December 1998

Understanding How Unregistered
Equities Can Be Better Than RRSPs

© Talbot Stevens

The following contains facts that fundamentally challenge the most popular financial planning belief — that RRSPs are always the best investment strategy.

This has been accepted for decades as a universal truth believed by most Canadians, including myself, until recently. Question everything! As discussed earlier, it is obvious that for income-based goals like retirement and education, after-tax income is all that matters.

According to respected leaders in the financial industry, my new After-Tax Income analysis revolutionizes the process of choosing the best investment strategy.

Part of my business mission is to be a leader in the research and education of valuable financial strategies. I am not against RRSPs. With the refund reinvested, RRSPs generally are better than unsheltered investments. But not always, as we will see.

My goal is to communicate ways to benefit financially. As an investor or an advisor, if there was a different approach that could increase your after-tax retirement income, would you want to know about it?

Before anyone can change their beliefs, especially on a long-held view that forms the foundation of financial planning, it is critical to understand how a non-registered approach could be better than RRSPs.

It is important to not overlook the fact that with any unregistered investment, you always get your own money — your original principal, back both tax- and clawback-free.

Following are factors where the attractiveness of RRSPs decreases.

Spending Your RRSP Refund. As explained in earlier Strategy Sheets, a refund that is spent increases your current standard of living but generates no future retirement income. If, by not reinvesting the 30 to 50% refund, you decrease the after-tax amount invested by 30 to 50%, it is possible that a larger amount growing in a less tax-efficient unregistered investment could produce a higher after-tax retirement income.

Besides the tax deduction, the other main benefit of RRSPs is tax deferral. Deferring tax is less valuable when the investment growth decreases. Growth decreases as the time invested decreases. This means that RRSPs become less valuable as you get closer to retirement. The need for tax deferral also decreases as investment returns decrease.

If tax rates, including clawbacks, rise, this clearly hurts the fully taxable RRSP strategy more than unregistered strategies. Capital gains have tax deferral similar to RRSPs and are later taxed less.

If foreign content limits restrict access to the historically higher returns of global equity funds, this hurts RRSPs in terms of potential returns and risk.

Conceptually, it should be clear that if one or more of these factors are tipped enough in the wrong direction, keeping your equity investments outside of RRSPs could produce more after-tax retirement income.

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