Hi. Today I’m going to give you some insight into your investment options as an incorporated physician.
I’ll start by quickly covering a few investment basics. Then we can look at some of the types of investment accounts you might have in your life—including your corporate account. And finally, some thoughts on how to make it all fit together.
To put it simply, there are basically two types of investments in the world: those that primarily pursue growth and those that focus more on income.
Now, there are also a lot of hybrids and alternatives out there, such as dividend-paying equities, ETFs, exotic bonds, commodities, private equity, and insurance-based investments. But traditionally, most core investments focus mainly on growth or income.
When we talk about growth investments, we’re generally talking about stocks or equities. The terms are pretty much interchangeable. A stock represents fractional ownership in a company. So when you buy a stock, you become a part owner, and accept both the rewards and the risks of ownership.
If a stock rises in value and you sell it, you will be realizing a capital gain. In Canada, only 50% of a capital gain is taxable, so stocks can be a great way to grow your investments without paying too much tax.
When it comes to income, we’re generally talking about bonds.
When a company or a government needs to raise funds, they issue bonds. Buying a bond is like loaning them money in exchange for an IOU promising to pay you back at a certain date in the future with fixed interest payments along the way. These interest payments provide nice predictable income, but unlike capital gains, they are fully taxable.
So, on one hand, you have stocks with the potential for higher returns and higher risk, but lower taxation. And on the other hand, you have bonds with generally lower returns and less risk, but higher taxation.
The third thing I want to quickly explain is mutual funds. Imagine you and a bunch of your friends all want to buy stocks and bonds. A mutual fund is like putting your money together in a pot and hiring a professional portfolio manager to manage it for you. The manager will do their best to buy and sell stocks and bonds at a profit. They do this in exchange for a fee—a small percentage of the money in the pot. For most investors, mutual funds are a great way to build up wealth. In the future, once your portfolio reaches a certain size, you may decide to take your money out of the pot and have a Private Investment Counselor manage your money for you individually.
Now, whether your goal is growth, income, or some combination of both, you need to put your investments in an investment account. From a tax point of view, there are two main types: registered accounts and nonregistered accounts.
With registered accounts, you can accumulate capital gains and interest on a tax deferred basis, meaning tax is not paid on contributions or income earned within the account until it is withdrawn. The exception is a TFSA where contributions are made on an after-tax basis and capital gains and interest accumulate on a tax-free basis. . An RRSP or IPP is used for retirement savings. An RESP is used to save for school. And a TFSA can be used for just about anything you like.
With nonregistered accounts, you have to pay tax on any capital gains or interest in the year you earn them. This includes your personal account and your corporate account. Fitting all these accounts together and aligning them with your investment goals is where things can start to get complex. Let me show you what I mean…
You might be saving to buy a home. You might be thinking about paying for a child’s university education. You definitely need to be planning for retirement. And you may even have ideas about creating a legacy that will last long after you’re gone.
Now, each of these goals takes place on a unique time horizon, from short-term to long-term.
These different time horizons, combined with your personal preferences, are going to dictate a mix of lower and higher-risk investments that you should own.
Then, we have to think about putting the right investments in the right tax-sheltered and non-tax sheltered accounts in order to maximize your results.
Oh, and if you’re married, we have all of these variables times two!
You can see why it’s not unusual for a family to have a dozen or more different investment strategies all at once.
The first step in making sense of it all is setting an overall asset allocation strategy. How much money should you be investing for growth, and how much for income? What’s your appropriate overall level of risk? And what target rate of return is realistic? Once these strategic questions are answered, you can start to execute a plan. Let's zoom in on just one account—your corporate account as an incorporated physician—to break things down a bit.
The money you save in your corporation is generally money you don’t need to spend. Therefore, the goal for a lot of this money is going to be funding your retirement. For many physicians, retirement is still pretty far away, so it’s a long-term goal. Since the time frame is long-term, you can generally afford to take higher risk with your corporate investments. After all, if the market goes down next year, you still have a long time to recover.
Higher risk investments generally mean stocks, and that’s a good match for a nonregistered corporate account, since you can benefit from capital gains. When you look at all of these factors, you can see why younger physicians often have 80% or more of their corporate investments in growth mutual funds that mainly hold stocks.
But to have a truly complete investment strategy, you need balance. With all those growth investments in your corporation, you might decide to hold more bonds in your RRSP to reduce risk and protect your bond interest from tax.
My advice? As always, it pays to work with an MD advisor.
An MD advisor can help you figure out your high-level strategy then show you how best to invest in all your individual accounts.
An MD advisor can recommend a range of sophisticated investment opportunities, including mutual funds, access to Private Investment Counsel, and alternative asset classes that can help tilt the balance of risk/reward in your favour.
And an MD advisor delivers it all with exceptional value, low-fee mutual funds and truly unbiased financial planning.
How should you invest? There are as many different answers as there are physicians, but nobody can give you more knowledgeable or personalized guidance than MD.
If you have any questions, speak to an MD advisor.
This has been an MD Quick Clinic. Thanks for watching.
All examples are for illustrative purposes only and not applicable to US Persons living in Canada.
MD Financial Management does not intend to provide taxation, accounting, legal or similar professional advice to clients or potential clients. The information contained herein is not intended to offer such advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals.
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Incorporation guidance limited to asset allocation and integrating corporate entities into financial plans and wealth strategies. Professional legal, tax and accounting advice regarding incorporation should be obtained in respect to an individual’s specific circumstances.