So what should one hold in the RRSP?  I have heard some people say that an RRSP should be “safe” and should have more low risk investments held in them (e.g. think GIC’s), some people say more growth-geared investments because it grows tax deferred.

From what I have learned, I would say that looking at how investments are taxed would be a good starting point.

Let’s look at GIC’s (guaranteed income certificates):  the rate that the big banks are offering now is pretty abysmal (what, 1% for a 1 year term, and 3% for a 5 year term?  Does that even cover inflation?).  But when you buy them outside of an RRSP, interest income (as the income from GIC’s or other savings plans is coined) is taxed at 100% your taxable rate.  So that means, if you are taxed at a rate of 30% of your regular income (check out this website for great information on our marginal tax rates and other good stuff http://www.taxtips.ca/), then you get 30% off your GIC money hacked off too, if it weren’t in an RRSP.

So suddenly that 1% becomes 0.7% after taxes are done with them, AND if you really think about it, if it weren’t in an RRSP you are using your after tax income dollars to pay for your GIC, so it’s even less!

Getting depressed yet?  It’s alright, just put investments like that in an RRSP or TFSA.

The best things to put in your RRSP “grocery basket” should be stuff that is taxed at 100% of your tax rate.

Those investments are: GIC’s, money market funds, bonds, and savings in cash to name a few.

AND one that I realized AFTER I filled up all my contribution room with Canadian investments thank-you-very-much, are high paying foreign dividends.  I thought ka-ching! when I saw that Johnson and Johnson was paying out a 44 cent per share dividend, but if you don’t keep it in a tax protected RRSP, that dividend gets hacked.  Learn from my mistakes, put US high paying dividend investments in an RRSP if you are planning to get any.

RRSP basket


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