Registered Retirement Savings Plan (RRSP)
An RRSP is a retirement savings account that is registered with the federal government and has special tax advantages:
- immediate tax relief by deducting the contribution amount from your income each year;
- interest earned is not taxed if it stays in the account; and,
- taxes on your contribution and interest earned are both deferred until you withdraw from the account in retirement when your marginal tax rate is likely lower than it was during your contributing (working) years.
How much you can contribute is determined by the lower of:
- 18% of your earned income in the previous year, or
- the maximum contribution amount for the current tax year: $26,500 for 2019.
*Note: If you participate in a pension plan, there will be a pension adjustment that will reduce the amount you can contribute to your RRSP.
Tax-Free Savings Account (TFSA)
A TFSA is a savings account available to any Canadian age 18 and over. While there is no tax deduction for contributing like an RRSP, all earnings (ex. interest, dividends, capital gains, etc.) within the plan are not taxed and withdrawals are also tax-free. There is an annual contribution limit that is not tied to earned income, and the money can be used for any goal you want.
Registered Education Savings Plan (RESP)
The average tuition cost for a four-year undergraduate university program in Canada is $27,300, and that doesn’t include accommodation, food, or other expenses. A RESP is a dedicated account geared towards saving for a child’s education after high school. Similar to the RRSP and TFSA, all earnings within the plan are not taxed until it is withdrawn at which point it is taxed as the child’s income, which is generally pretty low. The bigger benefit is that, for children under the age of 18, the federal government will make a matching contribution of 20% on every dollar up to a maximum of $500 per year (up to $600 for lower and middle-income families) to a lifetime maximum of $7,200. RESPs can remain open for 36 years.
Non-registered investments are not registered with the federal government and any earnings must be included as taxable income each year. Non-registered accounts can be used for both short and long-term investing as these accounts offer a lot of flexibility with consistent liquidity and no contribution limits.
High Interest Savings Account
A high interest savings account is a type of savings account that pays higher interest than standard savings accounts. Unlike a chequing account which is meant for everyday transactions, high interest savings accounts are designed to save money in for a longer period of time. They often have higher transaction fees than chequing accounts, but there are plenty of high interest savings accounts available that don’t charge monthly fees or transaction fees. You can open a high interest savings account anywhere, even if you do your everyday banking with another financial institution. Typically, they have no minimum deposit requirement.
Guaranteed Investment Certificate (GIC)
A GIC is an investment that works like a special kind of deposit. When you buy a GIC, you are agreeing to lend the bank or financial institution your money for a set number of months or years (the term). You are guaranteed to get the amount you deposited back at the end of the term. For this reason, GICs are one of the safest ways to invest. That being said, because GICs have a relatively low return, there is a risk they may not keep pace with inflation.