Investing $10k capital gain short term or long term in Canada

Question

I have recently received $10k from the sale of a personal asset, deposited to my chequing account. I have no need to spend this money right now, so I would like to invest it. I have an RRSP but have not made any contributions to it in 2015, so that seems like an easy choice, but I want to check here to see what my best option(s) might be. Here's some more information that might affect the answers:

I am on disability and thus receive a modest fixed income, but am able to live within my means and may even be able to begin saving a little bit again, but still well within the RRSP contribution limit if that were the case.

As mentioned, I do not anticipate any unusually large expenditures in the very near future. However, within 6-12 months, I will probably have to replace most of my 7-year-old PC, and probably a new (used) car to replace my 1991 Mitsubishi when it's no longer roadworthy. Would I be smart to keep a few $k back for those things, or invest now (possibly with a shorter term option) and withdraw when needed in a year or so? Or even take out a small car loan when the time comes?

Hopefully this question is amenable to precise enough answers. If that's not the case, please let me know how I can improve it.

Answer 1

The point of an RRSP is that you can put money in when you are paying a lot of taxes (maybe a 50% marginal rate) and take it out later when you are paying less taxes (maybe a 30% marginal rate.) You will thus end up with more money. Since you are not paying high taxes on your modest income, this aspect of an RRSP doesn't really apply to you. When the time comes that you start withdrawing from your RRSP, you will pay taxes on the entire withdrawal, both principal and interest.

A TFSA on the other hand allows withdrawals (typically limited to some small number a year) without the principal or the interest being considered taxable income. That seems like a better approach for you. However, they are not very liquid - you can't deposit, withdraw, deposit, withdraw week after week.

Look around for not-exactly-banks that offer higher interest rates than the banks do. Set up a TFSA with one, and put about 8k in it. (If you have time to investigate GICs, ETFs, and whatnot, fine, investigate that for a while and set up a TFSA that holds those.) Put the other 2k in a high-interest savings account from that institution. High interest will be between 1 and 2% which isn't very high, but oh well.

Assuming you get some notice when you need to replace your car, you could withdraw from the TFSA to get that money. Or you might be lucky and need a car at a terrible time for dealers to sell cars, and get a great deal on a new car with a long warranty, something you could keep for another 15 or 20 years. If you could afford the loan payment then your savings could stick around for a rainier day.

Answer 2

Disclaimer: I am not Canadian and have no experience with their laws and regulations.

There really aren't any safe short term investment options at the moment (with interest rates being close to zero). So, just put the money aside you will need for the car and the computer, maybe on a callable savings account to make at least a few Dollars. Do not take out any loans, it is very unlikely you will earn more than the cost of the loan.

You didn't say how much will be left but, unfortunately, it really is not much to go on anyway. Considering that you seem to have enough income to cover your expenses, you could transfer the rest to your RRSP, invest and just forget about it. I suggest to follow this rule of thumb: the growth portion of your portfolio, which for you means equities, should be directly related to the number of years you won't need to touch these funds. 1 year, 0 equity. 2 years, 10%, 3 years, 20%, and so on. What's not in equities, you could put in short term bonds, meaning an average duration of about 3 years. Needless to say, single stocks/bonds are out of question, ideally you can find 2 ETFs, one for stocks and one for bonds, respectively. However, if there is any possibility you did not mention that you could suddenly depend on this money, you have to keep your equity exposure, and thus your potential earnings, low.

Just a humble thought: i really don't know your specific situation, my apologies if I'm out of line. Often disability means that you are not capable of doing one particular thing anymore, i.e. work physically. Just maybe you would still be capable to do some other type of work, maybe even from the comfort of your home, that would allow you to generate a certain income (and also keep you busy).

I hope this helps. Good luck.