Prioritizing investments is sometimes a challenge for investors who are able to place their investments in several different kinds of accounts. Investing in a prioritized order can maximize the tax efficiency of a portfolio (pay the minimum amount of taxes). It can also maximize matching funds from employers and government grants.
In Canada, the general rule of thumb for investing priority is:
- For employers that have a pension plan or group retirement plan, if the employer matches employee contributions, contribute to the group Registered Retirement Savings Plan (RRSP) or Defined contribution pension plan up to the company match (the match is like free money, your best possible investment)
- If your children are planning to attend post-secondary education, contribute to a Registered Education Savings Plan (RESP) up to getting the Canada Education Savings Grant (CESG) maximum
- Pay off high interest debt (e.g., credit cards, consumer loans), a guaranteed high return
- Contribute as much as practical to your Tax-Free Savings Accounts (TFSA) and fill the rest of the RRSP (for which of those is best depending on circumstances, see TFSAs versus RRSPs)
- Add to RESP, if needed, depending on projections about costs of post-secondary education, although the TFSA can also be used for this purpose and is more flexible
- Contribute to taxable accounts (also called non-registered accounts, including margin accounts)
Somewhere in this list, paying down mortgages and other debts which do not necessarily have a high interest rate should also appear, but opinions vary widely about Paying down loans versus investing. If you are deciding to invest available cash instead of paying down loans, leverage is not used directly, but the net effect is the same as borrowing to invest.
- Creating a financial plan
- Importance of saving early
- Canadian account types
- Portfolio design and construction
- Tax-efficient investing
- Ram Balakrishnan, TFSA versus RESP, Canadian Capitalist, February 28, 2008, viewed December 12, 2015: "The calculations confirm my suspicion that it is more profitable to save for your child’s education in a RESP by contributing just enough to get the maximum CES grant. But it now makes no sense to contribute the maximum 50K allowed to a RESP over time. It is better to channel any contribution that doesn’t receive a matching grant into a TFSA instead."
- Paul Brent, Why turn down free money?, The Globe and Mail, updated August 23, 2012: "about one in five of his new clients have the opportunity to take part in an employer matching program but have never done so. For financial professionals, it is an act akin to leaving money on the table"
- Ram Balakrishnan, Should I participate in my employer’s matching program?, Canadian Capitalist, March 17, 2008, "In most cases an employee will be far better off taking advantage of any kind of company matching contribution in their group retirement account regardless of the fees charged in the company plan and regardless of any transfer-out restrictions."
RRSPs versus RESPs
- Bruce Sellery and Dan Bortolotti, RRSP vs. RESP: Which comes first? - Two MoneySense dads on which they’re prioritizing and why, MoneySense, February 20, 2015
- Jamie Golombek, When it makes sense to maximize RESPs over RRSPs, National Post, February 2, 2013