It’s already complicated enough that you have to choose where to invest your money to make the biggest bang for your buck. Before you actually invest your money, Canadians must make another decision — if you were to choose between a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP), which one should you contribute to first?
Generally, TFSA should be your number one priority, unless you’re in a high tax bracket. If you’re in a high tax bracket, you can consider contributing to your RRSP first to reduce your income taxes. For example, according to TaxTips.ca, if you’re a high earner in British Columbia, making $300,000 this year from your professional job, about $47,248 of your earnings are taxed at the highest bracket — resulting in income taxes of roughly $25,278 (a tax rate of 53.50%!) for that bracket. In that case, it’d make perfect sense to maximize your RRSP to minimize the income tax you pay at a high rate.
If you’re earning, say, $50,000 a year and expect to be in a higher tax bracket in the future, you can choose not to maximize your RRSP to save more room for future years. For most people, it’d be smart to target to maximize their TFSAs every year. Although contributing to the TFSA doesn’t reduce your taxes, what you earn inside is tax-free, including any income and price appreciation you get!
No matter what you choose to invest in your TFSA or RRSP, it makes good sense to maximize your returns. Therefore, it would be smart for investors to invest in solid stocks in these accounts to target growing their long-term wealth.
TFSA stock to own
One stock that I think is worthy of consideration for our TFSAs is Brookfield Asset Management (TSX:BAM). The stock offers both dividends and growth. The sector it is in is expected to continue to grow.
The company anticipates to grow at a double-digit rate. Specifically, the global alternative asset manager targets to double the size of its business over the next five years so that its fee-bearing capital hits the milestone of about US$1 trillion.
Its dividend yield of approximately 3.1% is not bad, seeing as it has the potential to increase that dividend by 10% or higher per year. At about $54 per share at writing, the stock is fairly valued. If you’re looking for a bargain, try to buy it on meaningful dips.
RRSP stock to consider
For their RRSPs, Canadians can consider investing in U.S. dividend stocks that pay decent dividend yields. Inside RRSPs, there’s no foreign withholding tax for the qualified dividends paid out from U.S. stocks. Otherwise, there’s a 15% withholding tax on the U.S. dividend if received in the TFSA or non-registered account, for example.
A safe U.S. stock for consideration is Pepsi. It owns well-known snacks and beverages, including Lay’s, Quaker Oats, Cheetos, Doritos, Pepsi, Mountain Dew, Gatorade, etc. The market correction of about 14% in the consumer staples stock from its 52-week high puts it at a reasonable valuation for buying.
At the recent price of US$168.53 per share, Pepsi trades at a price-to-earnings ratio of about 22.2 and offers a decent dividend yield of 3%. For your reference, its three-, five-, and 10-year dividend-growth rates are 7.1%, 6.6%, and 8.2%, respectively.
