By Devon Ethier, CFP®, MBA,
Investment Advisor, iA Private Wealth
The world of investment accounts offers a diverse landscape, comprising registered accounts such as RRSPs and TFSAs, as well as non-registered accounts. Each account type has its own set of benefits and considerations. In this article, we will navigate this terrain, helping you understand the differences and implications of each.
Registered Accounts
Registered Retirement Savings Plan (RRSP)
What is an RRSP?
An RRSP is a tax-advantaged account designed to help Canadians save for retirement. Contributions made to an RRSP are tax-deductible, meaning you can reduce your taxable income for the year in which you make the contribution.
Benefits:
Tax Deductions: Contributions are tax-deductible, which can lower your annual income tax bill.
Tax-Deferred Growth: Investments within an RRSP grow tax-free until you withdraw funds.
Retirement Income: RRSPs are intended to provide income during retirement.
Considerations:
Contribution Limits: There are annual contribution limits based on your income.
Tax on Withdrawals: Funds withdrawn from an RRSP are subject to taxation.
Limited Flexibility: Withdrawals for purposes other than retirement may incur penalties.
Tax-Free Savings Account (TFSA)
What is a TFSA?
A TFSA is a flexible savings account that allows Canadians to save and invest money tax-free. Contributions to a TFSA are not tax-deductible, but any investment gains or withdrawals are tax-free.
Benefits:
Tax-Free Growth: Investments within a TFSA grow tax-free, and withdrawals are not subject to taxation.
Flexibility: TFSA funds can be used for various purposes, such as buying a home, starting a business, or emergency expenses. Funds can be withdrawn without any limits or deductions.
Considerations:
Contribution Limits: There are annual contribution limits based on your age and the cumulative contribution room. Starting at age 18, TFSA contribution room begins to accrue. For example, the 2023 contribution limit was $6,500. This amount increases over time based on the rate of inflation.
Not Tax-Deductible: Contributions to a TFSA are not tax-deductible.
Other Registered accounts
There are numerous other types of registered accounts with specific uses, such as a Registered Education Savings Plan (RESP), Registered Disability Savings Plan (RDSP), Locked-in Retirement Accounts (LIRA), etc. Each account type has specific rules, benefits, and considerations. for more information on this, visit our articles on these account types.
Non-Registered Accounts
What is a Non-Registered Account?
A non-registered investment account is a standard brokerage account where you can buy and sell investments like stocks, bonds, and ETFs. Unlike registered accounts, contributions are not tax-deductible, and investment gains may be subject to taxation.
Benefits:
No Contribution Limits: You can invest any amount of money in a non-registered account.
Flexibility: There are no restrictions on how you use the funds or when you can withdraw money.
Considerations:
Taxation: Investment gains, dividends, and interest income are subject to taxation in the year they are earned.
Lack of Tax Sheltering: Non-registered accounts do not provide the same tax benefits as registered accounts.
Choosing the Right Account
Factors to Consider
When deciding between registered and non-registered accounts, consider the following factors:
Tax Situation: Evaluate your current and future tax situation to determine if tax deductions (RRSP) or tax-free growth (TFSA) is more advantageous.
Investment Goals: Consider your investment objectives, such as retirement savings, short-term goals, or emergency funds.
Contribution Room: Be aware of the annual contribution limits for RRSPs and TFSAs.
Liquidity Needs: Assess how easily you may need to access your funds without incurring penalties or taxes.
Diversification
A common strategy is to utilize a combination of both registered and non-registered accounts to achieve diversification and tax efficiency. For example, using an RRSP for retirement savings and a TFSA for more immediate goals can help you maximize the benefits of each account type.
Conclusion
Understanding the distinctions between registered and non-registered investment accounts is vital for building a sound financial strategy. Each account type offers unique benefits and considerations, and the choice should align with your financial goals, risk tolerance, and tax situation. Consulting with an investment advisor can provide further guidance tailored to your specific circumstances, ensuring you make informed investment decisions.
If you would like to learn more about the differences between the different kinds of accounts you are able to invest in, we are here to help. Call us today or Book here.
Devon Ethier, CFP®, MBA, Investment Advisor with iA Private Wealth, and Insurance Advisor* with Oceanside Wealth Management Ltd., can be reached at the iA Private Wealth office at 166 E. Island Hwy Parksville, BC by phone at 250-586-1332, by email at devon.ethier@iaprivatewealth.ca, or online at www.carolplaisier.com.
Disclosure
This information has been prepared by Devon Ethier who is an Investment Advisor for iA Private Wealth Inc. Opinions expressed in this article are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth Inc. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada
*Insurance products and services are offered Oceanside Wealth Management Ltd., an independent and separate company from iA Private Wealth Inc. Only products and services offered through iA Private Wealth Inc. are covered by the Canadian Investor Protection Fund.