# Canadian dividends for lower income earners



## JC NewGrad (Jun 2, 2009)

Hi,

I've got a bit of extra cash around, and I was thinking it would be a good time to pick up some TRP and T for the long term (as both are nicely priced right now). I'll be buying somewhat modest amounts though ($1000-1500 of each), as that's all I can afford.

I am a bit confused about where I should keep them -- in RRSPs, my TFSA or a non-registered account, as I know the tax benefits are distinct for each. I understand that it's best to keep US stocks, and interest producing investments inside RRSPs. Beyond that is where I get confused.

My income is about $40,000/yr, and from what I understand, with the dividend tax credit and because I'm in a lower tax bracket, I wouldn't have to pay tax on my dividends in a non-registered account, whereas I would pay full tax on them when withdrawing in retirement if I kept them in RRSPs.

That said, I should note that I don't have much in RRSPs right now and it would be nice to get the tax refund for dumping them in an RRSP.

I'm 28 and I expect my income in retirement to be about the same as it is now (hopefully advancing in the next fews years, but then getting smaller at retirement).

Any opinions as to what is best for my long term?


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## MoneyGal (Apr 24, 2009)

The standard advice, as you have seen, is to hold tax-preferred income sources outside an RRSP. However, this advice really only holds when you have investments both inside and outside RRSPs (or you are nearing retirement), and doesn't really help someone who is just starting out. 

In your shoes, I'd probably buy the assets in your RRSP. As your wealth grows, you can swap those assets out for other assets in a non-reg account - or convert them into other, non-dividend-paying assets as your tax situation changes. 

Good luck!


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## JC NewGrad (Jun 2, 2009)

Thanks, MoneyGal.

This is what I was leaning towards, but I guess I felt like my options were limited once the shares were in an RRSP. Is it generally easy to swap out? I guess I always assumed you could buy and sell within the RRSP, but not move stuff around much between RRSPs and non-registered accounts (without it being considered a withdrawal).


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## MoneyGal (Apr 24, 2009)

You can swap assets of equal value between a reg and non-reg account. Google "RRSP asset swap" for details (I'm at work, so short for time at the moment. )

However, don't worry about this too much until you have assets to swap. Instead, take advantage of the RRSP tax deduction and start building your wealth. You have many years yet to optimize your tax position for the withdrawal of those assets in retirement.


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## AdamW (Apr 22, 2009)

JC NewGrad said:


> That said, I should note that I don't have much in RRSPs right now and it would be nice to get the tax refund for dumping them in an RRSP.


I would say your best plan, moving forward, would be to always max out your RRSP if you don't need the cash. Then move onto maxing out the TFSA and only then invest in the non-registered accounts.

Obviously if you need access to the cash then leave it in the non-registered or TFSA accounts but anything you can really sock away the best place, for now, is the RRSP. 

That way you get the tax free growth and the extra tax deduction. Worry about swaps and things like that later on when you need to do some tax planning pre-retirement.


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## stephenheath (Apr 3, 2009)

> I would say your best plan, moving forward, would be to always max out your RRSP if you don't need the cash. Then move onto maxing out the TFSA and only then invest in the non-registered accounts.


I have a somewhat differing opinion, at least for now. Assuming tax rates both at the time of deposit and withdrawal are the same and all of the RRSP refunds are also put into the RRSP, an RRSP and a TFSA will work out to pretty much the same future value. (If the refunds aren't also put into the RRSP, the TFSA will have the higher future value). Since the original poster indicated he expected his tax rates to remain the same, it is the side benefits that will really make the difference.

If the original poster hasn't bought a home yet and intends to do so, then I would say deposit into the RRSP until you hit the maximum that you can withdraw under the home buyer's plan (I believe it's been raised to $25,000 but I'm not sure on that). That gives you the tax credit and the use of the money, even if you do have to slowly put it back over time.

Once that goal is met though, I'd put all of the rest into the TFSA until capped and then put into the RRSP, because in the long run the returns would be basically the same, but the TFSA can also be your emergency fund. The problem with using the RRSP as an emergency fund is that once you withdraw the money, not only do you have to give back the refund (magnifying the costs at a bad time), but you can never re-contribute that money again. With the TFSA, you can.

Finally, in terms of retirement, if you're planning an income of around $40,000 clawbacks of OAS and the like may not be an issue... unless demographics make the government tighten it up and leave the limit low as inflation creeps up over the years. To get $40,000 today, assuming $10,000 from the CPP, you'd need to withdraw $37,500 @ 20% taxes from the RRSP and you'd show a taxable income of $47,500. If you withdraw $30,000 from the TFSA, you're showing a taxable income of $10,000. Personally, that's why I like the TFSA best... because while it may not be an issue, I hope I do well enough that it is 

All that said, this is just a differing opinion and there may be other factors that make the RRSP superior in your case... for example, the tax treaty with the states to avoid the withholding taxes doesn't apply to TFSA's yet, so american stocks might be better held in the RRSP than the TFSA. Or you may have already opened the brokerage account in the RRSP so may want to keep putting contributions there until it grows to the point that you aren't paying annual fees any more.

No matter which way you decide, both the RRSP and TFSA are winners and you can't go wrong with either of them.


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