Which investment product for which savings plan: Investment basics
Posted on Wednesday February 17, 2021
Which investment product for which savings plan: Investment basics
Over the past few months, the markets have experienced ups, downs and upheavals. As the deadline for taking out RRSPs approaches, investors are reviewing their savings plans. Mutual funds, guaranteed investments, tax-free accounts... Where should you put your money in today's environment?
With the help of Marc Savoie, a wealth management advisor and mutual fund advisor at Credential Asset Management Inc., we untangle the types of investments and savings plans: RRSPs, TFSAs, RESPs, non-registered plans, GICs, MLGIs and mutual funds.
Savings plan: The envelope for your investments
"You can think of these plans as envelopes you fill with your various investment products," says Mr. Savoie.
The analogy is a good one and explains the distinction between a savings plan and the money you put into it. The plan is the container. There are many types of plans, each with different and often complementary benefits.
RRSPs: Lucrative now AND in the long term
Popular because they reduce your tax bill, registered retirement savings plans (RRSPs) are a "product aimed primarily at preparing for retirement," says Mr. Savoie. He also points out the tax advantage, in that "contributions are tax deductible up to a certain annual amount." Mr. Savoie describes RRSPs as a very good tool for long-term growth since no taxes are applicable prior to withdrawal.
TFSAs: Tax-free benefits for your portfolio
For tax-sheltered growth without waiting until retirement, turn to tax-free savings accounts (TFSAs). "TFSAs don't give you the same tax deductions as RRSPs, but they offer extraordinary flexibility and allow you to grow your investments completely tax-free, even when you withdraw money," Mr. Savoie explains.
There are several rules to follow to benefit from a TFSA. The main one is not to exceed the contribution room set each year by the federal government. The good news is that contribution room is cumulative, so "the total contribution room for an investor who was 18 years old when the program was created in 2009 and who has never contributed to a TFSA is now $75,500!"
Remember: "In a TFSA, income on investment products is non-taxable, even upon withdrawal." - Marc Savoie
Marc Savoie, wealth management advisor and mutual fund advisor at Credential Asset Management Inc.
Non-registered plans: Yes, if you reduce the tax impact
Have you contributed the maximum to which you are entitled to your TFSAs and RRSPs? If so, you're already familiar with non-registered plans, i.e., investments made outside a specific tax program.
"Non-registered plans are the least advantageous from a tax point of view," says our expert, because interest, dividends and capital gains are taxable.
How can you make the most of them?
"There are strategies to reduce the tax impact of this type of investment. For example, you might choose investments that focus on capital gains rather than interest income, which has a higher tax rate," Mr. Savoie explains.
RESPs: For the classroom
Already imagining your child at university? There's a great plan for them.
The main benefits of registered education savings plans (RESPs) are the accompanying government subsidies. "These can be as much as 20% of the principal invested." Your child will be able to withdraw the amount when they begin post-secondary education through education assistance payments (EAPs). Subsidies, capital gains and interest will be taxable only at the time of withdrawal.
Concerned about tax liability when you withdraw from your RESP? Don't worry. "Young members cashing in RESP benefits are by definition students, and therefore pay little or no tax." - Marc Savoie
In a nutshell, your savings envelope is important since choosing the right plan could help you taxwise. Now, let's talk about earnings. Which investment product will help you make your money grow?
Investment products: A question of value, risk tolerance and horizon
Your portfolio must be tailored to your objectives, all of which come with an investment horizon. You don't invest in the same way for a down payment to be used in two years as for a retirement planned in 20 or 30 years.
GICs: When it's about caution
Guaranteed investment certificates (GICs) make risk-averse investors feel more secure. Your capital is guaranteed and your interest rate is fixed, so you know going in how much you'll get at the end of the term. You won't lose a cent of what you've invested. On the other hand, you may not gain much. Are there any other disadvantages to a GIC?
"The main disadvantage is that with the recent drop in interest rates, the increase in value of GICs is currently below the rate of inflation. The other disadvantage is that you can't touch GICs during their term, so they can't be cashed out in an emergency," Mr. Savoie says.
MLGIs: A compromise
Nothing ventured, nothing gained. Can you make a little more interest without the risk of losing capital? With market-linked guaranteed investments (MLGIs) you can. Since interest depends on the strength of the market, you may earn a somewhat higher return than with a GIC. However, interest is not necessarily guaranteed and your total return is capped at a pre-set maximum.
Mutual funds: Risk more to "potentially" earn more
Want to add shares to your portfolio without trading directly on the stock exchange? With such a wide range of funds available, you're sure to find one that's right for you.
Mr. Savoie explains that "a mutual fund is administered by a manager who selects securities from various companies and industries around the world." Depending on the percentage of stocks and the composition of the fund, the level of risk varies. "The fund should match the investor's profile, objectives, investment horizon, risk tolerance and values."
The major mutual fund families UNI provides access to are:
- NEI (responsible and ethical investing)
- CI Investments
Each investment product can be placed in any of the savings plans. When establishing your investor profile, you can build a portfolio aligned with your objectives (retirement, home, travel, etc.).
Consider starting a plan that includes regular instalments. This excellent strategy allows you to invest on an ongoing basis and reduce the impact of market volatility. With regular payments in an amount that fits your budget, you can avoid making large contributions at the end of the year. This lets you maximize contributions to your various registered plans (TFSA, RESP, RRSP).
Many different combinations are possible. The challenge is to assemble the right pieces! Contact a UNI advisor if you have any questions.
Savings and investment management: Mutual funds and securities-related financial planning services are offered through Credential Asset Management Inc. Mutual funds, other securities and securities-related financial planning services are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered trademark of Aviso Wealth Inc.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured or guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions. Their values change frequently and past performance may not be repeated.
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This article is provided as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell mutual funds.
NEI Investments is a registered trademark of Northwest & Ethical Investments L.P. Credential Asset Management Inc., Credential Securities, Qtrade Investors and Northwest & Ethical Investments L.P. are all wholly owned subsidiaries of Aviso Wealth Inc.