Both capital gains and dividends from Canadian corporations are taxed less heavily than interest income. In addition, you'll receive preferential tax treatment on income distributed by qualifying Canadian equities, as well as the dividends earned by equity mutual funds that are flowed through to you as distributions or paid directly to you.
Tax advantaged mutual funds can also be a sound non-registered investment option. Unlike most common mutual funds, which trigger tax consequences any time you switch from one non-registered fund to another, funds within the same tax advantaged funds structure are treated as a single entity for tax purposes. This allows you to move assets freely among share classes while deferring taxation of any capital gains.
By investing in certain mutual funds that are managed specifically to minimize annual distributions, you may not have to report any investment income until you sell your investment. Consequently, you can time the sale of these investments for minimal tax exposure by, for example, selling them in a year when you can take advantage of offsetting capital gains or when you are in a lower tax bracket.
Universal life insurance* can be a powerful investment option for those who have maxed out their RSP contributions, have their debt under control, and can benefit from universal life's ability to shelter excess capital while maximizing the value of a final estate. A wide range of universal life investment options is available, including those with returns linked to the performance of equity or bond market indexes, money market accounts and guaranteed investment accounts.

Making tax-smart investments outside your RRSP enhances your opportunities for investment growth over time. A financial advisor can help you develop an investment strategy that is both tax-efficient and a perfect fit for your financial needs.