Unlocking the potential of your investment account is like optimizing which type of soil to grow your seeds for a secure financial future. Whether you’re planting for retirement or cultivating for wealth, choosing the right investment account type makes all the difference.

Discover the world of investment accounts and their myriad benefits with this guide. For you first-time buyers, pay attention the First Home Savings Account (FHSA).

What is an investment account?

One of the most important terms to be familiar with in investing is the investment account, which refers to an account that can hold stocks, bonds, cash, and other securities. Unlike a regular bank account, the value of assets an investment account holds can fluctuate.

Imagine investment accounts as the types of soil a gardener may choose from to grow their seeds. Some types may be nutrient-rich, allowing your investments to flourish at a higher rate, while other types may be versatile to cultivate your wealth without limits.

Types of investment accounts


 

In Canada, there are two general types of investment accounts: registered accounts and non-registered accounts. It is important to note that just opening an investment account won’t let you take advantage of its benefits; you also have to make the best investments that suit your financial goals.

Registered investment accounts:
 

Registered investment accounts are specially created accounts registered with the government and offer several tax advantages from the Canada Revenue Agency (CRA). This means the gains on your investments, whether interest, capital, or dividends, within a registered account, are only taxed once you take the money out (tax-deferred) or are generally tax-free (tax-sheltered), even during withdrawals.

 

Tax-Free Savings Accounts (TFSAs), Registered Retirement Savings Plans (RRSPs), and Registered Education Savings Plans (RESPs) are common types of registered accounts.

1. Registered Retirement Savings Plan (RRSP)
    

One of the most popular registered accounts among Canadians, a Registered Retirement Savings Plan (RRSP) enables you to invest and grow your capital tax-free. It allows you to invest up to 18% of your annual income tax-free from the previous year, plus any unused contributions for future use.

Any money you put into an RRSP within the contribution limit is also tax-deductible, meaning your taxable income will be reduced when you claim the tax deduction. RRSPs are designed for long-term retirement savings, which is why there are penalties for withdrawing early.

2. Tax-Free Savings Account (TFSA)
    

A Tax-Free Savings Account (TFSA) is a savings account designed for 18 years or older to save and invest tax-free money. While any amount contributed, including investment gains for assets held under this account, is not taxable, it is not tax-deductible like in RRSPs. However, withdrawals are tax-free, and you can re-contribute the following year with your unused contribution room.

Any individual who is a resident of Canada who has a valid Social Insurance Number (SIN) and is 18 years of age or older is eligible to open a TFSA. Non-residents are also eligible if they satisfy certain requirements. However, they will be subject to a 1% tax for each month the contribution stays in the account.

The federal government set the TFSA limit at $7,000 for 2024. Like RRSPs, if you contribute more than your available contribution room, you will be subject to penalties.

3. Registered Retirement Income Fund (RRIF)
    

The Registered Retirement Income Fund (RRIF) can be considered an extension to the RRSP. By December 31 of the year you turn 71, you must convert your RRSP accounts into an income fund like an RRIF or annuity.

With RRIFs, your funds will continue to grow tax-free; however, you will not be able to contribute. Instead, you are required to withdraw from it based on minimum withdrawal rates set by the CRA. This amount will increase as you get older.

4. Registered Education Savings Plan (RESP)
    

The Registered Education Savings Plan (RESP) allows individuals, particularly parents, to set aside money for their own or their children’s post-secondary education. Funds held in this account will grow tax-free but are subject to tax during withdrawals. Withdrawals are taxed at the beneficiary level, and since the beneficiaries are usually students with little earned income, the tax could be minimal.

RESPs are eligible for government grants, such as the Canada Learning Bond (CLB) and the Canada Education Savings Grant (CESB), which can provide a lifetime maximum of $2,000 for each eligible beneficiary and $7,200 to a RESP, respectively.

5. First Home Savings Account (FHSA)
    

The First Home Savings Account (FHSA) is a registered plan that helps first-time home buyers save for their down payment.

FHSA holders can enjoy the upsides of both RRSP and TFSA, which means contributions are tax-deductible while withdrawals are not taxed. There is an annual contribution limit of $8,000 with up to a maximum contribution amount of $40,000.
 

Non-registered investment accounts:
 

Non-registered accounts are investment accounts that do not receive any tax benefits. Unlike registered accounts, investment income such as interest, dividends, and capital gains in funds held in non-registered accounts is subject to tax on income and realized capital gains each year.

Cash, margin, and high-interest savings accounts are common types of non-registered accounts.
 

Cash account
 

A cash account is a regular, non-registered investment account that can hold stocks, bonds, and other financial assets. You can open an individual or joint cash account.
 

Margin account
 

A margin account functions the same as a cash account but has the added benefit of leverage. This means investors can borrow money to invest.


 

Choosing between registered vs non-registered investments

Comparison between a registered and non-registered account. Illustration from Amur Capital.

Both registered and non-registered accounts offer their unique benefits. Registered accounts, like RRSPs and TFSAs, offer immediate tax advantages. However, non-registered accounts can provide flexibility, especially with no contribution limits and the expanded types of investments they can hold.

The main benefit of registered accounts is that they allow you to invest and save tax-free. This means that any investment income, capital gains, or dividends you receive within these accounts are not taxed. Here’s how registered accounts can help you:

• Tax deferral: When you contribute to an RRSP, you’ll pay no tax on the investment gains. However, you still have to pay tax when you withdraw the funds. Tax deferral is especially helpful for those who are saving for their retirement (hence the name) and will withdraw funds once they are retired. They will pay less tax since they are in a lower tax bracket in retirement.

• Tax savings: With tax savings, you can allocate extra funds to other projects or invest in new assets.

• Faster compounding: Your investments can compound faster because you don’t pay taxes on investment gains or dividends.

Conversely, non-registered accounts have uncapped contribution and withdrawal limits, allowing you to invest and withdraw whenever you want. Here’s why you might consider non-registered accounts:

• Open to all asset classes: Non-registered accounts can hold mutual funds, exchange-traded funds (ETFs), stocks, bonds, collectibles, cryptocurrency, and real estate.

• Tax-loss harvesting: When you sell an investment below its original purchase price, you trigger a capital loss. However, you can use this loss to offset your capital gains, reducing your payable taxes and minimizing the negative impact of losses in your portfolio.

• Viable complements: Non-registered accounts can complement your investing and saving strategy when you’ve reached the contribution limit for your TFSA or RRSPs. Since non-registered accounts have no expiry, you can invest for the short or long term.
  
  
   

What kind of investment account should I open?

While having both types in your portfolio can help you maximize every dollar you save and invest, it is essential to consider other factors, such as timing or risk tolerance, as you create a robust investment plan to achieve your goals. For example, someone who is starting a new career can opt for a TFSA for tax-free investment growth, as their tax rates will increase along with their income.

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Brian Kondo
Sales Representative / Team Leader
The Brian Kondo Real Estate Team
Re/Max Hallmark First Group Realty Ltd.
905-683-7800 office
905-426-7484 direct
brian@briankondo.com
www.BrianKondo.com
www.BrianKondoTeam.com

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