The ins and outs of registered accounts

RRSPs, TFSAs, and RESPs, oh my!


Once you have your toe into investing, you will find account types with a variety of benefits. They can be tricky to sort through, so here are the basics of registered accounts in Canada.

A non-registered account is a cash or open account with few restrictions, so you can deposit and withdraw money and invest in products including mutual funds, bonds, ETFs, and stocks within the account. Any gains or losses on the investments held in an open account are taxable. So, if you purchase a stock at $25 a share and later sell it for $35, you will need to report the gain of $10 as taxable income.


To encourage saving and investing, the Canadian government introduced registered accounts including a Registered Retirement Savings Plan (RRSP), a Registered Education Savings Plan (RESP), a Tax-Free Savings Account (TFSA), and a Registered Retirement Income Fund (RRIF). These accounts are for long-term savings and are tax-sheltered accounts for investments. The account can include cash, but you are encouraged to invest to earn more interest than you would in typical savings accounts with your bank. After all, the banks do not keep up with rising inflation rates, so you are losing money if you are not earning the same rate as inflation.


A Registered Retirement Savings Plan (RRSP) is tax-deferred savings account for retirement. I know, I know … everyone thinks retirement is a long way off. Regardless of your age, this is a great account to build. Your annual taxable income determines how much you can deposit into your RRSP each year. By making a regular or a lump deposit throughout the year, you can reduce the amount of tax you pay now and the money will usually be taxed at a lower rate when you withdraw funds from the account in retirement. This is a great tool to ensure you have financial freedom in your golden years, and you can use it today to save on income tax. Think of your RRSP as a way to save today and pay yourself down the road. It is for everyone, and the earlier you start using your RRSP the more money you will make with the magic of compounding interest.


The Tax-Free Savings Account (TFSA) was created in 2009 and allows individuals over the age of 18 to deposit a given amount per year. If you were already 18 when the TFSA was created, you have a total of $81,500 in contribution room. You can confirm how much you can contribute by adding the annual contribution amount each year since you have turned 18:

Year

Annual Contribution Amount

2009-2012

$5000/year

2013-2014

$5500/year

2015

$10,000/year

2016-2018

$5500/year

2019-2022

$6000/year

In both the RRSP and the TFSA, unused contribution room can be carried forward.


Contributing to a TFSA does not minimize your taxable income this year like an RRSP, but you do not pay any tax on the gains within the account like a non-registered account. This allows you to build more wealth over time, and you can start off with $50 today! You can be penalized for overcontributing, but the TFSA allows you to freely withdraw from the account and re-contribute the funds later.

If you are planning for a child's education, you can use a Registered Education Savings Plan (RESP) to save and earn money for post-secondary school. Open an RESP as soon as possible because when you contribute to the account, the Government of Canada will contribute with the Canada Education Savings Grant (CESG) and possibly the Canada Learning Bond (CLB). CESG is money the government adds to the account in addition to the funds you contribute to an RESP. The amount could be $500 each year, and a child can receive up to $7,200 in CESGs. The CLB is money the government deposits into an RESP for a child from a low-income family. The government contributes up to $2,000 for an eligible child, and the amount depends on your contributions and your family circumstances.* The earlier you begin to contribute to an RESP, the more funds you receive from the government and you can earn compounding interest on the funds invested within the account.


Finally, a Registered Retirement Income Fund (RRIF) is a retirement account where a minimum amount is paid to you each year. While an RRSP is a tool to save for retirement, the RRIF is a payment plan in retirement to ensure you don't spend it all in one year. This is an investment account and the interest earned is tax-free, but RRIF payments are considered taxable income. You will be required to transfer your retirement savings into a RRIF by the time you turn 71 years old.


Registered accounts all follow different rules. If you are curious about how they can work for you, contact us on social media or email theteam@waverleywealth.ca .


*https://www.canada.ca/en/financial-consumer-agency/services/save-resp.html

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