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Building Retirement Strategies

Building Wealth for Retirement

As a matter of investment strategy, most investors should try to accumulate money with the aim of accumulating buying power while minimizing taxes before the money is available for spending. The conventional approach is to hold investments that generate income with preferential tax rates outside of the RRSP. In other words, investments that produce capital gains or losses should be held in taxable accounts, for the tax rates are lower than on earned income and interest income. As well, capital losses are deductible from capital gains and so provide a kind of tax advantage. Dividends are taxed at preferential rates, so they should be held outside of RRSPs. What goes for stocks that can change capital value and those that generate dividends also goes for mutual funds organized as pass-through trusts, which is the majority of funds, for capital gains and dividends do not change their character when distributed. Income-generating assets such as bonds, bond mutual funds and GICs can be held within the RRSP to take advantage of tax postponement and to make the most of the relatively low interest rates currently being paid on fixed income assets.

Tax considerations are important, but a portfolio cannot be built on tax strategies alone. There are other considerations, such as keeping some cash-equivalent assets such as GICs, treasury bills and money market funds outside of the RRSP in spite of the potentially high tax rates on the income they produce. After all, if someone needs a substantial amount of cash, it should not be necessary to sell stocks or take out a bank loan. Higher taxes on some cash can be a reasonable cost for maintaining liquidity.