As part of financial literacy month, for today’s post, I thought I’d propose a few changes I feel are necessary to some Canadian financial accounts. Let me know what you think about my proposals in a comment below or a Tweet.
Registered Retirement Savings Plan (RRSP) changes to Tax Deferred Retirement Account (TDRA)
When you put money into an RRSP, you get a receipt proving how much that contribution is. So, with that contribution you can reduce your taxable income. This makes this account almost the perfect retirement choice to save money and grow money tax-deferred until you take the money out. Remember though, you do have to pay taxes on money withdrawn from this account. While you can borrow money from this account to help with a home purchase or some education, there are payback requirements for those choices. I like to think of this account as a Tax Deferred Retirement Account (TDRA).
Registered Education Savings Plan (RESP) changes to Tax Free Education Account (TFEA)
This account was designed as a savings plan for your child’s post-secondary education and while most RESPs are opened for children, you can open an RESP for yourself. There is no taxation on investment earnings inside the RESP and like other registered accounts there are contribution limits. Unfortunately account contributions are not tax deductible but this also means you can withdraw contributions or have payments from this account tax-free. There are also requirements when this account must be collapsed. For the most part, I see this is as a Tax Free Education Account (TFEA).
Registered Disability Savings Plan (RDSP) changes to Tax Free Beneficiary Account (TFBA)
This account was established to help parents (and others) save for the long-term financial security of a disabled person under the disability tax credit. The main idea is, the plan holder opens and manages the account for the beneficiary. While there is no annual limit on account contributions there is a lifetime contribution limit. Contributions to this account also have an age limit. Contributions are not tax deductible but savings inside the account grow tax free. Let’s remove the term disability and instead call this a Tax Free Beneficiary Account (TFBA).
Tax Free Savings Account (TFSA) changes to Tax Free Retirement Account (TFRA)
When you put money into a TFSA, you do not get any receipt proving how much you’ve contributed (unlike an RRSP). This means you contribute to this account using after-tax dollars. While this sounds bad (because you’ve paid taxes on the monies contributed to this account) the major upside is investments inside the TFSA grow tax free. You do not have to pay taxes on money withdrawn from this account either and monies withdrawn from this account are not subject to income-tested government programs like the Canada Pension Plan. I prefer to think of this account as a (dream) Tax Free Retirement Account (TFRA).
High Interest Savings Account (HISA) changes to Taxable Savings Account (TSA)
Sorry banks, but earning 1.3% today is not a high interest savings account. Please come back and inform us when interest rates earned in savings accounts are at least 4%.
You should see a theme above. I think Canadian investors should be motivated to better understand the tax implications of using various accounts in order to best utilize them for their saving and retirement goals. We all know death and taxes are certainties in life but at least you can do a little something about the latter.
For more reading about these accounts and many more, I’d recommend visiting GetSmarterAboutMoney.ca.
What do you think of my account name changes? Do you disagree with them and why?