Investment Accounts

Last week I discussed the different types of investments that a person can make (Types of Investments). This week I will be discussing some of the different accounts you can open. We have spoken previously about the importance of having multiple accounts. Having multiple accounts can help create friction when budgeting your money. Making it more difficult to access your money can have very large benefits in the long term. Multiple accounts is just one way to insure this occurs. There are a number of accounts a person can open including LIPAs, GRSPs, RESPs, and many more. There are many benefits to each account but it can become annoying to figure which one best suits you. By providing a basic breakdown and explanation of the 3 major accounts I hope to help you better understand how they can be useful in your personal finance journey.

Accounts

1. TFSA
2. RESP
3. RRSP

TFSA

A TFSA or tax free savings account is an account that shelters interest earned, dividends and capital gains from tax. A TFSA can hold a large number of investments including mutual funds, securities, bonds and cash. A TFSA does have a yearly contribution limit determined ever year by the CRA. The contribution limit for 2021 is $6000 and TFSA owners are able to contribute up to $6000 plus any contribution limit carried over from previous years.  If you have never contributed to your TFSA and you were eligible for a TFSA when they were first introduced in 2009 you would have a contribution limit of 75,500 as of 2021. A TFSA can only be opened once you turn 18. After turning 18 any amount of contribution limit that hasn’t been fully used is carried over to the following years. The majority of people use TFSAs as their main vehicle for investing in stocks. Unlike an RRSP a person can withdraw from their TFSA at any time. Any amount taken from their TFSA is added to your contribution limit. A TFSA has many advantages including saving for retirement, tax free growth, tax free earnings, withdrawals and more. A TFSA is a great way to begin your personal finance journey for investing, if you don’t already have one I would consider getting one to capitalize on its many benefits.

RESP

An RESP is typically used by caregivers in order to save for a child’s post-secondary education. A person can contribute to a family RESP until the beneficiary turns 31. While a person with  an individual RESP can contribute to it up to 31 years after the plan was opened for the beneficiary. At the end of either RESP the account must be terminated. The maximum contribution limit is 50,000 per lifetime but there is no annual limit. Over-contributions are taxed at 1% per month of the over-contribution. The beneficiary of a RESP must be a Canadian resident and have a valid SIN number. RESPs not only provide the user access to the Canada Education Savings Grant (CESG)  but they also generate tax deferred income. The Canada Education Savings Grant is an amount of money given to each family based on the amount contributed to their RESP. The maximum grant a person can receive is $600 a year with a lifetime maximum of $7200. Those that are eligible will receive $500 of CESG contribution room yearly. Any unused contribution limit for a child that is under 18 is carried on to be used when contributions are made. Withdrawing any funds for non-educational purposes imposes tax consequences as well as returning any amount of CESG that you have accumulated. Although this account may not seem like an investment. An education is the greatest investment a person can ever make or be gifted. For this reason it is just as important as the other accounts and should be one of the many things you consider after having children.

RRSP

A registered retirement savings plan is a type of financial account in Canada for holding savings and investment assets. RRSPs have many advantages such as saving for retirement, tax deductions on contributions, and tax deferred growth. Unlike a TFSA any tax payers younger than the age of 71 can open and begin to contribute to a RRSP. The contribution limit is also determined by the CRA and is 18% of your previous years income or $27,230 in 2020. Any income you earn in the RRSP is exempt from tax and only taxable once payments are taken from the account. Withdrawing from this account before retirement requires a deregistration for a partial or full withdrawal and comes with tax deductions. This can be included in your taxable income in the year the withdrawal was made. On the last day of the year when a person turns 71 their RRSP matures and must be rolled over to a RRIF, purchase annuities or withdraw all money from the account. On top of CPP and eventually Old Age Security (OAS) your RRSP is a great way to fund your retirement.

All of these accounts may not be applicable to you at the moment but the average person will end up using some or all of these accounts at some point in their life. It is important to research all of the benefits to these accounts because you may be missing out on potential tax savings and greater protection on the money you have accumulated.

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