Savings and Investment Accounts in Canada

Table of Contents

• Overview
• What is a TFSA and how does it work?
• Who can open a TFSA in Canada?
• Is it worth putting money in a TFSA?
• What type of TFSA is best?
• What is an RRSP and how does it work?
• Is an RRSP worth it?
• What is needed to set up an RRSP?
• What type of RRSP is best?
• What is a Registered Retirement Income Fund (RRIF)?
• What type of investment account should I open in Canada?
• Contact CanadaVisa and Cohen Immigration Law for Assistance
  

Overview

This CanadaVisa guide will take you through two of the most prominent saving and investment accounts available to Canadian consumers – TFSAs and RRSPs.

First, this page will discuss what a TFSA is, including what makes it a worthwhile investment opportunity and how to open one. Following this discussion will be a section covering two types of TFSAs, standard and self-directed.

Next, we will take time to discuss the same topics as they relate to RRSPs. Readers will learn what RRSPs are and how they work, be able to start thinking about if an RRSP makes sense for them and what type of RRSPs are available to them.

Finally, this page will conclude with a brief overview of three other savings and investment accounts in Canada, Registered Education Savings Plans (RESPs), First Home Savings Accounts (FHSAs) and Registered Retirement Income Funds (RRIFs).

What is a TFSA and how does it work?

A Tax-Free Savings Account is an investment account, subject to a yearly contribution limit, that allows Canadians to set money aside without needing to worry about taxes. As described by the Government of Canada, “any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.”

Note: Contributions made to a TFSA are not deductible for income tax purposes and “administrative fees (or other fees) related to this account, as well as interest on money borrowed to contribute to a TFSA, are also not tax-deductible.

Who can open a TFSA in Canada?

TFSAs can be opened by any Canadian residents who are at least 18 years of age and possess a valid Social Insurance Number (SIN). In the case of non-residents, the same age and SIN validity rules apply if they want to open a TFSA, but contributions, in this case, are subject to a 1% tax for every month that the contribution remains in the account.

The maximum allowable contribution to a TFSA is dictated by the Canadian government through a designated maximum dollar amount that changes every year.

Note that it is possible for one consumer to have more than one TFSA at any given time, but the total amount you contribute to your TFSAs cannot be more than your available TFSA contribution room for that year.

To open a TFSA, consumers that meet the age and SIN validity requirements for this type of account must:

• Contact their financial institution, trust company, credit union, or insurance company (issuer)
• Provide the issuer with their SIN and date of birth so the issuer can register your qualifying arrangement as a TFSA. Your issuer could ask for supporting documents.

Is it worth putting money in a TFSA?

Deciding if it makes sense for you to open a TFSA depends on a few different factors, such as your income tax situation, investment period horizon, and what you are saving for. In addition, TFSAs are a good option for those who do not want to face restrictions when accessing their money and those who do not want a timeline attached to their account (which is not the case for RRSPs, as we will discuss later down the page).

What type of TFSA is best?

TFSAs fall into two general categories, a standard TFSA and a self-directed TFSA.

Standard TFSAs are controlled and managed by the financial institution that issues the account. Account holders still choose the type of investments they want to purchase (Guaranteed Investment Certificates, etc.) but the day-to-day processes are taken care of for the consumer.

Self-directed accounts, meanwhile, allow consumers to manage their own investment portfolios by buying and selling different investments of their choosing. The issuer of your TFSA can provide more information on self-directed options available at your financial institution.

What is an RRSP and how does it work?

A Registered Retirement Savings Plan (RRSP) is a way for Canadians to save for retirement. Contributions made to an RRSP allow account holders to avoid paying income tax on contributed money for the moment, meaning that their current income tax payments will be reduced. RRSPs can be contributed to by both the account holder and their spouse or common-law partner.

Note: RRSP income is typically exempt from tax until withdrawals are made, at which time account holders generally have to pay tax when receiving payments from their RRSP

Is an RRSP worth it?

What is needed to set up an RRSP?

Setting up an RRSP is similar to a TFSA. This is because you can set up an RRSP through your financial institution (bank, trust company, credit union or insurance company).

Note: The institution you choose to open the RRSP with will advise you of the available types of RRSPs and investments contained within them

What type of RRSP is best?

Two of the primary RRSP account types include self-directed RRSPs and Spousal or Common-Law Partner RRSPs.

Much like with TFSAs, self-directed RRSPs are best for consumers who want the freedom to buy and sell their own investments and independently build their investment portfolio. Again, the institution with whom you open an RRSP will have more information on self-directed options available to you.

Spousal/Common-Law Partner RRSPs help ensure that post-retirement income is more evenly split between the two contributors to the savings plan. Especially when there is an imbalance in the current income of the two contributors, this type of RRSP is beneficial because it provides everyone with a unique advantage. The higher income earner allows themselves to take advantage of greater short-term tax deductions for their account. Meanwhile, the lower-income spouse/partner, who is likely to be in a lower tax bracket when they retire, will receive good income when they are done working.

What is a Registered Retirement Income Fund (RRIF)?

An RRIF is what comes of an RRSP at the end of the calendar year that the account holder turns 71 years of age. RRIFs provide account holders with regular, salary-like, payments. Although these payments are subject to income tax, since most recipients should be in a lower income tax bracket at this time (compared to pre-retirement), the benefit of RRIFs is that consumers should be paying less tax on income earned through the fund.

What type of investment account should I open in Canada?

In addition to TFSAs and RRSPs, newcomers to Canada can explore these other savings/investment accounts to help grow their money:

Registered Educations Savings Plan (RESP)

RESPs are a popular way for Canadians to help their child save up for their post-secondary education. Generally, parents or grandparents of a child in Canada use this savings plan to make contributions towards their education after high school, making paying for such education easier when the time comes. RESP contributions are matched annually by the Government of Canada up to $500 per year.

First Home Savings Account (FHSA)

FHSAs allow first-time home buyers in Canada (over the age of 17) to accumulate $40,000 in tax-free savings - $8,000 per year for five years – that the Government of Canada hopes will help them save for a down payment on a house. The FHSA program comes with specific eligibility conditions and criteria that interested account holders must meet before saving money in the account. Read more about FHSAs here.

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