Where do Canadians Invest Their Money? The Basics
I’m not going to lie, this isn’t the most thrilling post I’ve ever written and I can guarantee it won’t be the juiciest thing you ever read. But, if you want to learn the basics on Canadian investment accounts, specifically the RRSP, TFSA and RESP, then you absolutely MUST read on!!
A simple overview of Canada’s Main Investment Accounts
The first three accounts that I will review are all registered accounts. This means that they are regulated by the Canadian government. These accounts offer many tax advantages but also have more rules than a non-registered account.
Think of government regulation like living with your parents. There are a lot of perks when you live at home like free food and free rent BUT you have to live by your parents rules (bummer)!
1. Registered Retirement Savings Plan (RRSP): Main retirement savings vehicle for Canadians. I will get into all of the details below.
Spousal RRSP: Allows you to income split with your partner. So if you make a lot of money and your partner makes a little money then you can contribute to an RRSP in their name allowing you to increase your tax deduction (aka reduce your taxable income).
Group Retirement Savings Plan (GRSP): This is an RRSP sponsored by your company or organization. Employee contributions are made through pay roll deduction (meaning they automatically take it off of each pay cheque) on pre-tax dollars. Some companies will match employee contributions.
Registered Retirement Income Fund (RRIF): At age 71 an RRSP must be converted to an RRIF.
2. Tax Free Savings Account (TFSA): General purpose savings vehicle. More details below.
3. Registered Educational Savings Plan (RESP): Investment vehicle used by parents/grandparents/friends etc. to save for a child’s post secondary education. More details below.
This fourth account is the non-registered account. As I mentioned above, you don’t get the same tax incentives as with the registered accounts but there are a lot less rules (e.g. no contribution limits).
A non-registered account is like when you move out of your parents house. You are totally free to do what you want but no more free food and you have to pay your own rent (boo).
4. Non-Registered Account (NRA): investment accounts that you can open through your bank or other financial providers (e.g. brokerage). Not as many rules as with an RRSP and no contribution limit. But, you don’t get the same kind of tax breaks as with an RRSP or TFSA. You don’t need to worry about this account unless you have maxed out your RRSP and TFSA contributions.
BEFORE WE GO ANY FURTHER…
I’m assuming most of you reading this are in the Gen Y or Gen Z demographic so I am going to focus on the Canadian investment accounts that are most relevant to you. The RRSP, TFSA and RESP.
Here I’ll present the “basics,” meaning I’m not going to get into some of the nuances of each account….maybe in a future post. For now I’m going to try and keep it simple!
A side by side comparison of the RRSP, TFSA and RESP
| RRSP | TFSA | RESP | |
| When was it founded? |
1957 |
2009 |
1998 |
| Is there a minimum contribution age? | No minimum age. If you are earning and income and filing a tax return then you (or your guardian) can set up an RRSP. | Must be 18 years of age to participate. Don’t need to be earning an income. | Contributions can begin as soon as the infant/child has a social insurance number (SIN). |
| What is it for? | Main retirement vehicle for people who don’t have a pension. | This is a general purpose savings vehicle. Save for a vacation, a car or even your retirement. Whatever you want. | Investment vehicle used by parents/grandparents/friends etc. to save for a child’s post secondary education. |
| Does it expire? | RRSP expires at 71 years of age. Then money is converted to RRIF. | Does not expire. | Expires 35 years after the RESP was opened. |
| How much can I contribute? | Can contribute 18% of pre-tax income up to $26,230 (as of 2018). | Can contribute a max of $5,500.00 (as of 2018). | Can contribute a maximum of $50,000 per child. No annual limit.
The government will also make contributions through the Canadian Education Savings Grant (CESG). This grant matches your contribution up to 20% on the first $2500.00 per year and a lifetime total of $7200.00. |
| Can I carry forward any unused contribution room? | Yes, unused contribution room can be carried forward until the age of 71. | Yes, unused contribution room can be carried forward indefinitely. | Yes….but…unused CESG money can be carried forward to future years but only one years worth at at time. It’s a bit confusing.
For example, if you didn’t contribute anything in 2017 then in 2018 you can contribute $2500 (to cover for missed contribution in 2017) and then you can contribute an additional $2500 (for 2018). This will allow you to receive the maximum grant money $1000.00 ($500/year). You can contribute more then $5000.00 but at this point you have maxed out the grant contribution until the next year (2019). |
| Pre-tax dollars or After-tax dollars? | Invest pre-tax dollars. | Invest after-tax dollars. | Principle investment is after-tax dollars (taxed at contributors, aka parent or grandparents, rate) |
| Is it tax deductible? (deductible: does it lower the amount of income you will be taxed on?) | Yes, it is tax deductible. If you make $50,000 and put $5,000 into RRSP you will only be taxed on $45,000 of income. | Not tax deductible. | Not tax deductible. |
| Am I taxed on investment gains? (Investment gains: increase in the value of your principle investment). | Yes, but not until you withdraw the money. When you withdraw from your RRSPs it is added to your taxable income for that year.
The idea is to invest when you are in a high tax bracket to lower your overall taxes and then withdraw the money when you are retired and in a much lower tax bracket.
|
No, investment gains are not taxed | Yes, investment gains and CESG are taxed upon withdrawal at the recipient aka students tax rate. When the investment gains and CESG are withdrawn these are referred to as Educational Assistance Payments.
Contributions (aka the money you put into the account) are NOT taxed. Students are often in such a low earning bracket that they pay no taxes at all |
| Can I withdraw my money at any time? | Yes, but your withdrawal will be considered earned income for that year and taxes will be withheld at the time of withdrawal. There are two exceptions where you can borrow money from your RRSPs but you have to pay the money back: Home Buyers Plan and Life Long Learning Plan | Yes, you can withdraw your money at any time without penalty | Yes, but, if you withdraw the money for non-educational purposes you will have to return the CESG money.
The withdrawal process for RESPs is a bit more complicated. In an effort to focus on the basics I am not going to get into them here. If you would like more info check out the Government of Canada site here. |
| Do I get a tax refund? | Yes you do!
Your best move is likely to reinvest this money in an RRSP or TFSA |
Nope | Nope |
| Who should contribute? | High income earners as they benefit from the tax deduction.
|
Everyone!
Lower income earners: this can be a better option than an RRSP as you wont benefit much from the tax deduction if you are already in a low tax bracket. Higher income earners: great place to put more money if you have maxed out your RRSPs. Also a good option for people who want access to their money in the shorter term (e.g. if saving for vacation, wedding etc)….as you can withdraw anytime without penalty. But, also very good for long term savings. TFSAs are really great!! |
Anyone who wants to help their child/grandchild/friend etc.pay for their post secondary education.
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Well, there you have it folks! Some important basics on Canadian investment accounts. Maybe not the most provocative post but hopefully this information can help you make some important decisions about where you want to invest your hard earned Canadian dollars!
References
Post Photo by Redd Angelo on Unsplash
