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Some experts say an RSP should only hold interest-bearing investments that would otherwise be fully taxed. They prefer to keep stocks and equity mutual funds outside the plan in order to benefit from tax breaks for capital gains and Canadian-source dividends. Others insist an RSP should include such equity investments because they are likely to provide the best long-term growth.
If your resources allow you to have
both an RSP and a regular investment
account, manage them as one large
portfolio, weighted according to the
asset mix recommendations that our
specialists publish quarterly. Then, tax
considerations make it advantageous to
concentrate interest-bearing securities
in the RSP and hold equities in your
regular account. However, if your RSP is
the bulk of your financial assets, ignore
the tax considerations mentioned above
and focus instead on RSP investments
that will earn the highest return consistent
with the amount of risk you
are comfortable assuming.
Take your total financial situation
into account. For instance, if much
of your wealth is invested in your
own business, you already have a
growth-producing asset. Your RSP
should therefore be run more conservatively
to balance your financial
exposure. If, on the other hand, you
are in a defined benefit pension plan,
you already have the equivalent of a
substantial fixed-income investment,
and would likely be well-advised
to run your RSP more aggressively
with growth-oriented investments
such as stocks, equity funds and
long-term bonds.
Your definition of risk should also
change with your time horizon. Your
greatest short-term risk is market
volatility since fluctuating stock and
bond prices mean your retirement
savings may briefly decline in value.
However, your greatest long-term
risk is inflation because it erodes the
purchasing value of your savings year
by year. So, money for the near future
should be oriented toward guaranteed
investments, which ensure capital
preservation. Money that won’t be
needed for many years should generally
be placed in growth-oriented
investments to counteract the impact
of inflation. The key is to properly
define your time horizon.
Obviously, the younger you are, the
more growth-producing assets you can,
and should, hold. Meanwhile, conventional
wisdom suggests that as you
approach retirement, you should switch
to highly liquid, low-risk investments.
Consider, though, that someone retiring
at 65 stands to live for at least another
20 years. That is certainly a long-term
investment horizon. So, even as a retiree,
it makes sense to keep at least some
of your savings in equities as a hedge
against inflation. That’s yet another
reason to have a self-directed RSP.
You can convert this type of plan to a
self-directed retirement income fund
(RIF) without disrupting your holdings.
There is a word of caution, however,
if you intend to convert to an annuity.
Your investment horizon would then
correspond to the time left until your
planned conversion. As that date
approaches, we recommend switching
into short-term investments to minimize
the volatility risk of stock and
bond markets.
Managing your self-directed RSP
portfolio may seem rather daunting,
particularly if your investment experience
is limited. But remember, you
are in good hands. Your Investment
Advisor will help translate your situation,
resources and objectives into
a personalized investment strategy
designed to optimize your future
financial well-being.
“Labour-sponsored venture
capital funds, or laboursponsored
investment funds
(LSIFs), have become popular
RSP investments because they
generate tax credits that equal
15–35% of their purchase price,
depending on the province.
That’s on top of the normal
RSP tax deduction. Ever
stopped to think why you get
this generous tax treatment?
It’s the government’s way of
rewarding you for accepting
to do venture capital financing
with your retirement savings.
This is not exactly for the faint
of heart, so don’t be seduced
by the tax credits, and make
sure you fully understand what
you are investing in before
committing your capital. It’s
also easy to fritter away those
tax credits because they put,
or keep, money in your pocket
only when you file your tax
return. When making an LSIF
investment, make a note to
invest the tax credits – ideally
in a more conservative vehicle
that will offset the risk you’ve
assumed through the LSIF’s
venture capital investing.“
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