Should I Put US stocks in TFSA or RRSP?
Deciding whether to hold US stocks in a Tax Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP) can be tricky, but understanding the benefits and drawbacks of each can help you make a more informed choice.
Can I buy US stocks in a TFSA? | Can I Buy US Stocks in an RRSP? |
Yes, you can definitely buy US stocks in a TFSA! All the investment in the TFSA account, whether from capital gains or dividends, is tax-free within Canada. However, U.S. dividends are subject to a 15% withholding tax. This tax is applied directly by the U.S. government and, unfortunately, you can't reclaim it through foreign tax credits within a TFSA. So while your investments grow tax-free in Canada, you'll still lose a small portion of your U.S. dividends to this withholding tax. | Yes, you can also buy US stocks in an RRSP! One of the most significant benefits of holding US stocks in an RRSP is the exemption from the 15% U.S. withholding tax on dividends. Additionally, contributions to an RRSP are tax deductible, which can reduce your taxable income for the year. Your investments grow tax-deferred, meaning you won't pay any taxes on them until you withdraw the money, typically in retirement when you might be in a lower tax bracket. |
Buying US stocks in TFSA or RRSP?
Choosing between a TFSA and an RRSP for your US stocks depends on your personal financial goals and circumstances, here are the key differences between TFSA and RRSP:
TFSA
Tax-free growth: Gains from US stocks in a TFSA are not taxed in Canada, allowing for tax-free growth.
U.S. withholding tax: Dividends from US stocks are subject to a 15% withholding tax by the U.S. government. This tax is not recoverable within a TFSA.
Contribution limits: Be mindful of annual contribution limits to avoid penalties.
RRSP
Tax-deferred growth: Gains from US stocks in an RRSP are tax-deferred until withdrawal, at which point they are taxed as ordinary income.
No U.S. withholding tax: on dividends: Dividends from US stocks in an RRSP are not subject to the 15% U.S. withholding tax due to a tax treaty between Canada and the U.S.
Immediate tax deductions: Contributions to an RRSP provide immediate tax deductions, reducing your taxable income for the year.
Considerations of choosing a TFSA or RRSP
Currency exchange fees: Buying US stocks involves converting Canadian dollars to U.S. dollars, which may incur currency exchange fees.
Diversification: Holding US stocks can diversify your portfolio, but be aware of geopolitical and economic risks associated with foreign investments.
Investment Goals: Choose the account type based on your investment goals and tax considerations. An RRSP may be more beneficial for long-term retirement savings, while a TFSA offers more flexibility for shorter-term goals.
By understanding the benefits and limitations of each account, you can make informed decisions when buying US stocks in a TFSA or RRSP.
