Name Changes Needed to Canadian Financial Accounts
As part of financial literacy month 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!
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 Remember though, you do have to pay taxes on money withdrawn from this account.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 the RRSP 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. There are also requirements when this account must be collapsed.
Here are some other great RESP benefits:
- Your money grows tax-free while it is in your RESP.
- You do not get a tax deduction for the money you put into an RESP.
- The money that your investment earns while it is in the RESP will not be taxed until money is taken out to pay for your child’s education.
- Money paid out of the RESP as an Educational Assistance Payment is taxed in the hands of the student. Since many students have little or no other income, they can usually withdraw the money tax-free.
- The money that you have put in the RESP is returned to you, tax-free.
For the most part, I see this is as a Tax Free Education Account (TFEA) although tax-deferred principles do apply!
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 (for many reasons) 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) and I’ve been using as an investment account since Day 1.
High Interest Savings Account (HISA) changes to Taxable Savings Account (TSA)
Sorry banks, but today earning less than 2% is not a high interest savings account. Please come back and inform us when interest rates earned in savings accounts are at least 4-5%. That could be never.
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. 🙂
What do you think of my account name changes? Do you disagree with them and why?
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
OK, cool… Love your blog. Keep up the work!
Will do and thanks for reading!
Hi Mark,
RRSP’s may be tax deferred but the money does indeed grows tax-free. By saying that the entire thing is tax-deferred ignores the fact that the contributor received an initial tax refund, which could have been used to fund the RRSP further.
Point I’m trying to make is that the money in RRSP actually does indeed grows tax-free, even though the “government portion” (which is the initial and all/any subsequent refunds) is something you have to give back along with the growth.
Thanks R.
I guess that is what I’m trying to imply with that tax deferred statement: the investments inside the account avoid any tax consequences now because investors technically get the government loan with their RRSP-generated refund AND tax deferred also means the investments are free from tax because you are deferring the tax consequences until a future period.
We are basically saying the same thing 🙂
I fully support the suggestions and logic of the name changes. The minor exception for me is TFSA… I don’t consider it only as a “retirement” account. I am “retired” and still contribute to the fullest extent allowable. I consider and promote these accounts as “investment” accounts (TFIAs). My strategy is to use savings from pension income and top up with RIF payments.
Fair point Curt. I was certainly looking at this account for my asset accumulation years and not my asset preservation years but I can see this account being excellent to contribute to in retirement; move some RRSP withdrawals to the TFSA and use the tax-free dividends paid inside the TFSA for expenses. Thanks for the comment.
I agree with renaming the TFSA , too many use it for interest accounts at 0.5%.
Have also seen people do things like save for property tax or a vacation , put money in and out too many times , confuse themselves, over contribute and get in a tangle with CRA.
Ouch. Well, the accounts are still, somewhat “new” but there is simply a huge body of knowledge when it comes to personal finance and investing, so I’m not surprised I guess. At least renaming the accounts, in my opinion, might be a start. 🙂
Thanks Mark–you started a great conversation here! I have often found that Canadian investors were TFSAs.
You’re welcome Rob!
Good ideas for name changes. Many people don’t use their TFSAs as retirement accounts (which is too bad, because that’s what they should be used for). I especially like the TDRA idea (the first one). It’s a much more straight forward title for the account.
Thanks Daisy! Not touching the TFSA will take some discipline, but I think it’s a great retirement account. I wonder if others will eventually treat this account this way?
Nice idea Mark. Now rename all the group savings and retirement plans! 🙂
Thanks Brian! Yes, let the renaming process begin!
Very create names you came up with there Mark! I chuckled quite hard at a few of them. I really like Tax Deferred Retirement Account instead of RRSP the best I think though. Changing that one name would avoid a lot of confusion for many folks!
I think the government needs to put you on their product/program naming committee.
For the RESP, I would propose the name “Tax Shifted Education Account (TSEA)” since EAP and AIP are taxed, but in the hands of the beneficiary (which is usually in a low tax bracket and has some really nice tuition deductions).
Thanks for the comments B.
I should clarify, the contributions to the RESP are not tax deductible, so you can withdraw them tax free from the plan at any time for any reason.
The educational assistance payment (EAP) is the amount paid to a beneficiary (a student) from an RESP, yes, and you’re right, the tax is shifted from “contributor” to student – since the student includes the EAPs as income on his or her return for the year the student receives them.
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/resp-reee/pymnts/p-eng.html
I thought that investment earnings in the RESP were taxable in the name of the student, although the taxes are deferred until the earnings are withdrawn.
As far as I know Justin, there is no tax on the investment earnings inside the RESP, as long as they stay in the plan.
The tax shift (as “B” pointed out in the comment above) occurs when the student includes the EAPs as income on his or her return for the year the student receives them.
I have to disagree re the RDSP account though. I am a blind adult, setup to, contribute to and manage my RDSP investments on my own. Though true a third party can contribute to an RDSP and many family choose to run it that way, that is not required. Also, unless mentally incompitent, the account is opened by and in the name of the beneficiary.
Btw, on the blind front, no audio option for the capcha? 🙁
Hey Shane,
Thanks for your comment. Regarding the RDSP, you are absolutely right that you can be the beneficiary as well as the plan holder, I didn’t cover that specifically. I appreciate the clarification.
Regarding the audio option for Captcha, I will see what I can do to update my plugin Shane 🙂
Hard to argue with the need to change these accounts.
It really frightens me how financially illiterate the general population is. There seems to be this general malaise as far as taking responsibility for your financial future. Changing these names may help the ignorant, but it won’t help with, what I feel are the majority, the people who simply do not think about their future. In fact, one of the biggest risks to my and your retirement plans is that the majority that have not saved could vote to expropriate from those that have via punitive taxation.
Thanks for the comment Matt. I agree with your general malaise angle, and likely changing any account names are immaterial to the real issues Canadians have: taking on too much debt/mortgage, not saving enough or often enough and not planning for their retirement appropriately using low-cost, diversified products.
Thanks for the comment Matt. I agree with your general malaise angle, and likely changing any account names are immaterial to the real issues Canadians have: taking on too much debt/mortgage, not saving enough or often enough and planning for their retirement appropriately using low-cost, diversified products.
I think financial literacy is key in today’s world. There are so many options for what to do with our money these days, but the subject is relatively complex and it seems to me that many people would rather leave it in the hands of a ‘financial advisor’ at their bank. I was just speaking to my 23 year old brother the other day (who’s enrolled in post-secondary education) and he didn’t know what the purpose of an RRSP or a TFSA was, and he certainly didn’t know how mutual funds work, which are the basic investment vehicles banks try to sell you! I can see why a market exists for basic advisory services…
I still need to learn lots Jason. There are many options, you are correct, but if you want to save and invest smartly, the options are ironically rather limited. Make money, pay yourself first, save, invest mostly in indexed products, and stick to your investment plan. Do the same month after month after month. Relatively simple but difficult for many of us to do consistently.
Once your brother starts working, I’m sure he’ll lean on you for some investing advice. If not, tell him to subscribe to my blog via email for updates 🙂