Personal Investor: 4 tax tools to boost investment returns
Taxes are normally seen as a drain on investments but there are four tax tools available to the average investor that could actually boost returns over the long term.
All four tools can help investors save thousands of dollars separately, and even more if they are used together as a strategy.
- Registered Retirement Savings Plan: Most of us are familiar with the RRSP. Contributions can be deducted from an individual’s highest income tax bracket and grow tax free in just about any investment. Plan holders who reinvest the tax savings can watch their tax savings compound over the years. Contributions and gains are not taxed until they are withdrawn – ideally in retirement when the plan holder is in a lower tax bracket. If you don’t have enough income to contribute one year, you can carry the available contribution space forward to future years when you are in a higher income tax bracket.
- Tax Free Savings Account: The TFSA is the same as the RRSP – only different. Investors can hold the same broad range of securities in a TFSA, but unlike an RRSP, they cannot deduct their contributions from their taxable income. On the plus side, unlike RRSPs, in most cases returns from investments in a TFSA are not taxed.
- Capital gains exemption: Outside a registered account like an RRSP and TFSA only half of equity gains are taxed. Equity losses can even be used to wipe out capital gains going back three years or forward indefinitely.
- Dividend tax credit: Dividends outside a registered account are usually fully taxed but a dividend tax credit is available for eligible dividend stocks.