Let’s be honest: the lure of a tax refund in the spring is what really motivates most Canadians to contribute to their registered retirement savings plans before the March 1 deadline.
In the scramble to raise short-term cash, the benefits of a long-term investment strategy often go overlooked. Tax advantages aside; the investments inside an RRSP are what ultimately determine its success or failure.
First, it’s important to know that the March 1 deadline only applies if you want to deduct contributions from your 2021 tax bill. Contributions can be made any time and claimed in 2022 or future years. You can avoid the annual RRSP rush by making regular contributions throughout the year.
Even if you meet this year’s deadline, contributions can be parked in cash for now and invested later.
That leaves some breathing room and the ability to stand back and plan how to get the most out of your RRSP. There are a lot of moving parts that a qualified investment adviser can help explain and implement, but informed investors can save on fees by doing it themselves.
Tax advantages
Contributions can be deducted from the top rate of your taxable income. If your income is high, and you are taxed at a higher marginal rate, the potential tax savings are bigger than if you earn less.
Those contributions can be invested and grow tax-free for decades, but are fully taxed when they are withdrawn. If your RRSP grows too much or your original contributions were made at a low marginal rate, your tax bill could be higher than the original tax savings.
It’s all about the investments
For most Canadians, actual tax savings from an RRSP are small. From an investment perspective, the greatest advantages are forced savings and a long time horizon for investments to grow.
The best way to grow investments over a long period of time, while limiting the risk of overall losses, is through diversification. Diversification can be achieved in countless ways but it generally means a diversity of equity sectors and geographic regions, and fixed income to act as a stabilizer for equity market volatility.
The balance can be adjusted according to your return goals, time horizon, and tolerance for risk.
The best investments for an RRSP
RRSP contributions can be invested in just about anything that trades on legitimate markets.
Most Canadians invest for retirement through mutual funds because it’s the only way for them to get diversification through professional investment managers.
Many mutual funds outperform their benchmark indices over long periods of time, but fees on Canadian mutual funds overall are notoriously high. Once you subtract fees, most mutual funds underperform the benchmark indices they track.
Exchange-traded funds (ETFs) can provide a similar level of diversification for a sliver of the cost of mutual funds. Instead of having a manger choose the holdings, ETFs mimic the holdings in an underlying index such as the S&P 500 and S&P/TSX Composite Index. The most basic ETFs are market-weighted; meaning the weighting of any particular holding in an ETF fluctuates with its price at any given time.
As the value of a portfolio grows, investors can break free from annual fees and diversify by investing directly in stocks. The best stocks for an RRSP are those with long histories of growing earnings over time, strong fundamentals for future earnings, and paying consistent dividends.
Generating income is important for long-term investors saving for retirement. For more sophisticated investors, the derivatives market can offer options that leverage existing holdings to generate income with very little risk.
Investments not right for an RRSP
Time is one of the RRSP’s best qualities. If you make regular contributions, it takes away much of the risk and stress of having to time volatile markets. That makes trendy or speculative investments such as cryptocurrencies, cannabis stocks, or other low-volume equities less than ideal.
Investors with strong stomachs looking for quick returns would be better trading in a tax-free savings account. You can’t deduct TFSA contributions from your income but if you hit the jackpot, withdrawals are never taxed.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
