Everyone talks about the benefits of investing in tax free savings accounts (TFSAs) and registered retirement savings plans (RRSPs). That is, you can invest tax free in TFSAs and invest tax deferred in RRSPs.
However, people seldom talk about the dangers of investing in TFSAs or RRSPs. If you experience any losses in those accounts, it’ll be very hard to recuperate the losses.
On the other hand, if you experience losses in a non-registered account, you can use them to offset capital gains, which makes it more worthwhile to realize losses in non-registered accounts.
What must you do before investing stocks in TFSAs or RRSPs?
Gain real experience investing in stocks in a non-registered account before investing in TFSAs or RRSPs. Because you can use realized losses to offset capital gains, it makes sense to learn to invest in a non-registered account first.
For example, if you invested in Teck Resources Ltd (TSX:TCK.B)(NYSE:TCK) five years ago in a non-registered account, the investment would have declined 63%. You might decide that you want to take a loss.
Let’s say five years ago, you also invested in Alimentation Couche-Tard Inc (TSX:ATD.B). The investment would have appreciated 490%.
If you sold Teck Resources for a loss of $5,000, you can sell Alimentation Couche-Tard for a gain of $5,000 without having to pay any taxes.
It might seem silly because essentially, you didn’t lose or gain anything from the sales. However, imagine starting investing in TFSAs or RRSPs and you experienced more losses than gains. The overall negative experience can be very detrimental to your wealth and health.
What else should you know?
If you have more losses than gains this year, you can use the remaining losses (after they’ve offset this year’s gains) to lower your capital gains in any of the three preceding years or future years.
If you sell shares at a loss in a non-registered account, you cannot buy the shares again within 30 calendar days. If you do, the shares you sold at a loss will not be deducted as a capital loss.
If investors do sell shares at a loss, and they still like the industry and want to buy shares again within 30 days, one strategy investors use is to buy a peer company with similar growth prospects.
In a non-registered account, capital gains are more favourably taxed than ordinary income because only 50% of capital gains is taxed. However, if you don’t sell for gains, you are essentially deferring paying taxes. So, if you bought quality companies at a good price, it may make sense to hold on to them for the long term and just let it grow.
Test your theories and learn to invest in a non-registered account. Once you have optimized your investment strategy, you can translate that success in TFSAs and RRSPs, so that you can avoid losses and maximize gains.
If you like what you've just read, consider subscribing via the "Subscribe Here" form at the top right so that you will receive an email notification when I publish a new article.Disclosure: At the time of writing, I own shares in ATD.B.
Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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