This post was written by our friend Enoch at Savvy New Canadians. The views and opinions he expresses here are independent of CI Direct Investing.
After arriving in Canada in the fall of 2011, it didn’t take long for me to realize that I had a lot to learn.
Settling into a new country is generally challenging and it becomes even more so when the financial system is quite different from what you’re familiar with back in your home country.
I’ve since found my footing in Canada and have a good understanding of how things work – buying a home, starting a business, saving for our kid’s post-secondary education, investing, planning for retirement, and more.
I wish I had come across a financial checklist that summarized the important financial steps newcomers should be aware of from day one.
As you work through this checklist, you’ll need to know what investment accounts (registered and non-registered) are available to you as a newcomer to Canada. Let’s take a look:
Registered investment accounts
These are government registered plans such as RRSPs, TFSAs and RESPs. They offer tax advantages that can help your funds grow tax-free until withdrawal, or in the case of TFSAs, tax-free for life.
Registered investment accounts come with some restrictions, such as what you can invest in and how much.
1. Registered Retirement Savings Plan (RRSP)
The RRSP was established in 1957 and is aimed at helping Canadians build up their retirement nest egg, particularly if they don’t have a workplace pension plan.
Often referred to as the “third pillar” of Canada’s retirement income system, an RRSP account grows your money tax-free until you start making withdrawals in retirement. To contribute to an RRSP, you must have earned income.
The annual RRSP contribution limit is published every year and is 18% of your income for the previous year up to a maximum amount. For 2019, the maximum RRSP contribution amount is $26,500. If you don’t max out your savings in a given year that you qualify for this account, you accumulate contribution room.
Other details to note about this plan:
- RRSP contribution deductions lower your taxable income which means you should see a larger tax return and potentially, an increase in your income-tested benefits, such as the Canada Child Benefit.
- You can use your contribution room towards a spousal RRSP as part of an income-splitting strategy to lower your combined family taxes in retirement.
- Unused contribution room can be carried forward to future years indefinitely.
- RRSP funds can also be used to make a down payment on your first home (Home Buyers’ Plan) or to pay for your education (Lifelong Learning Plan).
- At age 71, you can convert your RRSP into a registered retirement income fund.
You can find your RRSP deduction limit by checking your CRA My Account or find it on your Notice of Assessment.
2. Tax-Free Savings Account (TFSA)
The TFSA was introduced in 2009 and has since grown to become an important account for Canadians who are saving or investing for both short and long-term needs. As the name suggests, the money you invest in your TFSA grows tax-free.
To be eligible to contribute to a TFSA, you must be at least 18 years of age, a resident of Canada and have a valid social insurance number.
The annual TFSA contribution room is indexed to inflation (in $500 increments at a time) and announced every year. For 2019, the contribution limit is $6,000 and if you have been eligible to contribute to a TFSA since its inception, your total contribution room amounts to $63,500 in 2019.
A few points to note for the TFSA:
- Unlike the RRSP, you do not need to have an income to contribute to a TFSA account. Also, contributions are from after-tax income and there are no tax deductions at tax time.
- You can invest your TFSA using various kinds of investment assets including stocks, bonds, exchange-traded funds (ETFs), guaranteed investment certificates (GICs), and mutual funds. You can also put your money in a high-interest savings account.
- Unused contribution room can be carried forward indefinitely to future years.
My quick take on TFSA’s…
Tax-Free Savings Accounts are not just for short-term savings. They can actually play a major role in your retirement planning.
I emphasize this because I often come across people who believe that TFSAs are solely meant to be piggy banks you put money in and then withdraw at will.
A TFSA can serve as an emergency fund. In this case, you can keep your money in a high-interest savings account that you can access for short-term money needs.
On the other hand, your TFSA can also hold investment assets such as ETFs made up of stocks and bonds (similar to an RRSP) with long-term growth in mind.
3. Registered Education Savings Plan(RESP)
College tuition can be very expensive and can leave your kids with significant student loan debts after graduation. The RESP is a tax-deferred investment account that helps parents plan for their children’s post-secondary education or training.
To encourage parents to save, the government chips in 20 cents on every dollar you save up to a maximum benefit of $500 per year and up to a lifetime limit of $7,200.
This government contribution is referred to as the Canada Education Savings Grant (CESG) and is available until your child turns 17 years of age.
When your child later enrolls in an eligible educational program, they can start to withdraw funds from their RESP to pay for school.
Other things to note about the RESP:
- A $2,500 per year contribution qualifies for the full $500 government grant.
- Depending on your family’s net income, you may qualify for additional CESG grants and/or the Canada Learning Bond.
- There is a lifetime limit of $50,000 in total contributions to an RESP (excluding government grant money).
- If your child decides to not pursue post-secondary education or training, you may be able to use the funds for another child, move it to your RRSP, or withdraw your contributions as cash.
- Investment options for an RESP are similar to those acceptable in an RRSP or TFSA.
Apart from registered accounts that enjoy tax-deferred or tax-free status, you can also save and invest using non-registered accounts.
Income earned (interest, dividends, or capital gains) on assets in your non-registered accounts is subject to tax on an annual basis.
Non-registered accounts are more flexible than registered ones and have no restrictions on the assets you can invest in or how much you can invest.
Some of the reasons why you may want to invest using a non-registered investment account are:
- If you have maxed out your registered accounts (TFSA and RRSP) and want to continue investing. There are no withdrawal or contribution limits.
- In order to reach your financial goals faster. This is particularly important for new Canadians who are playing catch-up on their retirement savings.
- Your investment strategy. For example, if you are using leverage, you can easily deduct your interest costs when accounting for taxes at year-end.
- The nature of returns on your portfolio. Investments that result in dividends or capital gains can take advantage of preferential tax rates in non-registered accounts. Income earning assets like bonds and GICs are taxed like regular income.
Options for investing your money
Investors in Canada have access to a variety of investment securities and can go about purchasing them in different ways.
Regardless of which strategy you choose, you will want to pay attention to the investment fees you pay per year on your portfolio. Higher fees do not always translate into higher returns and this can erode your portfolio value over time.
Here are some ways you can invest:
A. Use a discount brokerage
Do-it-yourself investors can open a self-directed account and directly purchase securities like stocks, ETFs and more online.
This strategy can help you cut your investment costs to the bone. However, you need to be confident with allocating assets to suit your risk tolerance and investment horizon, as well as be comfortable with portfolio re-balancing.
If you plan to make small and frequent contributions to your account, watch out for transaction fees.
B. Invest with a robo-adviser
Robo-advisers take the hassle out of investing. They typically use low-cost ETFs to diversify your holdings, automatically re-balance it when required, and may provide financial advice.
If you are looking for a hands-free approach to investing that works at low fees, a robo-adviser is a great choice.
C. Mutual funds (big banks)
Mutual funds remain popular as a traditional vehicle for investing towards retirement.
A final word
Canada has a great retirement system in place for seniors with programs like Old Age Security, Guaranteed Income Supplement, and the Canada Pension Plan. That said, these programs are not designed to augment 100% of your retirement income.
In order to meet all of your retirement income needs and have a chance at retiring comfortably, take advantage of investment accounts like the RRSP, TFSA and others.
Savvy New Canadians is a personal finance blog dedicated to discussing relevant personal finance information as it relates to money, DIY investing, freedom from debt, frugal living, entrepreneurship, productivity, creating multiple streams of income, and much more.