You’re in your adulthood and have a good job with a decent salary. One time, while hanging out with your best friend, he was all bells and whistles when sharing about setting up his very first RRSP and TFSA. He was going on and on about all the benefits of those registered accounts. He suggested you should open up yours too. After the talk, you read about those registered accounts, but it’s all Greek to you. No worries, I’m here to tell you all you should know about those registered accounts.
What are registered investment accounts?
Registered accounts, recognized by the Canada Revenue Agency (CRA), are your financial allies. They let your money grow tax-free or with tax breaks. You might be wondering, ‘Why are these things around?’ Well, it’s simple. The government set them up to encourage Canadians to save for various purposes, including retirement, education, first home purchase and short-term goals, so you can have a secure life down the road.
Type of registered investment accounts
You might think there are only two registered accounts: TFSA and RRSP. Plain and simple, eh? Sorry to disappoint you, but there is actually a long list of these accounts. However, because pension plans have become less and less relevant nowadays, I won’t mention those accounts, including:
Tax Free Savings Account (TFSA)
This account was first introduced in 2009, allowing anyone who is 18 or older to set money aside completely tax-free. That means all capital gains, dividends, or interest withdrawals from this account don’t cost you a dime in taxes. The account is intended for saving toward both short-term and long-term goals, such as saving for a vacation or purchasing a car. Contribution room accumulates if you haven’t maxed it out. You can recontribute whatever amount you take out from the TFSA in the next calendar year. Despite these significant advantages, there are limits to how much you can contribute to a TFSA each year.
Registered Retirement Savings Plan (RRSP)
As the name suggests, this plan is specifically created to help you save for your retirement. All the money you put into your RRSP is tax-exempt, which means you don’t have to pay tax on it. This allows your money to grow tax-free until a later day. Once you retire and start withdrawing money from your RRSP, the money you withdraw is treated as your income and is taxed at your marginal tax rate. Your contribution room is linked to your annual income. You can contribute up to 18% of your annual income, with a cap of $30,780 in 2023. For example, if your income is $50,000 a year, your RRSP contribution room would be $9,000 (which is 18% of $50,000). All the contribution room you haven’t used will roll over to next year.
Registered Education Savings Plan (RESP)
The RESP is designed for parents who want to save for their child’s education. Contributions made to this account are not tax-exempt. However, the government offers a 20% match, up to $500 per year per child, on the contributions you make until your child turns 17. When your child attends college or university, you can withdraw funds from this account to cover educational expenses. The money you withdraw is considered your child’s income and is taxed at their marginal tax rate.
Registered Disability Savings Plan (RDSP)
The RDSP is designed to help individuals with disabilities who have been approved for the Disability Tax Credit save for their future. This plan can be opened at any time before the beneficiary turns 59. Depending on their family income, the government will make contributions to the plan in the form of grants or bonds until the disable person reaches the age of 49. When individuals begin withdrawing funds, the original contributions are not subject to taxation. Only the bonds, grants, and interest earned on investments are taxable.
First Home Savings Account (FHSA)
This recently introduced account is aimed at helping Canadians save for their first home down payment. You can contribute up to $8,000 annually, with a lifetime maximum of $40,000. Furthermore, contributions to this account are tax-deductible, and any investment returns remain non-taxable. Unused contribution room rolls over to the next year. If you don’t end up using this account for a down payment, you can seamlessly roll it into your RRSP, or RRIF without losing any contribution room.
Registered Retirement Income Fund (RRIF)
This fund operates as an extension of the RRSP. When you reach the age of 71, you’re required to convert your RRSP into a RRIF. Within this account, your funds will continue to grow without incurring taxes. However, new contributions are not permitted, and you must make annual withdrawals. The amount you withdraw is subject to taxation at your marginal tax rate.
The Bottom Line
In conclusion, these registered investment accounts, whether it’s the TFSA for your short-term goals, the RRSP for retirement, the RESP for your child’s education, the RDSP for a disabled person’s financial security, or the FHSA for your first home, each offers unique advantages. When used correctly, they can provide a significant edge in the financial game. It’s essential to understand the rules, contribution limits, and tax implications of each account to make the most of these valuable financial tools. So, explore your options, plan wisely, and secure your financial future with confidence. If needed, don’t hesitate to seek guidance from a financial advisor at your bank, who can provide valuable assistance in achieving your financial goals.
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Category: Investing
