Which type of investments to keep inside RRSP?
Everything else can be held inside or outside your registered account depending on your investment or tax needs Milliondollarjourney.com has a couple of articles on this topic. How Investing Taxes Work part 1 and part 2. The following is a summary of that article. Capital gains and dividends are taxed at a preferred rate, while interest tax is taxed at your regular rate. Interest is taxed at your marginal rate, but capital gains are taxed at only 50% of your marginal rate. That means that it makes sense to place the interest bearing account inside the RRSP but keep stocks outside. Additionally, you can claim your losses on your capital appreciating stocks against your gains if they are outside of your RRSP. Hopefully, your stocks will never go down but that's not very realistic. Dividends from Canadian companies are eligible for a dividend tax credit, but not dividends from foreign companies. [I actually understood that dividends from U.S. companies are treated as a special case] It's not clear to me from reading the article how much of this applies to mutual funds. The summary is as follows:
A questoin that I deal with almost every day.  Like most investments it comes down to.....What is the purpose for this money?  If it is truly a rainy day savings account that you may need in the short term, then fixed income investments like savings accounts, GIC's, Bonds, Bond funds and Fixed Income ETF's are ideal as they are taxed very inefficiently outside of any registered plan (therefore tax free in here).  However if you have a plan in place that has all your short term needs covered elsewhere, I believe this is the place that you should be the most aggressive in your overall portfolio.  If that mining stock goes up by 1000% wouldn't it be nice to put all of that gain in your pocket? I personally invest in 4 different ETFs.  I have $1000 to invest every month.  To save on transaction costs, I invest that sum in only one ETF each month, the one that is most underweight at the time. For example, I invest in XIC (30%), VTI (30%), VEA (30%), and VWO (10%).  One month, I'll buy XIC, next month VTA, next month, VEA, then XIC again.  Eventually I'll buy VWO when it's $1000 underweight.  If one ETF tanks, I may buy it twice in a row to reach my target allocation, or if it shoots up, I may skip buying it for a while.  My actual asset allocation never ends up looking exactly like the target, but it trends towards it.  And I only pay one commission a month. If this is in a tax-sheltered account (main TFSA or RRSP), another option is to invest in no-load index mutual funds that match the ETFs each month (assuming there's no commission to buy them).  Once they reach a certain amount, sell and buy the equivalent ETFs.  This is not a good approach in a non-registered account because you will have to pay tax on any capital gains when selling the mutual funds. Let's say your marginal tax rate is 33%.  For every dollar you put in an RRSP, you'll get 33 cents back on your taxes, while the whole amount grows tax free inside the investment.  If you can afford it, money in an RRSP generates a lot of free money. You will not benefit at tax time like you did with your initial contributions, because you have already benefited and are simply repaying your withdrawn contributions. However, capital gains are not taxed inside of your RRSP, until you withdraw the money. Let's say you have $10,000 to repay and have all the money now. It makes sense to repay it immediately. Whatever interest or capital gains you make inside of the RRSP are not taxed. However, your $10,000 contribution this year will not offer you any deductions on your tax return. There are exactly two reasons I can see to not immediately repay the full amount, if able. First, you may need the money for an emergency fund, and there are significant implications for removing money from your RRSP in such a case. Second, if you believe you will be in a higher tax bracket when you retire, it may not make sense to put any money into an RRSP right now. Almost certainly, you want to repay the entire lump sum if able. Here's how I think about money. There are only 3 categories / contexts (buckets) that my earned money falls into. Savings is my emergency fund. I keep 6 months of total expenses (expenses are anything in the consumption bucket). You can be as detailed as you want with this area but I tend to leave a fudge factor. In other words, if I estimate that I spend approximately $3,000 a month in consumption dollars then I'll save $3,500 times 6 in the bank. This money needs to be liquid. Some people use a HELOC, other people use their ROTH contributions. In any case, you need to put this money some place you can get access to it in case you go from accumulation (income exceed expenses) to decumulation mode (expenses exceed income). This money is distinct from consumption which I will cover in paragraph three. Investments are