These daily financial tips are designed to be short ideas covering different aspects of family and business finances. They are short pieces intended to provide information to enable individuals, families and businesses to make informed financial decisions. Not all tips will apply to every situation, but over the course of a year, most financial topics will be covered. Check in regularly and share with friends and associates.
I am often asked to buy/invest into an RRSP, TFSA, RESP, etc. Many people think these account types are investments. Accounts such as RRSP, TFSA, etc are actually account types that have preferred tax treatments attached to them. Each is designed to encourage savings behaviours for specific family financial objectives. They are not in and of themselves investments, but account types that can hold a variety of different investments such as GIC, cash, mutual funds, stocks and bonds. It is important to understand this differentiation as the actual investments held within the various accounts have very different attributes, investment characteristics and volatility. It is the tax treatment of the underlying investments that varies for the different account types. Below is a brief overview of the different tax treatments and objectives of the accounts. I will elaborate more each day this week focusing in each account individually.
One of the most common accounts that receives considerable attention during the first couple of months of each year are Registered Retirement Savings Plans (RRSP). These accounts are designed to encourage savings for retirement. RRSP are intended to provide an investment vehicle where Canadians can supplement Canada Pension Plan and Old Age Security payments. They are a great vehicle to save for retirement for those who don’t have employer retirement plans or to top up and supplement employer savings plans. Contributions to RRSP are tax deductible (within prescribed limits) and the investment gains (ie interest, capital gains, dividends) are also tax sheltered while held in the RRSP. RRSPs must begin to be liquidated at age 71 (minimum amounts are required).
Another popular tax investment account is a Tax Free Saving Account (TFSA). Like an RRSP, investment gains (interest, capital gains and dividends) accumulate within the account tax free. There are annual contributions limits as to how much can be deposited/invested. Deposits/contributions are not tax deductible (like RRSP) but withdrawals are also not taxed.
Families with Children can set aside monies for post secondary education with a Registered Education Savings Plan (RESP). Like RRSP and TFSA, the investment returns (interest, capital gains, dividends) accumulate within the plan tax free. Additionally, the government will also match certain contributions with an additional 20%. When children attend post secondary educational institutions, the RESP monies can be withdrawn tax free.
Lastly, Registered Income Funds (RIF) are tax effective vehicles for retirees to convert their RRSP monies in a tax efficient account when they withdraw their RRSP contributions as retirement income. The investment gains (interest, capital gains, investments) accumulate tax free, however, there are minimal annual withdrawals required which will be taxed as taxable income.
These are the primary investment account vehicles Canadians can take advantage of to invest monies in a tax efficient (ie. Minimize income tax payments) manner. Each type of account has it’s advantages but each has different tax treatments. It’s best to speak with an investment specialist to determine which is most appropriate for your family and savings objectives. Each account will be discussed in more detail over the next few days.
Share these ideas with friends and family and come back to check out daily financial tips and ideas. If there are subjects you wish covered or questions, please email me and I’ll include them in future posts.