WHAT TYPE OF SECURITIES TO HOLD BY ACCOUNT*

January 28, 2022

On this post, I answered a question that I have gone back and forth on with some Stock Talk readers in the past.

What type of securities should I hold in each of my investment accounts?

I’ll share some thoughts on 4 types of accounts: RRSP, TFSA, RESP, and Non-registered. Without getting into a lot of detail, here are some basic benefits and tax implications of investing through each type of account:

I don't have a one-size fits all answer to which accounts should be funded first or what type of securities to invest in each of them. It really depends on the marginal tax, time horizon for withdrawals, kids age (for RESP), etc. However, in broad strokes:

• I would first max out the registered accounts. I’d start with RRSPs as it gives an immediate tax benefit. The equivalent to the tax benefit can be considered a gift from the government as one would have had to pay it in taxes. This amount inside the RRSP is now yours to invest and grow as taxes are deferred to when the money is withdrawn.

• Then, assuming there are kids, I’d invest in an RESP. Not only the government provides a 20% return on the annual investment (up to $2,500 as mentioned before) but it’s also a good discipline to help fund kids higher education

• Afterwards, I’ll add as much as possible to the TFSAs. In a country with such a high level of taxes, having an account that is completely tax free feels like a treat.

• If there is any money left after maxing out these accounts, the rest would go in a non-registered account.

Types of investments to hold in each account:

• RRSPs: If early in one’s career, I’d favour equities either dividend-paying or growth stocks. As one gets closer to retirement age (I’d say less than 20 years until retirement), I’d lean towards using RRSPs for fixed income securities and would move stocks to TFSA or non registered. To determine this, I did the exercise of projecting how much would be left in a non-registered account as well as in an RRSP for 2 types of stocks: 1) Growth stocks (+15% annual growth), US dividends (+3% annual growth). In both cases, after 20 years, the after tax amount was higher in the non-registered account even though I was assuming the impact of taxes for trading stocks inside the non-registered account during that time frame. I’d invite you to do your own projection and confirm this finding before making any decisions.

• TFSAs: I would favour growth stocks as in theory they should help grow the amount of space you have in the TFSA. All (except US dividend-paying stocks) are completely tax free.

• RESP: Before kids go to high school, I think leaning towards equities makes sense. As they get closer to going to post-secondary school, I’d suggest moving to a more conservative balance (~40/60 fixed income / blue chip equities)

• Non-registered: Growth stocks or Canadian Dividend paying stocks to take advantage of tax benefits.

Claudia Soler

* Disclaimer: The information contained within this blog is for informational purposes only and it is not intended as a recommendation of the securities highlighted or any particular investment strategy; nor should it be considered a solicitation to buy or sell any security. In addition, this information is not represented or warranted to be accurate, correct, complete or timely. the securities mentioned in this blog may not be suitable for all types of investors and the information contained in this blog does not constitute advice. Before acting on any information in this blog, readers should consider whether such an investment is suitable for their particular circumstances, perform their own due diligence, and if necessary, seek professional advice.