stocks, bonds, income producing real estate, small businesses, etc. These dollars require a strategy. The strategy can include some form of asset allocation but more importantly a timeline. These are the dollars that are working for you. Each dollar placed here will multiply over time. Once you put a dollar here it shouldn't be taken out unless there is some sort of catastrophe that your savings can't handle or your timeline has been achieved. Notice that rental real estate is included so liquidating stocks to purchase rental real estate is NOT considered removing investment dollars. Just reallocating based on your asset allocation. This bucket includes 401k's, IRAs, all tax-sheltered accounts, non-sheltered brokerage accounts, and rental real estate. In general your primary residence is not included in this bucket. Some people include the equity of their primary residence in the investment column but it can complicate the equation and I prefer to leave it out. The consumption bucket is the most important bucket and the one you spend the most time with. It requires a budget. This includes your $5 magazine and your $200 bottle of wine. Anything in this bucket is gone. You can recover a portion of it by selling it on ebay for $3 (these are earned dollars) but the original $5 is still considered spent. The reason your thought process in this area is distinct from the other two, the decisions made in this area will have the biggest impact on your personal finances. Warren Buffett was famous for skimping on haircuts because they are worth thousands of dollars down the road if they are invested instead. Remember this is a zero-sum game so every $1 not consumed is placed in one of the other buckets. Once your savings bucket is full every dollar not consumed is sent to investments. Remember to include everything that does not fit in the other two buckets. Most people forget their car insurance, life insurance, tax bill at the end of the year, accountant bill, etc. In conclusion, there are three buckets. Savings, which serve as your emergency bucket. This money should not be touched unless you switch from accumulation to decumulation. Investments, which are your dollars that are working for you over time. They require a strategy and a timeline. Consumption, which are your monthly expenses. These dollars keep you alive and contribute to your enjoyment. This is a short explanation of my use of money. It can get as complicated and detailed as you want it to be but as long as you tag your dollars correctly you'll be okay IMHO. HTH. You don't seem to have any particular question to be answered. Your understanding of RRSPs seems to be very good.  Have you considered whether you might be better off putting your retirement savings into a TFSA instead? Both types can protect your growth from taxation (provided you reinvest the refund from the RRSP). The main way in which the RRSP is better than TFSA is that you can pay the tax on the contribution at a time when your income is lower, and thus have a lower marginal tax rate. Most people retire with a lower income than during their earning years, but it's a matter of tax brackets. If you think you'll be in the same bracket (same marginal tax rate) when you retire, then the TFSA and RRSP work out even in that regard. So in your case, the question you want to ask yourself is: when I retire, will I have an income (including CPP, OAS, pension payments, etc) that exceeds $45,282 worth of today's dollars? If so, your RRSP holds no advantage over the TFSA. In fact, the RRSP may even be worse, since the withdrawals count as income and reduce the amount of OAS and perhaps GIS payments that the government gives you - at least under current regulations. If you're unsure, I suggest you try this calculator from taxtips.ca that runs both scenarios and helps you see which one is more beneficial. It even factors in the OAS/GIS clawbacks. This is a somewhat complicated question because it really depends on your personal situation.  For example, the following parameters might impact your optimal asset allocation: If you need the money before 3 years, I would suggest keeping almost all of it in cash, CDs, Treasuries, and ultra safe short-term corporate bonds. If however, you have a longer time horizon (and since you're in your 30s you would ideally have decades) you should diversify by investing in many different asset classes.  This includes Australian equity, international equity, foreign and domestic debt, commodities, and real estate.  Since you have such a long time horizon market timing is not that important. "shouldn't withdraw stock investments for at least 5 years would be better re-phrased as: ""don't invest money in stocks if you (really) need it within next few years"". The underlying principle is: stocks are one of the higher-risk investment classes out there.  