Further diversify your investments
If equities and fixed income are the two most basic diversifiers, the next question to ask is about diversification beyond Canada.
Most investors around the world have a bias for their own countries’ stocks, and tax rules tend to encourage that bias by, for example, taxing dividend payments from domestic companies more favourably. However, the value of global diversification should not be ignored, especially since Canada makes up only about 3% of the world’s stock market value.
This can quickly get complicated, but one way around this is to invest in asset-allocation exchange-traded funds (ETFs).
Dan Bortolotti, a frequent contributor to MoneySense, and a portfolio manager at PWL Capital, has some model portfolios on his Canadian Couch Potato website, as does his colleague, Justin Bender, on his Canadian Portfolio Manager blog. Once you have decided on your asset allocation, adapting models from either of these investment professionals will provide you with a well-diversified portfolio.
Decision #2: RRSPs vs TFSAs vs non-registered accounts
Most Canadians use two or three account types. The first is the registered retirement savings plan (RRSP). With this account type, qualifying earned income will generate contribution room. Contributions will create a tax deduction and any assets that are invested within the RRSP will grow tax-free until withdrawn. Contributions are capped, however, and if you have been a diligent investor, you may have little room for your $50,000.
Another account type is the tax-free savings account (TFSA). Unlike the RRSP, you do not get a tax deduction for your contribution, but investments grow tax-free within the account and can be withdrawn tax-free as well. Contributions to a TFSA are not governed by your earned income. Instead, there is an annual limit that is declared by the federal government and is currently targeted to increase by the rate of inflation in $500 increments. As of 2023, the new limit is $6,500. If you have been eligible to contribute since 2009, the first year of the TFSA, but have never done so, you now have $88,000 in contribution room. Again, though, as there is a limit, if you have been keeping up on your TFSA investments, you may have no more than $6,500 in contribution room.
If neither the RRSP nor the TFSA can absorb your $50,000, the third alternative is a non-registered account. This account is taxable, although interest, dividends and capital gains are each taxed differently.
Let’s return to the RRSP and TFSA once more before moving on. If you have the contribution room to invest in either account, which one should you prefer? This is largely a tax question. At age 62, you may have a good idea of what your income in retirement is likely to be. If your income now is considerably higher than it is likely to be in retirement, then the RRSP is a good account type to invest in as you will get a larger refund now than you will have to pay in tax in retirement.