Answer...

Here is the anser to this Frequently Asked Question.

Non-Registered Investment account or RRSP? Which one will benefit me in the long-run?

In recent years, reductions in the capital gains inclusion rate have resulted in non-registered accounts becoming an attractive option for investors. Investors are now asking when they should invest in RRSPs and when they should invest in non-registered accounts. The following highlights the advantages and disadvantages of both.

The advantages of investing in RRSPs

RRSPs and RRIFs offer unlimited tax deferral until funds are withdrawn. When withdrawn, funds are treated as income and taxed at the full marginal rate at the time of withdrawal. Any withdrawals are taxed as straight income notwithstanding the fact that they may have been the result of Canadian dividends or capital gains earned inside the registered account. With RRSPs and RRIFs, the annuitant can choose to rebalance his or her portfolio as appropriate.

If gains have been realized on some of the investments inside the registered plan, they remain tax sheltered as assets are reallocated from one asset class (e.g., equities) to another (e.g., bonds). With a non-registered equity investment, generally, no tax is payable until the investment is sold. However, not many investors buy and hold an individual security or mutual fund in a non-registered account for 20 or 30 years. Also, an investor may be reluctant to dispose of a property that has gone up tremendously in value because of the potential for large capital gains tax on such rebalancing. This may have the added effect of discouraging a reallocation of the investment mix where such a reallocation may be the appropriate choice for the investor as he or she approaches retirement age.

Most importantly, RRSPs offer a tax deduction in respect of contributions made. For example, a $14,500 RRSP contribution would result in a tax savings of $6,525 for an individual with a marginal tax rate of 45 per cent. The tax refund received from making a contribution can be invested into a non-registered account. 

Over time, the combined after-tax value of the registered and non-registered accounts with reinvested tax refunds will generally surpass the after-tax value of a non-registered account alone, even though income from the registered account is fully taxable.

The advantages of investing in a non-registered account
Now, let’s assume that instead of contributing funds to an RRSP each year, the investor deposits the same amount in a non-registered account that holds a mix of equity investments. Upon ultimate disposition, any profits earned on these investments will result in capital gains to the investor, taxable at only 50 per cent of the investor’s marginal tax rate.

There are a few, more specific situations where ceasing to make RRSP contributions makes the most sense. This may be the case for investors who:

• Have already accumulated a significant amount of assets inside their registered plans
• Are approaching the age at which they will begin withdrawing from the plan
• Expect to be in a higher tax bracket when withdrawing the funds than they were when the RRSP deduction was taken

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