Deciding between a registered retirement savings plan (RRSP) and a tax-free savings account (TFSA) can be a complicated calculation involving tax rates, timelines and how one plans to use the funds involved. But for Canadian savers, the choices don’t end with simply prioritizing one account over the other.

Strategizing about what kind of investments to put in each in order to maximize the tax benefits while keeping your overall portfolio in the right balance adds another layer of complexity.

The key to deciding what should go where usually comes down to how each vehicle is taxed, said Colin White, chief executive and portfolio manager at Verecan Capital Management Inc.

“The money you make in your TFSA is 100 per cent tax-free and the money you make inside your RRSP is going to be taxed in the future,” White said, noting that those using both accounts would thus lean toward the TFSA for equities and fixed-income in an RRSP.

Martin Pelletier, a senior portfolio manager at Wellington-Altus Private Counsel Inc. and columnist for the Financial Post, is even more specific, suggesting that growth stocks in particular are better suited to the TFSA.

“If you have the S&P 500, or even some of the (Magnificent Seven Big Tech) stocks, those are good names to hold within that TFSA,” Pelletier said. “It obviously depends on when you’re buying and the market conditions, but anything where you see any sort of market upside on the equity growth side, that should be within your TFSA.”

That’s because, as White points out, you keep 100 per cent of the gains in the TFSA. The downside, of course, is that higher risk stocks can cost you as well.

You can also use a TFSA to balance risk and growth, Pelletier said,

outlining a strategy his company uses to capture the upside of equities during volatile markets while still protecting some or all of the capital on the downside.

“What you want to do is harvest volatility and take more growth in your TFSA. And you can do that through rebalancing (during) market pullbacks, buying assets or investments when volatility expands,” he said. The protection in this case can come through structured note products.

Structured notes are hybrid investment products tied to the performance of various underlying assets, which Pelletier said helps mitigate the downside while still making money.

“These notes are taxed as income outside of a registered vehicle, so that’s why they’re an excellent instrument to use within tax sheltered

TFSAs and RRSPs ,” said Pelletier. As investors get older and closer to retirement, most will gradually shift toward taking volatility off the table, said Pelletier.

“An RRSP is going to smooth your cash flows, it’s going to provide a predictable return … and then allow you to reinvest interest and coupons during periods of market distress,” he said.

Dividend-paying companies are one source of stable income. Canada has more dividend-paying companies than the U.S., Pelletier said, partly because of the oligopolies we have in certain sectors. More stable dividend payers such as banks, utilities and telecoms are usually better suited for an RRSP because they provide predictable income with lower volatility, he said.

“In Canada, there are companies like Enbridge that are paying a nice consistent dividend in the mid-single digits with a little bit of growth attached to it, and you’re getting a seven or eight per cent compounded rate of return within your RRSP,” he said.

However, companies that pay high dividends can have their place in a growth-focused TFSA.

“If you think that dividend is sustainable and the share price increases to lower the dividend yield, you can make a lot of money on capital appreciation and the dividend,” said Pelletier.

One area where Canadians need to be strategic involves where they put U.S. dividend-paying securities.

These are subject to a withholding tax for non-U.S. residents if held in the wrong tax-sheltered vehicle.

Keeping them in a TFSA can have “unintended tax consequences,” said John De Goey, portfolio manager at Designed Securities Ltd.

“It may not be the most effective investment strategy because U.S. dividends paid to Canadian residents are subject to a 15 per cent withholding tax when held in a TFSA,” he said. “If you want exposure to American asset classes, buy mutual funds or ETFs that trade in Toronto.”

In an RRSP, however, U.S. dividend bearing assets are exempt from withholding taxes.

Pelletier said fixed income investments such as corporate bonds are also better suited for RRSPs.

One thing to consider, said De Goey, is that while bonds are taxed at your top marginal rate and stocks are taxed at a 50 per cent inclusion rate, stocks may earn more than twice as much as bonds.

“As such, putting stocks in registered plans and bonds in non-registered plans might actually be shrewd,” he said. “While you might pay less tax now if you keep growth assets in your RRSP, you will likely ultimately pay more when the larger dollar amounts are slowly liquidated and added to your income after converting your RRSP to a RRIF.”

Finally, there’s the question of how to handle those times you may need to unexpectedly withdraw money from your holdings. White said having three to six months’ worth of expenses for emergencies is a good idea from a financial planning perspective. In general, any money you plan to spend over the next few years should be easily accessible in a high-interest savings account, which can be held inside a TFSA.

Withdrawals from TFSAs are tax-free, so you can access your money at any time and the funds can be recontributed in the next calendar year.

  • Garry Marr: Borrowing to fund your TFSA or RRSP is tempting — but is it worth the risk?
  • Avoid these TFSA and RRSP mistakes to keep the CRA off your back
  • TFSA vs. RRSP: How Canadians from gen Z to the baby boomers can get the most out of their savings

Read more from our TFSA vs. RRSP series

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  • TFSA vs. RRSP: How Canadians from gen Z to the baby boomers can get the most out of their savings
  • TFSA vs. RRSP: Avoid these TFSA and RRSP mistakes to keep the CRA off your back
  • TFSA vs. RRSP: Garry Marr: Borrowing to fund your TFSA or RRSP is tempting — but is it worth the risk?