Investing is simple, but not easy. Today, Manmeet Bhatia, head of Private Wealth at Franklin Templeton Canada is answering questions around registered retirement savings plans, and investments.
Question: Can I claim an income tax loss if a stock in my RRSP went bankrupt?
Answer: Unfortunately no, losses are not claimable within an RRSP. Any capital gains triggered within an RRSP are not taxable at the time they are generated, rather income ultimately drawn from the RRSP in retirement is taxable at the individual’s marginal rate when withdrawn. As such, overall gains would be netted off by losses triggered within an RRSP from a de-listed security, and there would be no claimable loss available.
Question: Can I transfer securities I already own into my RRSP?
Answer: Yes, securities may be contributed to an RRSP at fair market value, assuming you have the available room for the contributions. It is important to note that if securities are contributed to an RRSP, a deemed disposition occurs which may result in the following scenarios arising:
-If the Fair Market Value of the security exceeds the Book Value, the crystallization of any unrealized capital gains and subsequent tax payable for the contributor will come due
-If the Fair Market Value of the security is lower than the Book Value, there will be no crystallization of a loss that can be used to offset other capital gains
This is important as the resulting tax benefit from the RRSP contribution may be partially offset by a realized capital gain triggered by the deemed disposition of the security.
Question: What investments should I hold in my RRSP? How should I decide
Answer: The best way to ensure that your RRSP meets your investment needs is to have a financial professional set up a flexible plan that is tailored to your personal situation and investment goals, which can be adjusted when personal circumstances and market conditions change. A general rule of thumb from an investment perspective is to look at your “age” and “stage” of life.
Age: Younger investors who expect a long period of time before drawing income from their registered plans can invest more heavily in growth-oriented investments – often equities or even specific growth sectors in areas of innovation like technology or biotech which can experience higher short-term volatility. In contrast, those individuals closer in age to retirement would tend to weigh more of their portfolios around a balance of income generating investments such as money market funds, bonds, GICs and stable, dividend paying equities – often found in the financials or consumer staples sectors.
Stage: Those with relatively larger portfolios where a principal need is security of capital or downside protection may find the need to skew their portfolio to more conservative assets.
Investment portfolios will serve a continued need throughout the retirement period which could last several decades. Ensuring that your portfolio continues to not only provide income for yourself or a nest egg for your beneficiaries, but also maintains your standard of living by keeping pace with inflation may involve maintaining or adding to your growth component. A lack of focus on inflation in a plan has resulted in many retirees having to return to the work force on a part-time or full-time basis to supplement their existing savings.
Don't Forget Tax!
For non-registered accounts, interest is fully taxable and thus attracts the most taxation, while certain dividends eligible for the dividend tax credit are taxed more favourably at a lower rate, and capital gains taxed at a 50% inclusion rate are taxed most favourably of all.
Therefore, when looking at the combined non-registered and registered portfolios, some investors choose to allocate a higher amount of interest earning fixed income investments to their RRSP, and a greater amount of equity investments that can benefit from the dividend tax credit and capital gains to their non-registered account. The idea here is that since all types of investment income are tax deferred and ultimately taxed the same way upon withdrawal from an RRSP, it may be advantageous to have a greater amount of equity investments outside the RRSP to benefit from the lower taxes applicable to eligible dividends and capital gains. Working with a financial professional can help you decide what makes the most sense for your situation when determining if you should put your interest-earning investments in an RRSP.
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