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Bode Jobi, Regional Wealth Specialist, Financial Horizons Group
As RRSP season is in full swing, let’s jump in today and talk about Asset Location Strategy.
An asset location strategy goes deeper than asset allocation – aligning different amounts to each specific account type benefiting the client by reducing the tax amount paid.
Let’s look at different Asset Location Strategies.
Advisors execute an asset allocation strategy at the account level.
- A client that holds an RRSP, TFSA and non-registered account will likely have similar allocations in each of their accounts.
Executing an asset location strategy aligns different taxed assets with specific account types so that lower tax is paid.
The result is, an individual or household asset allocation that not only meets the client’s risk tolerance, it should also yield a higher after-tax return.
There are four categories of taxable investments in Canada, they include (from highest to lowest tax): investment income, dividends, capital gains and return of capital.
In a similar way, there are three categories of accounts: Registered retirement accounts (such as RRSPs), non-registered accounts and TFSAs.
When implementing an asset location strategy, the higher taxed assets, such as income, should be held in registered retirement accounts.
- Assets where distributions cannot be controlled such as (Dividend paying assets) are held in the TFSA.
- Capital assets should be held in the non-registered accounts where losses can be used to offset gains, whereas realized capital gains can be planned at the investors discretion.
- Assets that mainly distribute return of capital should also be held in non-registered accounts
The result is clients execute asset allocation across all accounts to maximize after-tax income.
This strategy is appropriate for those that maximize their RRSPs, TFSA accounts and have a non-registered account.
Consider the Asset Location strategy next time you’re talking to clients about effective solutions to reduce the amount of tax they pay.
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