December 2, 2007

The Ideal Investments for Tax-Free Growth

Arrange your investments so that the ones which would attract the most tax are held inside your RRSP. ---
The advice above comes from a retired husband/wife team that owned and operated a small business. One is a retired professional accountant. With, their goal is to be "a reference site for easy to understand tax, financial, and related information." That's commendable.

They say: "Interest income (t-bills, GICs, bonds, etc.) and dividends from foreign corporations attract the most income tax, because the total amount is included in taxable income. Thus, if you want to hold this type of investment, it should be held inside the RRSP."

You've probably heard this advice before. Even so, you may have mutual funds inside your RRSP and GICs outside. Maybe you want liquidity. Maybe you want the maximum growth in your RRSP. Maybe you want short term investments outside. People have different reasons. This post isn't about the psychology of investing.

An Overlooked Place For Tax-free Growth
You can also put your most taxed investments into universal life insurance, an option you lose if you "buy term and invest the difference". As with an RRSP, the growth is tax-free until withdrawn. Like a Guaranteed Interest Certificate (GIC), you have a choice of terms --- often 1-5 years or longer. These investment choices are usually called Guaranteed Interest Accounts (GIAs), to distinguish them from GICs.

I couldn't find a nice online comparison for you. There are plans that guarantee minimum interest rates of 4%. How's that for tax-free growth?


1 comment:

Promod Sharma said...

If I were writing this 2007 post today, I would say "tax-sheltered" instead of "tax-free". In 2009, the Tax-Free Savings Account (TFSA) was introduced for true tax-free growth (but with limited deposit room).