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Types of Investment Accounts
 
There are many types of accounts that an individual can put their money into, each with their own unique benefits and their own restrictions. The choice can be daunting.

Money can be invested in an ‘open’ (Or non-registered) account. The various ‘registered’ accounts are created to suit a specific cause such as retirement or savings or education or for people with disabilities.

The main breakdown are as follows:

  • Registered Retirement Savings Plan (RRSP)
  • Registered Retirement Income Fund (RRIF)
  • Locked-in Retirement Account (LIRA) (Variation of the RRSP)
  • Locked-in Income Fund (LIF) (Variation of the RRIF)
  • Tax Free Savings Account (TFSA)
  • Registered Education Savings Plan (RESP)
  • Registered Disability Savings Plan (RDSP)
Registered Retirement Savings Plan (RRSP)
A Registered Retirement Savings Plan (RRSP) is an investment vehicle that allows you to defer tax and save for retirement. Annual contributions are tax-deductible up to allowable limits. This means you can put aside some of your annual income each year without having to pay current income tax on that income. Contributing to an RRSP means that you generally receive a refund of the tax already paid on that income. Furthermore, any earnings generated on the funds held in an RRSP are sheltered from taxes for as long as those earnings remain in the plan. You, therefore, enjoyed substantial benefit of tax-free compounding of earnings. Note that RRSP’s only defer the payment of taxes eventually all funds contributed to as well as the earnings within an RRSP will be taxed. The advantage of an RRSP is that a retiree will likely pay income taxes on RRSP funds at a lower tax rate than would have been paid at the time of contribution. After age 71, an RRSP will become a RRIF and mandate minimum withdrawals during your retirement years.

The maximum annual tax-deductible contributions to RRSP’s an individual can make is the lesser of: 18% of the previous year’s earned income; and the RRSP dollar limit for the year [which was $24,930 in 2015. The contribution limit is indexed to inflation each year]. If you do not contribute the maximum allowable amount to your RRSP in any given year, you can carry forward the unused contribution indefinitely to future years.

How the RRSP Works
  • RRSP Contribution Limit Updated for 2018 The maximum annual tax-deductible contributions to RRSP’s an individual can make is the lesser of: 18% of the previous year’s earned income; and the RRSP dollar limit for the year [which was $26,230 in 2018. The contribution limit is indexed to inflation each year].
  • Investment income earned in a RRSP is tax-free.
  • Withdrawals from a RRSP are fully taxable AND subject to a withholding tax if withdrawn before age 71.
  • Unused RRSP contribution room is carried forward and accumulates in future years.
  • Full amount of withdrawals CANNOT be put back into the RRSP unless you have available contribution room (Unlike a TFSA).
  • Contributions are tax-deductible often creating a tax refund (Unlike a contribution to a TFSA).
Tax-Free Savings Account (TFSA)
The Tax-Free Savings Account (TFSA) is a flexible, registered, general-purpose savings vehicle that allows Canadians over the age of 18 to earn tax-free investment income to more easily meet lifetime savings needs. The TFSA complements existing registered savings plans like the Registered Retirement Savings Plans (RRSP) and the Registered Education Savings Plans (RESP).
How the Tax-Free Savings Account Works
  • Annual contribution limit of $5,500 indexed.
  • Investment income earned in a TFSA is tax-free.
  • Withdrawals from a TFSA are tax-free.
  • Unused TFSA contribution room is carried forward and accumulates in future years.
  • Full amount of withdrawals can be put back into the TFSA in future years.
  • Contributions are not tax-deductible unlike an RRSP.
  • Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.
Registered Education Savings Plans (RESP)
Registered Education Savings Plans (RESP’s) are tax-deferred savings plans intended to help pay for the post-secondary education of a child. Although contributions to the plan are not tax-deductible, there is a tax deferral opportunity, since the income accumulates tax-deferred within the plan. On withdrawal, the portion of the payments that were not original capital are taxable in the hands of the beneficiary, provided they are enrolled in qualifying or specified educational programs. Typically, a student will be in a much lower tax bracket especially if they are attending school full time. If you have multiple children, it is advised to start a family plan which allows for the money to be transferred to a sibling for their education.
How the Registered Education Savings Plans Work
  • The is no Annual contribution limit but there is a $50,000 lifetime contribution limit per beneficiary.
  • Investment income earned in a RESP is tax-free.
  • Withdrawals from a RESP are taxable – although in the hands of the student.
  • Money withdrawn must be used to help pay for post-secondary education of a child.
  • Contributions are eligible for a CESG grant of $500 per year up to a lifetime limit of $7200 per beneficiary. (Additional grants are available for low income families)
  • Contributions are not tax-deductible (Unlike an RRSP).
  • RESP Plans must be wrapped up within 35 years of the starting date.
  • Any unused RESP money must be withdrawn but can be transferred to a parent’s RRSP if they have unused contribution room.
Registered Disability Savings Plan (RDSP)
A Registered Disability Savings Plan (RDSP) is a savings plan that is intended to help parents and others save for the long term financial security of a person who is eligible for the disability tax credit (DTC). Contributions to an RDSP are not tax deductible and can be made until the end of the year in which the beneficiary turns 59. Contributions that are withdrawn are not included in income for the beneficiary when they are paid out of an RDSP. However, the Canada disability savings grant (grant), the Canada disability savings bond (bond), investment income earned in the plan, and rollover amounts are included in the beneficiary’s income for tax purposes when they are paid out of the RDSP.
How the Registered Disability Savings Plans Work
  • The is no Annual contribution limit but there is a $200,000 lifetime contribution limit per beneficiary up to the age of 59.
  • Investment income earned in a RDSP is tax-free.
  • Withdrawals from a RDSP are partially taxable (Contribution amounts are not) (Although in the hands of the beneficiary).
  • Money withdrawn must remain in an RDSP for at least 10 years (Withdrawals in less than 10 years subject to sever penalties).
  • Contributions are eligible for a grants and bonds grant of at least $1000 up to a possible $4500 per year with a combined maximum lifetime limit of $90,000 per beneficiary. (Additional grants are available for low income families)
  • Contributions are not tax-deductible (Unlike an RRSP).
  • RDSP Plans do not allow contribution after ager 59 and the plan will start paying a mandatory minimum lifetime disability assistance payment (Similar to a RRIF)

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