When investing, it is vital to find an account that meets your needs. Whether it is hopping in and out of the market daily, investing for retirement, or for your children’s education. The two groups of accounts which they all fall into are Registered Investment Accounts and Non-Registered Investment Accounts. The difference is that in a Registered Investment Account there are no limitations stopping you such as; depositing as much money as you want and the period of time you have to hold your investments.
Non-Registered Investment Accounts:
Cash or margin accounts have no limit to how much money you can add to or withdraw from a non-registered account. 50% of capital gains you make (money made from selling the investment) is taxed the same as your income tax. You also have the ability to use margin (borrowed money from the broker) to leverage and buy investments.
Registered Investment Accounts:
To be eligible for a tax-free saving account (TFSA), you must be at least 18 years of age and have a valid Canadian social insurance number. All of your investment gains are tax-free, even when withdrawn from the account. There is a contribution limit of $6,000 (the current year contribution limit, subject to change every year) per year. Any losses you have can’t be used to offset gains in other accounts in a process known as tax-loss harvesting. You will never lose your contribution room and can recontribute amounts you have withdrawn. Although you have to wait until the next year to recontribute.
To have a Registered Retirement Savings Plan (RRSP) you must be under 69 years of age, have available contribution room, and file income taxes with the Canadian government. The RRSP contribution limit for this year is 18% of earned income reported on your tax return in the previous year, up to a maximum of $27,830. The amount contributed to your RRSP each year is deductible from your income. You can make a withdrawal from your RRSP any time although you have to pay tax on withdrawals.
Registered Education Saving Plan (RESP) helps parents save for their children’s education. The Canadian government matches 20% on the first $2,500 contributed annually to an RESP, to a maximum of $500 per beneficiary (person) per year. The lifetime maximum per beneficiary is $7,200, up to age 18. These contributions cannot be deducted from income. Any earnings that are withdrawn but not used for post-secondary education will include a 20% penalty, and income taxes must be paid on the money.
Looking at all the different investment accounts, they all have different purposes and one or more align best with your goals. While the TFSA is great for saving money that you don’t want to be taxed, the cash/margin account is perfect for those who are interested in short-term investments as the short-term investments in the TFSA may not be as favorable. In addition, the RESP is perfect for saving for your child’s education and getting a guaranteed 20% return on your money. Lastly, the RRSP is perfect for saving for retirement as you will likely be at a lower income tax when you retire, therefore, it may benefit you to get an income deduction right now when you are at a higher income tax bracket.
Written by Tejpal Gill