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The Importance of Asset Location

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To be successful in investing, just buying a good asset isn’t the only thing you have to consider. You should also think about where to hold those assets to maximize tax efficiency. Asset location refers to the process of strategically placing your investments across different types of accounts to minimize taxes and maximize after-tax returns. Let’s look at how the right Asset Location can help you reach your goals the quickest.

Understanding Tax-Advantaged Accounts

Canadian investors have a few accounts at their disposal that work differently but can all optimize their tax situation and ultimately help them achieve their goals in the most efficient manner. Some of these accounts are:

Registered Retirement Savings Plan (RRSP): Any contribution you make to your RRSP is tax-deductible. This means if you made $100,000 and invested $10,000 into your RRSP, you would only be taxed for $90,000. The growth of your investments in an RRSP is not taxed until you withdraw them. When you withdraw funds, usually in retirement, they are subject to taxation at your marginal tax rate, which is often lower than during your working years.

Tax-Free Savings Account (TFSA): TFSA contributions are made with after-tax dollars, but any investment growth and withdrawals are entirely tax-free. This account provides an excellent opportunity for longterm tax-free growth. Registered Education Savings Plan (RESP): The RESP is specifically designed for saving for a child's education. Contributions are not tax-deductible, but you receive grants from the government for your contributions. Investment growth is tax-deferred, which means they are not taxed until it’s withdrawn. Withdrawals are taxed in the hands of the student, who often has a lower income tax rate.

Optimizing Asset Location

Now that we understand the tax-advantaged accounts available, let's explore how asset location can be optimized:

Tax-Efficient Asset Placement: Different types of investments have varying tax implications. Generally, tax-efficient investments, such as stocks held for the long term or tax-efficient ETFs, are better suited for non-registered accounts or TFSAs. Capital Gains are the cheapest form of tax you could pay on your investment growth, hence having it in a non-registered account is beneficial. Investments with higher expected taxable income, such as interest-bearing bonds, are more suitable for tax-advantaged accounts like RRSPs.

Income Splitting: Asset location can also be used to optimize income-splitting strategies, especially for couples. By using accounts like the Spousal RRSP of the spouse with the lower income, it is possible to equalize income levels in retirement and potentially reduce the overall tax burden for the household.

Withdrawal Strategies: During retirement, the order in which you withdraw funds from different accounts can have significant tax implications. By carefully planning withdrawals, you can minimize your tax burden. For example, not withdrawing from your TFSA investments till later in life will allow you the maximum tax advantage because your investments are growing tax-free. There is also an advantage from an Estate Planning perspective to not use your TFSA investments till later in life.

Optimizing asset location requires careful consideration of your financial goals, risk tolerance, and tax situation. Everyone’s tax situation is different, which is why you should consult with your advisor while making these decisions. They can help assess your unique circumstances, develop a tailored asset location strategy, and ensure it aligns with your long-term financial goals. At the end of the day, meeting your goals is what will decide your financial success. Click here to schedule a free consultation.

- Jai Gandhi, Associate Investment Advisor

Jai Gandhi is an Associate Investment Advisor at Endeavour Wealth Management with iA Private Wealth, an award-winning office as recognized by the Carson Group. Endeavour Wealth Management provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Jai Gandhi who is a Associate Investment Advisor for iA Private Wealth and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained here in may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.

iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.

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