While that's exactly what you want over a long time horizon (longer than the ebb and flow of the broader economy); if you know you'll definitely have to withdraw $50k (or any large chunk) of it within just a few years, it's possible that a great long-term vehicle like stocks, could actually rob you of money on a shorter time horizon. So if you want to start a business 2 years from now, you'll probably want to retain some of that $300k initial pile in lower-risk investment vehicles (e.g. bonds, CDs, certain ETFs and mutual funds aimed at ""capital preservation"", etc). That said, interest rates are so low, that if you're flexible with how much money you'll need to start that business, I'd probably keep as much as you can stomach in diversified stocks (per your original plan)." I was thinking to do mix of ELSS and Tax Saving FDs. But is my choice correct? Also what other options I am left with? This depends on individual's choice and risk appetite. Generally at younger age, investment in ELSS / PPF is advisable. Other options are Life Insurance, Retirement Plans by Mutual Funds, NSC, etc Most people carry a diversity of stock, bond, and commodities in their portfolio.  The ratio and types of these investments should be based on your goals and risk tolerance.  I personally choose to manage mine through mutual funds which combine the three, but ETFs are also becoming popular. As for where you keep your portfolio, it depends on what you're investing for.  If you're investing for retirement you are definitely best to keep as much of your investment as possible in 401k or IRAs (preferably Roth IRAs).  Many advisers suggest contributing as much to your 401k as your company matches, then the rest to IRA, and if you over contribute for the IRA back to the 401k.  You may choose to skip the 401k if you are not comfortable with the choices your company offers in it (such as only investing in company stock). If you are investing for a point closer than retirement and you still want the risk (and reward potential) of stock I would suggest investing in low tax mutual funds, or eating the tax and investing in regular mutual funds.  If you are going to take money out before retirement the penalties of a 401k or IRA make it not worth doing. Technically a savings account isn't investing, but rather a place to store money. "Your question is based on incorrect assumptions. Generally, there's no ""penalty"", per se, to make a withdrawal from your RRSP, even if you make a withdrawal earlier than retirement, however you define it. A precise meaning for ""retirement"" with respect to RRSPs is largely irrelevant.* Our U.S. neighbours have a 10% penalty on non-hardship early withdrawals (before age 59 &half;) from retirement accounts like the 401k and IRA. It's an additional measure designed to discourage early withdrawals, and raise more tax.  Yet, in Canada, there is no similar penalty. Individual investments inside your RRSP may have associated penalties, such as the dreaded ""deferred sales charge"" (DSC) of some back-end loaded mutual funds, or such as LSVCC funds that generated additional special tax credits that could get clawed back.  Yet, these early withdrawal penalties are distinct from the RRSP nature of your account.  Choose your investments carefully to avoid these kinds of surprises. Rather, an RRSP is a tax-deferred account, and it works like this:  The government allows you to claim a nice juicy tax deduction, which can reduce your income tax at your marginal rate in the year you make a contribution, or later if you should choose to defer the deduction. The resulting pre-tax money accumulated in your RRSP benefits from further tax deferral: assets can grow without attracting annual income tax on earned interest, dividends, or capital gains. You don't need to declare on your income tax return any of the income earned inside your RRSP, unlike a regular investment account. Here's the rub: Once you decide to withdraw money from your RRSP, the entire amount withdrawn is considered regular income in the year in which you make the withdrawal.  Thus, your withdrawals are subject to income tax, and yes, at your marginal rate.  This is always the case, whether before or after retirement. You mentioned two special programs: The Home Buyers' Plan (HBP), and the Lifelong Learning Plan (LLP).  Neither the HBP nor the LLP permit tax-free withdrawals.  Rather, each of these programs are special kinds of loans that you can borrow from your own RRSP. HBP and LLP loan money isn't taxed when you get it because you are required to pay it back, and you pay it back into your own RRSP: You always pay income tax at your marginal rate on your RRSP withdrawals.** * Above, I said a precise meaning for ""retirement"" with respect to RRSPs is largely irrelevant.  Yet, there are ages that matter:  By the end of the year in which you turn 71, you are required to convert your RRSP to a RRIF. It's similar, but you can no longer contribute, and you must withdraw a minimum amount each year. Other circumstances related to age may qualify for minor tax relief intended for retirees, such as the Age Amount or the Pension Income Credit.  