Canadians have two types of accounts available to them to meet savings goals. The Registered Retirement Savings Plan (RRSP) was created in 1957, while 2009 was the first year of the Tax-Free Savings Account (TFSA). Since idle cash doesn’t give the best return, you can contribute to either account or both for considerable money growth.
The qualified investments in an RRSP and TFSA are the same, although utilization depends on the accountholder’s needs. While the TFSA might be more popular today, the older RRSP has advantages that are most beneficial to investors.
1. Tax-deductible contributions Users can claim their RRSP contributions as deductions on tax returns. If you’re in a higher income bracket, contribute to the RRSP to reduce your tax payable significantly. Conversely, if you belong to the lower-income bracket, consider carrying forward the deduction for your contribution to a future year when you anticipate being in a higher tax bracket.
2. International diversification The RRSP is suitable for investors desiring international diversification. For example, you can combine Corus Entertainment (TSX:CJRb) (TSX:CJR.B) and high-yield AT&T in your portfolio. The U.S.-Canada tax treaty allows Canadians to invest in American stocks and not pay taxes on dividends earned, provided you hold them in an RRSP, not the TFSA.
Corus is among the TSX stocks with strong buy ratings by market analysts. They forecast a 55.96% upside potential. The current share price of $5.35 (+28.8% year to date) could climb to $8.34 in 12 months. Also, the overall return should be higher to include the 4.49% dividend. It should be a potent combo with AT&T, which pays an 8.62% dividend.
The $1.11 billion influential media and content company has returned to profitability in fiscal 2021 following the $625.3 million net loss in fiscal 2020. Corus’s consolidated revenue growth was 3%, while net income reached $172.55 million. According to management, the building of a content powerhouse will continue in fiscal 2022.
Doug Murphy, president and CEO of Corus, said powerful tailwinds from the economic recovery are emerging. The impressive top- and bottom-line growth in Q4 fiscal 2021 are proof. He reveals that Corus will direct free cash flow towards pursuing its leverage target while funding an attractive dividend.
Also, the plan is to invest in digital video, advertising innovation, and its own content business. All three present incredible opportunities, Murphy said.
3. Investment growth in retirement RRSP users must close their accounts when they reach age 71, but retiring it presents an option for investment growth in retirement. Most accountholders transfer their RRSP is to a Registered Retirement Income Fund (RRIF). Dividends from U.S. stocks are likewise tax-exempt, because the RRIF is also a retirement plan.
However, be aware of the minimum withdrawal factor that increases gradually every year. The factor pertains to the percentage of the funds you must take out for any given year. The basis of calculation is the fund value and age as of January 1 for the year of your withdrawal. Again, you pay fewer taxes if you’re in a lower tax bracket in retirement.
Complementing accounts The TFSA offers more flexibility, while the RRSP has a higher contribution room. Still, they are complementing accounts. It would be best to own both and use them depending on your circumstance.
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Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.