Investing in bonds
Question: I am interested in investing in one or two high-quality bond funds for the fixed income part of my portfolios, one in a RRIF and one non-registered. Do the same principles hold true when investing in bond funds as in individual bonds? If so, is this a sensible time to invest, or should I wait until I think interest rates have peaked? If now is not a good time, what alternative is there for fixed income other than GICs? – D.S.
For starters, the tax implications of your bond investments are very different inside and outside the RRIF. In the non-registered portfolio, the interest income will be taxed at your marginal rate, which means you may not have a lot left at the end of the day. For example, if the bond yields 6% and your marginal tax rate is 40%, your net after-tax return will be only 3.6%. Inside the RRIF, of course, the full amount of the interest will be received and taxed only when you make withdrawals from the plan.