RRSP vs. Non-Registered: Which to Invest In Next?
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!
Moving Forward
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?
Tax Season is just around the corner here in Canada, Jeff. Are you planning to play some Tax Defense with your RRSP vehicle?
Buying enough to control your tax bracket exposure and bankrolling for Home Buyer’s Plan sounds like a double win. Since you seem to be working with a solid company, do you have any advice on taking advantage of Employer RRSP Contribution Benefits?
Hi KingAce, I have already made some contributions to my RRSP that will be reflected in my next net worth update. I will begin aggressively fueling my RRSP once my TFSA is maxed as I see that I will be in a very high tax bracket this year! Also, I will have to make sure that I don’t over contribute as my pension plan will slightly reduce my contribution limit.
Now for your situation, if you decide to do the the tax sheltered, the question is whether you can get it out without penalty to buy a house immediately or you have to wait for a year or two? since your net worth is only 20K now, don’t you need to build a bit of emergency fund or just keep some cash for the next down market?
Hi Vivianne, the HBP allows us to take out to take money out of our RRSP without any penalty or taxes to purchase the first home. As soon as I save up enough money for the down payment, I will take it out to purchase a property. Also, I don’t believe in emergency funds. I can always take money out of my TFSA or chequing account and I wont lose my job randomly since I am in a stable and secure government job.
I really don’t think the home buyer program is a good idea. When you take out the money from your RRSP you’re not taking advantage the power of compound interest. If you end up putting that money back after 5 years, you lose 5 years of compounding power. But I suppose you also need to consider how much the real estate value would increase during that 5 years. A lot to consider for sure.
Hi Tawcan. I completely agree. Of course, there is always the option of taking out a home equity line of credit and refilling the RRSP. Assuming that the portfolio has a return rate of the HELOC, the compound can be minimized.
Hi – I’m not completely sure I understand your post. ” 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.” I think you are interpreting the withdrawal as an additional tax, while it is really just an initial holding back of some of the eventual income tax. As far as I am aware, you do not pay anything more than tax on that income based on your bracket. In addition, you are most certainly allowed to take money out of an RRSP any time you like, but again you will pay tax on it (and lose the contribution room). If you decide to retire early, you are most certainly able to take money out of the RRSP, and if you have limited other income, you will pay very minimal tax on these withdrawals as well. I am not an expert in this area (and might be completely wrong), but based on what I have read, I think you need to talk this over with someone who has expertise in taxes to make sure you have it right.
Hi Chris, that is what a meant. A with holding tax and rate depending on the amount withdrawn and since rrsp withdrawal is considered as additional income, it must be reported when its tax season. Of course, the with holding tax is mostly compensated on the tax return and it is better to contribute when income is higher. Thanks for stopping by!