Maxed out your RRSP and TFSA? What’s next? Non-registered investments vs. HISAs or GICs
So, you’ve maxed out your registered retirement savings plan (RRSP) and tax-free savings account (TFSA). Maybe you’re a diligent saver. Or you’ve just sold a home or a business. Maybe you’ve inherited wealth. Whatever the reason, you’ve got additional money to invest. And if you were thinking about putting it into a high-interest savings account (HISA) or GIC, think again. There are better ways to grow your money.
Earn more with Non-Registered Investments
Any investment that generates positive returns will bring you closer to your financial goals. And while GICs and HISAs do generate small but guaranteed returns, historically you’re much better off generating growth in an investment than letting it sit in a slow-to-grow savings account.
The chart1 below compares the growth and performance of a non-registered investment, GIC and HISA overtime. While HISAs and GICs promise consistent returns, you can see that the non-registered investment account comes out significantly ahead.
How are Non-Registered Investments, HISAs & GICs taxed?
The most common types of investment income include: dividends, interest and capital gains. And while the income earned from investments is always subject to tax, not all forms of investment income is taxed the same way. Some investment income attracts less tax.
Investment income from HISAs and GICs is considered interest and the taxes owed are based on your marginal tax rate (which varies by income and province). This is noteworthy because this type of tax is the most expensive.
Non-registered investments have a unique advantage in that they can earn a blend of different types of income as a result of what’s held within the account (the most common includes dividend income and capital gains). This is an advantage because the gains earned are taxed at different rates, opening up an opportunity to reduce the taxes paid on the income earned.
Example: Pete invests $10,000 for 1 year
Pete has maxed out both his TFSA and RRSP accounts and is looking to invest more. He is considering investing in either a non-registered investment, GIC or high interest savings account. Before he makes a decision, Pete needs to know which investment option will be worth more after tax.
Because he lives in Ontario with an annual income of $65,000, the taxes on the investment income Pete earns on dividends, interest and capital gains breakdown as follows:
|Type of Investment Income||Tax Rate* |
Here’s what happens when Pete invests $10,000 into a non-registered investment, HISA and GIC.
|Non-registered investment||High interest savings account||GIC|
|Return||4% from dividends = $400 |
2% from capital gains = $200
|2% from interest = $200||3% from interest = $300|
|Principal plus return||$10,600||$10,200||$10,300|
|Taxes owing(based on tax rate above)||$59.90 from dividends and capital gains||$59.30 from interest||$88.95 from interest|
|Investment total, after tax||$10,540.10||$10,140.70||$10,211.05|
In this example, a non-registered account provides the best after tax return.
When do HISAs or GICs make sense?
Good question. HISAs and GICs should be considered when capital preservation is of the utmost importance.
While nobody ever wants to lose money, the reality is that when you invest, there is no such thing as a guaranteed return. If markets dip while you’re invested, you might want to wait out volatility to recoup losses.
By contrast, however, the return on a GIC is guaranteed. And while HISA returns are ‘subject to change without notice’, they aren’t subject to market volatility investments are and therefore remain pretty consistent.
These kinds of low risk, low return solutions could be considered in the following instances:
1. HISAs: When you need the money in the very short term.
This is often the case for those looking to purchase a home in the coming weeks or months.
2. HISAs & GICs: When you want a steady return.
For those that find themselves in this camp, a word of caution: while GIC returns are guaranteed and HISA returns are generally consistent, oftentimes they are not on par with the rate of inflation. So, over time, investors may see the purchasing power of their money decline (along with the foregone opportunity of higher earnings).
To avoid this, many financial advisers will recommend a conservative investment portfolio instead. That way, investors can reduce their risk while enjoying the potential for higher returns.
Experts in financial planning
Any time you’re using non-registered investments as part of your retirement strategy, it’s always a good idea to work with an adviser.
Our team of CERTIFIED FINANCIAL PLANNER® professionals can work with you to optimize your investments. We’ll show you your options and guide you toward choices that make sense, given your stage of life and financial goals.
Disclaimer: This blog post may make financial planning assumptions such as rate of return, inflation, and/or tax rates to illustrate a concept. It is provided for informational purposes only and is not to be considered as investment advice. Investment returns are not guaranteed. The value of your investment may go down as well as up. There may be significant differences between the investments that are not discussed here, including different investment objectives and risk factors.
1 Above is an illustration of hypothetical performance of a non-registered investment, GIC and HISA over 30 years with constant 6%, 3% and 2% annual growth, respectively. It does not take into account any fees that may be charged.
* Calculations based on applicable marginal tax rates in Ontario for 2019 assuming $65,000 gross annual income.