Is an RSP swap right for
Like many Canadians, you likely have most if not
all of your retirement savings inside your Retirement Savings Plan
(RSP). However, different types of investment returns are taxed
differently. You could be missing an opportunity to improve your
post-tax returns by holding the right investments inside and
outside your RSP.
In other words, it might be time for an RSP
There are two types of investments that should be
considered for a swap. From a tax perspective, it can benefit you
to keep investments that generate capital gains or dividends from
Canadian corporations (“Capital A”) outside
your RSP, and to keep fully taxable interest-generating investments
(“Interest B”) inside it.
“This strategy is particularly beneficial
to those who maximize their RSP contribution every year and who
also regularly invest outside a retirement plan,” says
Patricia Lovett-Reid, Senior Vice President, TD Waterhouse.
Let’s assume you currently hold mostly
“Capital A” investments inside your RSP and
mostly “Interest B” investments outside it. In
other words, you are not making the most of tax efficiency
– and you are not alone. This is what a great many
Canadian investment portfolios look like.
Help is on the way. Current tax laws allow you to
swap a “Capital A” investment with an
“Interest B” investment, as long as three
conditions are met. First, you need to have a self-directed RSP.
Second, the “Capital A” asset and
“Interest B” asset you plan to swap must be
equal in value. And third, the “Interest B”
that is headed for your registered plan has to be RSP-eligible.
Under these conditions, the swap won’t count as an RSP
contribution and won’t affect your RSP contribution room.
And the asset moved from your RSP into the non-registered portfolio
(“Capital A” in our example) won’t be
After the swap, “Interest B”
will grow tax-free inside your RSP and “Capital
A” will be subject to tax from the day of the transfer.
If “Capital A” generates capital gains from
that point on, half the gain must be included in income in the year
that the investment is sold.
However, gains made by “Capital
A” up to the date of transfer will remain in the
registered plan and will not be subject to tax until the funds are
withdrawn from the plan.
When you swap investments, fees should be minimal,
as most transactions aren’t considered commissionable
trades. Instead, the asset location is simply changed from
registered to non-registered — or the other way
“There may still be tax consequences as a
result of an asset swap, especially if the value of the asset being
swapped into your RSP has grown considerably over its
‘book value’, which is the asset’s
price when you purchased it,” continues Lovett-Reid.
“That’s why I urge anyone thinking of doing a
swap to talk to a financial advisor first .Then you can be sure
that you will be making the best move possible.”