Investing is a crucial part of financial planning. It allows you to grow wealth, save for retirement, and achieve financial goals. Various investment options are available, each with its own set of benefits and considerations.
This article takes a deeper dive into non-registered investments, how they differ from registered investments, and the benefits and considerations associated with them.
We also provide tips on effectively managing non-registered assets to maximize their potential.
What are non-registered investments?
Non-registered or taxable investments refer to any investment not held within a registered account, such as Registered Retirement Savings Plans (RRSPs), Registered Education Savings Plans (RESPs), or Tax-Free Savings Accounts (TFSAs).
These investments can include a wide range of securities such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate investment trusts (REITs), and other types of securities.
A non-registered account offers flexibility
Unlike registered investments, non-registered investments do not offer any tax advantages or incentives. Any income generated from these investments, such as dividends or capital gains, is subject to taxation.
However, on the flip side, they also do not have the same restrictions and limitations as registered accounts, providing you with more flexibility and control over your investments.
This feature makes non-registered investments attractive to those who max out their registered accounts yearly. They are also appealing to investors who want to diversify their holdings further.
How do non-registered investments differ from registered investments?
The main difference between non-registered and registered investments is their tax treatment. Registered investments, such as RRSPs, Registered Education Savings Plan, or a Tax-Free Savings Account, offer tax advantages to help individuals save for retirement or other financial goals.
Contributions to these accounts result in a tax deduction, and any investment growth is tax-sheltered until withdrawal. You can reduce your income tax liabilities and save significantly with this tax treatment.
Non-registered investment accounts mean you pay taxes
Conversely, non-registered investments are subject to taxation. Any income generated from these investments, such as dividends or capital gains, is taxable in the year earned.
You must report and pay taxes on any investment income received.
However, it's worth noting that only 50% of capital gains are taxable in Canada, which can be a significant advantage for investors.
Another key difference is the contribution limits. Registered accounts have annual contribution limits, restricting the amount you can invest yearly.
In contrast, non-registered investments have no such limitations. You can invest as much as you want in non-registered accounts, providing more flexibility in your investment strategies.
Benefits of non-registered investments
While non-registered investments may not offer the same special tax treatment as registered accounts, they come with benefits. Here are some advantages of non-registered investments.
Non-registered investments allow you to withdraw your funds anytime without penalties or restrictions. This feature is beneficial when you need access to funds in the short term, such as for a down payment on a house or to pay for an emergency. You may also be able to borrow money against these investments.
A non-registered investment is more common to a cash account, where your funds are always available to cash in.
You can structure non-registered investments to improve tax efficiency. For example, you can strategically allocate assets with lower taxable income, such as Canadian dividend stocks, to non-registered accounts.
You can then hold higher taxable income investments, such as interest-bearing bonds, in registered accounts.
This strategy is known as asset location. You should speak with a professional regarding how to structure your investment accounts. You may also want to ask them about any dividend tax credit you might be eligible for.
Non-registered investments allow you to diversify your investment portfolio beyond registered account limitations. This diversification can help spread risk and increase returns.
For example, you can invest in a broader range of securities, including foreign stocks and alternative investments, which may not be eligible for registered accounts.
Non-registered investments can be advantageous for estate planning purposes. Unlike registered accounts, you can transfer non-registered assets to beneficiaries without tax consequences upon death.
These accounts make estate settlement more straightforward and more efficient.
Considerations for non-registered investments
While non-registered investments offer flexibility and other benefits, there are also some considerations to keep in mind, such as the following:
Tax implications: As mentioned earlier, non-registered investments are subject to taxation. You must know the tax implications and ensure you report and pay taxes on any investment income received. This awareness requires careful record-keeping and tax planning.
Capital gains: Non-registered investments are subject to capital gains tax. This tax applies to any profit made when selling an investment.
It is essential to consider the potential capital gains tax liability when making investment decisions.
For example, you should hold onto your investments longer to qualify for long-term capital gains tax rates, typically lower than short-term rates.
Investment strategy: Non-registered investments can be valuable to an overall investment strategy. However, it is important to consider how these investments fit into the more extensive portfolio and align with financial goals.
For example, you should consider their risk tolerance, investment horizon, and financial goals when deciding how much to invest in non-registered accounts.
Professional advice: Investing in non-registered accounts can be complex, especially regarding tax planning and optimization. Seeking professional advice from a financial advisor or tax specialist can help you make informed decisions and maximize the benefits of non-registered investments. These professionals can provide personalized advice based on an individual's unique financial situation and goals.
Non-registered investments offer you the flexibility and control to invest outside registered accounts. While they may not provide the same tax advantages, they come with their benefits, such as flexibility, tax efficiency, diversification, and estate planning advantages.
Speaking with a financial advisor to plan for your goals
It is vital to consider the tax implications and seek professional investment advice to make the most of non-registered investments. By understanding the differences between non-registered and registered investments, you can make informed decisions and create a well-rounded investment portfolio that aligns with your financial goals.
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