What are my best investment options as a ‘forever renter?’

Q.

What is the best investment vehicle for me at this time? I am single, age 38 with a maxed out

tax-free savings account (TFSA)

. I am a nurse earning $70,000 a year and am a forever renter. I do not see myself buying a home for the foreseeable future. I save about $12,000 annually.

Should I open a

registered retirement savings plan (RRSP)

since I have about $60,000 in accumulated contribution room, or invest in a non-registered investment account? I am already part of a private pension plan through work for five years. Also, I have $90,000 in my TFSA and hold all-equity exchange-traded funds (ETFs) that have done quite well. If I open an RRSP, what would be the best investment strategy for me: continue with equities or do more of a 60/40 split with guaranteed investment certificates (GICs) in case an opportunity comes in the future to make withdrawals in a lower tax bracket?

—Allison B. in North Bay, Ont.

FP Answers:

Allison, first of all, congratulations for having a maxed-out TFSA.

Canada Revenue Agency (CRA)

statistics show Canadians are not maximizing contributions to their plans. In 2020, only 8.9 per cent of TFSA holders had maximized contributions to their TFSAs, referring to an individual’s cumulative contribution room, not the annual dollar amount.

A TFSA is a great way to save tax-free for many things. Some Canadians will save in their TFSA for short-term goals such as buying a car, for travel or home repairs. Others will invest in their TFSA for the longer term, aiming to increase their retirement nest egg or estate value at the end of life.

There are several things to consider when looking at investment accounts. First, when will you need to use that money? And what are the tax consequences of depositing or withdrawing money to that account? In other words, what ‘job’ does the money need to do for you?

While TFSA contribution room is not based on your income level, RRSP room is. TFSA room is set annually by the government while RRSP room depends not just on your income but on whether you are part of a pension plan that reduces your personal contribution room, such as in your situation. As well, it’s important to note that an RRSP will provide a tax deduction for the full amount of the contribution and is then taxed when you withdraw it. Alternatively, a TFSA is not taxed at any time.

There are several programs around an RRSP that may be useful to some investors, like the

Home Buyers’ Plan

which allows you to withdraw up to $60,000 tax fee from your RRSP in order to buy a home. While this is not your goal, it could be helpful if you change your mind in the future. The RRSP also provides a Lifelong Learning Plan (LLP) where you can withdraw up to $20,000 from your RRSP for post-secondary education. Both programs require an annual repayment of some of the money, otherwise that annual portion is added to your income for that year.

A non-registered account (also known as an open or margin account) has no restrictions on how much you can deposit and can hold any type of investment in it. For many people it’s an overflow account after RRSP and TFSA room is maximized.

There are different tax options in a non-registered account depending on the investment chosen. Interest earned on non-registered investments is 100 per cent taxed in the year it is earned. Dividend income is also taxed in the year it’s earned but on Canadian dividends earned, there is a dividend tax credit that slightly reduces the tax owing.

If you are holding equity products in your non-registered account, you will pay the difference between the Book Value (initial purchase price, also known as Adjusted Cash Base, ACB) and the selling price at time of sale, even if the sale date is years in the future. These capital gains are currently taxed at 50 per cent of the total gain earned and which you then pay your tax rate on.

There are several questions you should ask yourself, Allison, before you decide on a road map for your future investments. Here are some.

1. If you lost your job or became disabled, do you have an emergency fund? It is recommended you have sufficient resources in funds you can easily access and that could cover you for three to six months of lifestyle expenses while you find other employment or disability income options. Other items that may create expenses are children, pets, cars or homes.
2. Do you currently have credit card debt or other outstanding high-interest debt balances? Best practice is to pay down toxic debt such as these first before saving or investing.
3. Do you know what your projected pension benefit will be in your retirement? Most pensions offer a pension benefit calculator so you can estimate your pension payable based on the years you work until your projected retirement date. It will also outline any early pension penalties or even buyback opportunities.
4. What short-term goals or obligations do you see in the next three years? This reflection will help you estimate your short-term expenses versus long-term costs and is helpful in your investment choices.
5. If you think your income might increase in the future, you could save the $12,000 in a non-registered account and move it to an RRSP when income is higher for a potentially larger tax deduction and potential refund. Most, if not all, investments can be the same for either an RRSP or a non-registered account; mainly the tax implications differ.
6. Do you see a time where you might need to draw from your RRSP before starting your pension? If your RRSP is intended for long-term retirement goals, and you don’t foresee an earlier use for it, then a balanced portfolio is acceptable. Some investors with pensions feel they can take slightly higher risk because the pension (usually seen as fixed income) can balance out the risk. As you get closer in time to an RRSP withdrawal, make sure you hold some of the RRSP in cash or GICs to minimize the impact of market decreases.

Some or all of these considerations will help you maximize your savings going forward. Even if you are a lifetime renter, with diligent saving and a few key investment choices, you will grow your wealth and prosper.

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Janet Gray is an advice-only Certified Financial Planner with Money Coaches Canada in Ottawa

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