Saving for Retirement - Registered vs Non-registered Investments

As only 50% of capital gains are considered taxable income, some financial planners question the value of RRSPs and suggest that Canadians save for their retirement with non-registered investments. The choice between an RRSP and non-RRSP investment has become one of the most debated issues in the financial community.

Critics of RRSPs point out that RRSP withdrawals are fully taxed as income at rates of up to 49% - versus capital gains, which are taxed at half an individual's tax rate (based on the inclusion in income of only 50% of gains). To generate mostly capital gains and take advantage of the lower tax rate, some financial advisors recommend that people invest outside their RRSPs in a diversified portfolio of small-cap and other growth-oriented equity mutual funds and stocks, and then hold them for the long term to maximize tax deferral.

Both quantitative and qualitative issues should be considered in determining an appropriate saving strategy. On a quantitative basis, the following general conclusions can be drawn. If individuals:

  • Reinvest their RRSP tax savings into their RRSP, an RRSP will be significantly favourable
  • Reinvest their tax savings into non-registered investments, an RRSP will be favourable
  • Use their tax savings to pay down non-tax-deductible debt (e.g., their mortgage), an RRSP will likely be favourable
  • Spend their refunds, they are likely better off investing in equities in their non-registered plans

Given these scenarios, RRSPs still make sense for most people. Because of tax-deferred compounding of all types of income within an RRSP, it is difficult to beat the amount that may be accumulated within a registered plan over time.

How RRSPs stand up against non-RRSPs will vary from individual to individual based on several factors, including expected returns and marginal tax rates - now and upon retirement. Recent tax changes now allow retirees over the age of 65 to transfer up to 50% of their RRIF and other pension income to their spouse or common-law partner. This form of income splitting can potentially save a couple a significant amount in taxes. Individuals should explore a number of scenarios taking into account their personal circumstances to determine the best option from a quantitative perspective.

Investors may also wish to consider a Tax-Free Savings Account (TFSA) as part of their financial plan. A Tax-Free Savings Account (TFSA) is a type of registered plan that enables Canadians to save money without having to pay tax on the income generated.

Qualitative issues such as risk tolerance, investment knowledge and ability and willingness to monitor investments will also play a role in deciding whether to choose a registered or non-registered account. Keep in mind that shifts in an individual's personal and professional situations will influence the types of products that best suit their goals.

Non-RRSPs and RRSPs: A case for both

Now, more than ever, Canadians may want to consider using a combination of registered and non-registered investments to save for their retirement.

As always, if individuals have both non-registered and registered assets, it is more tax-efficient to structure the investments so those that generate interest income are held within the RRSP and those that generate capital gains are held outside the RRSP. Individuals may want to set up their portfolios as follows.


  • Hold growth-oriented stocks and equity mutual funds outside RRSPs
  • Consider index funds, which have low securities turnover (and management fees); choose physical-based index investments to generate capital gains, as opposed to derivative-based index funds, whose earnings are fully taxed as ordinary income


  • Hold bonds and other fixed-income instruments inside RRSPs
  • Consider actively managed equity mutual funds and portfolios (no tax implications as securities are traded)
  • Invest a tax refund as part of the following year's contribution to maximize tax deferral

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