Savings accounts can play a crucial role in your financial plans and meeting your personal investment goals. In order to make sure you’re on the right track, you have to understand the different types of accounts, their rules around contributions and withdrawals, and whether or not they’re a good fit for your financial plan.
Jason Hare is the founder and Certified Financial Planner of Cornerstone Wealth Planning, a wealth management company based in Kingston, Canada. With more than two decades of experience in finance, Jason has an extensive background in financial markets, wealth creation, fundamentals-based investing, and business valuations.
Today, he’s going to help us explore the different types of savings accounts and how they may benefit you.
“It’s best to take the time to ask questions and take the time to fully understand the various options there are before you open an account and begin making investments,” says Hare. “A registered financial advisor can answer any questions and help you choose the savings accounts and investments that are right for you.
Registered Retirement Savings Plan (RRSP)
A Registered Retirement Savings Plan is an account registered with the federal government that you can use to save for retirement or other related financial goals.
“RRSPs offer special tax advantages, such as the ability to deduct your RRSP contributions from your taxable income each year and sheltering your investments from taxes so long as it stays in the plan,” says Hare.
An RRSP is not an investment product or fund, but rather it’s an account that can hold cash, GICs, bonds, mutual funds, ETFs, stocks, and other qualified investments.
Tax-Free Savings Account (TFSA)
Tax-Free Savings Accounts allow you to save tax-free to reach any financial goal (home, car, vacation, retirement, etc.), Your contributions are not tax deductible for income purposes, but contributions and income earned in the account generally are considered tax-free, even after being withdrawn.
“TFSAs are available to Canadians aged 18-plus who have a valid social insurance number and have an annual contribution limit,” says Hare. “However, if you don’t contribute the full amount each year, you can carry forward any unused amounts.”
You can hold a wide range of qualified investments in a TFSA, including cash, GICs, stocks, bonds, and mutual funds.
Registered Retirement Income Fund (RRIF)
A Registered Retirement Income Fund is an account registered with the federal government that holds funds you have previously put into your RRSP or other approved registered plan. An RRIF has to be opened by the end of the year when you turn 71 and pays an annual amount. You can withdraw more, but not less than the minimum annual amount. Earnings are tax-free, but withdrawals are taxable.
“You can’t make new contributions to an RRIF. However, you can invest the money paid out each year in GICs, mutual funds, ETFs, segregated funds, stocks, and bonds to continue growing your retirement savings,” says Hare.
Registered Education Savings Plan (RESP)
Registered Education Savings Plans help you save for your child’s post-secondary education by deferring tax while in the plan, and offering government grant contributions to help grow the savings faster. When your child enrolls in post-secondary education, there are two types of withdrawals you can make. Educational assistant payments (EAPs) are made up of investment earnings and government grant money in the account. Contribution withdrawals are generally made up of the money you contributed to the plan.
“Your contributions to the plan aren’t tax-deductible, but can be withdrawn tax-free [like a TFSA],” says Hare. “The EAPs are included in the student’s income when withdrawn [like an RRSP]. However, students generally have a lower income and usually exist in a low tax bracket, making the amount of tax they will pay minimal.”
RESPs can hold a range of investments, including cash, stocks, bonds, mutual funds, as well as GICS.
Regardless of what your savings goals are, you should speak with a financial professional to make sure you’re using the right account for you. Never take financial advice from anyone other than a registered financial professional.