In Canada, you can open registered accounts such as Tax Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) to save for short and long-term goals. These types of investment accounts are registered with the Canada Revenue Agency (CRA). In this post, we discuss how you can utilize registered and non-registered investment accounts to reach your financial goals.
A Quick Look at TFSAs
A TFSA is a type of account which allows you to save your earnings for long or short-term financial goals tax-free. You may open a TFSA as long as you are over the age of 18 and have a valid Social Insurance Number (SIN).
There are different types of TFSAs and TFSAs also qualify a variety of investments. Since TFSA rules can change, it’s best to check the CRA website to determine the accounts available and types of investments that you can hold in a TFSA.
Things to Consider
There are benefits to keeping a TFSA, even if you only save a small amount annually.
- Earnings within the account are not taxed.
- You can make withdrawals from your TFSA without having to report it on your tax returns.
- There is no age at which you must close your account.
- If you make a withdrawal, you can replace those funds in the next year.
There are also limitations to these accounts, such as:
- Over-contribution penalties;
- Tax on any gains made on prohibited investments in your TFSA; and
- Contributions to and fees associated with your account are not income tax deductible.
A Quick Look at RRSPs
RRSPs are registered accounts which help you save for retirement. These accounts can be opened through various financial institutions. To open your account you must provide your personal and financial information which proves that you have earned income.
The contribution deadline is 60 days after the end of each calendar year. The Canada Revenue Agency (CRA) sets annual personal contribution limits. You can carry unused contribution room forward to the next tax year. Unused room will be taken into account on your deduction limit.
Types of RRSPs
There are three types of RRSP accounts that you may open:
- Individual: This account is registered in your name – any investments held, and tax advantages associated with the account belong to you.
- Spousal: This type of RRSP allows you to contribute to your spouse or common-law partner’s plan and receive tax deductions.
- Group: Your employer may offer group RRSPs as a benefit. These are individual accounts that permit contributions to be made through your employer.
Things to Consider
Like any investment account, RRSPs have advantages and limitations. Advantages include:
- Income tax deductible contributions;
- Deferrable tax liability;
- Tax-free interest on investments within your account; and
- The ability to borrow from your RRSP early to purchase a home or pay for education.
Restrictions and limitations associated with RRSPs include:
- An annual contribution limit;
- Withdrawals made before retirement are taxed; and
- Mandatory closing of your RRSP account by the end of the year you turn 71.
A Quick Look at Non-Registered Investment Accounts
Non-registered investment accounts can hold cash and investments (such as stocks, bonds, ETFs, and mutual funds) that you can buy and sell.
Because non-registered accounts differ from institution to institution, it’s important to:
- Understand what types of investments you can purchase through the account;
- Understand the applicable fees and charges; and
- Explore account options available to you.
There are generally no restrictions on depositing funds into a non-registered, cash account.
You must declare investment income (or losses) and interest on your taxes in non-registered accounts even if you don’t withdraw the money.
Things to Consider
- Before opening any type of investment account, be sure you understand what you’re going to be investing in.
- Make sure you are aware of the fees and charges associated with the account, and factor in your risk tolerance.
- The types of investments you can hold will differ between registered and non-registered investments accounts.
- Lastly, a registered investment advisor can help you understand what investments are available to you, and help you develop your investment strategy.
Report a Concern
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393, or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using BCSC’s online complaint form.
The CSA encourages all investors to participate in Check Registration Day on March 16, 2016.