Generally, such measures don't significantly change the fact that you pay income tax on RRSP withdrawals at your marginal rate – these measures raise the minimum you can take out without attracting tax, but most do nothing at the margin.** ** Exception: One might split eligible pension income with a spouse or common-law partner, which may reduce tax at the margin." I would focus first on maxing out your RRSPs (or 401k) each year, and once you've done that, try to put another 10% of your income away into unregistered long term growth savings. Let's say you're 30 and you've been doing that since you graduated 7 years ago, and maybe you averaged 8% p.a. return and an average of $50k per year salary (as a round number).  I would say you should have 60k to 120k in straight up investments around age 30.  If that's the case, you're probably well on your way to a very comfortable retirement. "First, you don't state where you are and this is a rather global site.  There are people from Canada, US, and many other countries here so ""mutual funds"" that mean one thing to you may be a bit different for someone in a foreign country for one point.  Thanks for stating that point in a tag. Second, mutual funds are merely a type of investment vehicle, there is something to be said for what is in the fund which could be an investment company, trust or a few other possibilities.  Within North America there are money market mutual funds, bond mutual funds, stock mutual funds, mutual funds of other mutual funds and funds that are a combination of any and all of the former choices.  Thus, something like a money market mutual fund would be low risk but quite likely low return as well.  Short-term bond funds would bring up the risk a tick though this depends on how you handle the volatility of the fund's NAV changing.  There is also something to be said for open-end, ETF and closed-end funds that are a few types to consider as well. Third, taxes are something not even mentioned here which could impact which kinds of funds make sense as some funds may invest in instruments with favorable tax-treatment. Aside from funds, I'd look at CDs and Treasuries would be my suggestion.  With a rather short time frame, stocks could be quite dangerous to my mind. I'd only suggest stocks if you are investing for at least 5 years.  In 2 years there is a lot that can happen with stocks where if you look at history there was a record of stocks going down about 1 in every 4 years on average.  Something to consider is what kind of downside would you accept here?  Are you OK if what you save gets cut in half?  This is what can happen with some growth funds in the short-term which is what a 2 year time horizon looks like.  If you do with a stock mutual fund, it would be a gamble to my mind.  Don't forget that if the fund goes down 10% and then comes up 10%, you're still down 1% since the down will take more." Question One: Question Two: Your best reference for this would be a brokerage account with data privileges in the markets you wish to trade. Failing that, I would reference the Chicago Mercantile Exchange Group (CME Group) website. Question Three: Considering future tuition costs and being Canadian, you are eligible to open a Registered Education Savings Plan (RESP). While contributions to this plan are not tax deductible, any taxes on income earned through investments within the fund are deferred until the beneficiary withdraws the funds. Since the beneficiary will likely be in a lower tax bracket at such a time, the sum will likely be taxed at a lower rate, assuming that the beneficiary enrolls in a qualifying post secondary institution. The Canadian government also offers the Canada Education Savings Grant (CESG) in which the federal government will match 20% of the first $2500 of your annual RESP contribution up to a maximum of $500. I would say yes, it makes sense to keep some money in taxable accounts.  Retirement accounts are for retirement, and the various early withdrawal penalties are designed to enforce that.  If you're anticipating using the money before retirement (e.g., for home purchase), it makes sense to keep it out of retirement accounts. On the other hand, be aware that, regardless of what kind of account it is in, you face the usual risk/return tradeoff.  If you put your money in the S&P 500 and the S&P 500 tanks just before you were going to buy a house, your down payment evaporates and you will have to wait and buy a house later.  You can manage this by shifting the allocation of this money and perhaps cashing it out if a certain amount is gained (i.e., it grows to the level of your target down payment) and you are close enough to the house purchase time that you don't want to risk it anymore. Basically, if you invest money for a pre-retirement use, you may want to keep it in a taxable account, but you also need to take account of when you'll need it and manage the risk accordingly.