A number of Canadians wait until the last minute to contribute to their RRSP. Perhaps it’s a financial hangover after the Christmas bills have come in or a general avoidance to deal with their finances. Often the RSP investment is made without any real thought on how the investment will be withdrawn to create and income stream in retirement or without considering alternative types of investments such as a TFSA. Before the March 1st deadline ask yourself: have I created a plan to pay as little tax as possible when I start to draw an income from my investments?
Are all investments taxed the same? The answer is no….
The important thing to understand about passive income is that different types of investments are also taxed differently. For example Interest income is taxed more heavily up front and capital gains investments are taxed more when you withdraw them. Some have limits as to how much can be invested such as the RRSP and TFSA, for example.
How risky is it to invest?
Certain passive investments do not guarantee income, such as stocks or equity mutual funds, while other assets such as annuities provide a contractual income guarantee. Some passive investments receive income from different types of asset classes, such as a balanced mutual fund, and some depending on the asset type, will produce a small, moderate, or higher income to live on. Keep in mind RSP and TFSA can be invested in any asset class you choose.
Some investments that create income might be more conservative in terms of income earned (GIC for example) but a lower risk of losing the amount you invested while others might produce a higher return (like a stock) but your investment is at a greater risk of short term loss. Keep in mind RSP and TFSA can be invested in any asset class you choose.
The ideal scenario is to have multiple passive income streams working on your behalf so that you are not having to draw income from only one type of investment. This helps to spread out the taxes and risks over a number of investment sources.