I admit it’s not easy to tune out everything that’s happening in
Washington. Not a day goes by without some Trump pronouncement grabbing the
newspaper headlines and the lead slots on the television news.
And it’s true that some of his words and actions are going to have a
negative effect on stocks. The turmoil that followed his immigration order
riled the markets, with the Dow recording triple-digit losses for two
straight days after it was proclaimed and courts weighing in on its
But all this will pass. Pension fund managers never worry about the
day-to-day movements of the indexes; they focus instead on investing in
sound, long-term securities. Your RRSP is simply a small pension plan, so
you should adopt the same psychology.
Here are some tips on how to get the most out of your RRSP, this year and
1. Review your asset allocation
You should have established a target asset mix when you set up your plan
(if you didn’t, do it now). This is a good time to review it.
For starters, go through your portfolio and allocate each security into one
of three categories: cash; fixed income; and growth (stocks). In the case
of balanced funds, check how their assets are distributed and apportion
them in your portfolio accordingly. For example, you may have a fund that
is 50% in stocks, 45% in fixed income, and 5% in cash. The allocation in
your RRSP should follow the same pattern.
Once that is done, review your overall portfolio mix. Since 2016 was a good
year for stocks, you may find the growth portion is a little top-heavy for
your risk level. That can be corrected in two ways: either by adding new
money to your fixed income or cash positions, or by selling some stocks or
equity mutual funds and moving the money into the other two sectors.
It is essential to complete this review before you make any decisions on
where to invest this year’s RRSP contribution. The result will guide your
decision as to what type of investments to consider.
One more thought. The closer you are to retirement, the more conservative
your asset mix should be. Stocks have been very strong in the past few
years, but the market looks expensive at this point. If retirement is only
a year or two away, you don’t want too high a percentage of your assets to
be at risk in the event of a crash.
2. Invest for the long term
I have an acquaintance who recently invested $15,000 in a penny stock in
his RRSP. The stock jumped more than 250% in just 10 days, and the value of
that investment soared to almost $40,000! True story!
Windfalls like that are great to read about, but I would not try to emulate
them in your own retirement plan. More often than not, you’ll end up losing
your money. You’ll never find a professional pension fund manager who buys
penny stocks with his clients’ hard-earned savings. You shouldn’t either.
Rather, you should adopt a long time-horizon when choosing securities. How
long depends to a large extent on your age, but 10 to 20 years is
reasonable. Of course, you should revisit your holdings periodically to see
how they are performing, but the basic rule is to choose securities that
you will be comfortable owning for years to come.
For growth, look at dividend-paying stocks like
Enbridge Inc. (TSX: ENB),
TransCanada Corp. (TSX: TRP),
Brookfield Asset Management Inc. (TSX: BAM.A),
Canadian National Railway Co. (TSX: CNR),
BCE Inc. (TSX: BCE),
Toronto-Dominion Bank (TSX: TD),
Fortis Inc. (TSX: FTS),
TELUS Corp. (TSX: T), and so on. These are bedrock companies that will continue to grow and
enhance your bottom line.
If you prefer to invest in funds, consider
SPDR S&P Dividend ETF (ARCX: SDY),
iShares Core S&P/TSX Capped Composite Index ETF (TSX: XIC),
Beutel Goodman American Equity Fund,
Mawer Canadian Equity Fund, and
Leith Wheeler Canadian Equity Fund.
The fixed-income side of your portfolio may seem a little trickier right
now, but here again focus on the long term. Rising interest rates may drive
down the price of bonds for the next year or two, but that will not always
be the case.
If you have enough money in the RRSP and deal with a brokerage firm that
maintains a bond inventory, you can purchase individual bonds or strips for
your plan. The advantage is that you’ll receive the full face value at
maturity (assuming you choose high quality bonds) while receiving
predictable cash flow in the interim.
Most investors prefer to use funds for their fixed income holdings because
they are easier to purchase. The
iShares Canadian Universe Bond Index ETF (TSX: XBB) is a good choice for a long-term hold.
If you’ve parked your RRSP contribution in cash and are waiting to decide
how to allocate your money, I’ll update my RRSP Portfolio in my next
3. Decide between RRSP and TFSA
If you have a lot of money to invest, I advise using both plans. If you
only have a limited amount of cash, you’ll need to decide between them.
The RRSP has the advantage of an instant tax break. Your contribution will
generate a refund, calculated at your marginal rate. If you’re in a 40% tax
bracket, you’ll get $2,000 back on a $5,000 investment. Not a bad return!
The downside, of course, is that you’ll pay tax at your marginal rate when
the money is withdrawn from the plan (or from a RRIF) years down the road.
I have had many people write to me bemoaning the high level of taxes they
have to pay as a result. RRSP/RRIF income also impacts your tax credits and
GIS payments, if you qualify.
The biggest tax hit comes when you die. If there is no surviving spouse,
the government deems that all the money in an RRSP/RRIF is taken into
income in your final year, and your estate is taxed accordingly at the
marginal rate. The final tax bill could be in the tens, or even hundreds,
of thousands of dollars.
Tax-Free Savings Accounts don’t come with that baggage. There’s no tax
refund now, but in exchange there’s no tax grab in the future. All
withdrawals are tax-free and at death your heirs will inherit all the
proceeds, again tax-free.
So the choice is short-term financial gratification vs. long-term pain
(RRSPs) or short-term pain vs. long-term gain (TFSAs). Here’s a tip: if you
have any reason to believe your income will be higher in retirement than it
is now, choose the TFSA.
Whatever you decide, the key is to tax shelter as much money as you can.
Canadian tax rates are high so do everything you can to minimize the bite
on your wallet.
is one of Canada’s best-known personal finance commentators and
investment experts. He is the publisher of
The Internet Wealth Builder and The Income Investornewsletter, which are available through the Building Wealth website.
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Notes and Disclaimer
© 2017 by The Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned carry risk of loss, and no guarantee of
performance is made or implied. This information is not intended to provide
specific personalized advice including, without limitation, investment,
financial, legal, accounting, or tax advice. Always seek advice from your
own financial advisor before making investment decisions.
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