Registered investment accounts to build wealth: What every Canadian should know
The following is a sponsored post with Sun Life Financial, all thoughts and opinions are my own.
Investors today are surrounded by choice. It’s sometimes hard to figure out where to focus your investing.
The TFSA, RRSP, RESP in focus
You might be just starting out on your investing journey. Or you’ve had an investment account for some time. Understanding the nuts-and-bolts of some key accounts will help you grow your wealth.
Thanks to my partners at Sun Life, I’ve dug deep into the fine print for this post. Learning how key registered investment accounts are structured will help you maximize your wealth building approach today. It will also help you preserve the wealth you accumulate.
Let’s get into it!
Tax-Free Savings Account (TFSA)
Did you know that you can invest the money that is inside your TFSA? That it doesn’t have to be a ”savings account” at all?
- The TFSA’s name isn’t completely accurate. You can make cash contributions to this account and own investments such as stocks and bonds inside the account.
- Contributions to your TFSA are not tax deductible, so you cannotuse contributions to reduce your taxable income. However, TFSAs are tax-effective for every Canadian regardless of their tax bracket. Why? After you choose TFSA investments, the income you earn on those investments inside the TFSA can grow tax-free.
- If/when you decide to take money out of the account, you can withdraw the money tax-free.
- Contributions to a TFSA can occur throughout the year.
- TFSAs have contribution limits. Strive to maximize your TFSA contributions each year. New contribution room is added every January 1 for each individual who is resident in Canada and is 18 years of age or older. The contribution limit for the TFSA as of January 1, 2020, is $6,000.
- Contribution limits have nothing to do with your annual income.
- There are penalties if you over-contribute to your TFSA, or contribute to your TFSA as a non-resident.
- You can carry forward unused TFSA contribution room into future calendar years.
- You can contribute existing investments held within any taxable investment account you hold into your TFSA as well. Just be mindful that you might have a capital gain to claim – and that capital losses cannot be claimed on this type of transfer. If you want to learn more about that, including the approach I took, check out this post here.
Why TFSAs should matter to you
TFSAs provide Canadian investors with tax benefits:
- income on investments inside the TFSA can grow tax-free, and
- if/when you decide to withdraw money from this account, you can do so tax-free.
How can you protect your wealth?
You can choose whomever you want as your TFSA beneficiary. I named my wife. As a TFSA account holder, though, I named my wife a “successor holder” not a “beneficiary.” There is a difference.
TFSA successor holder
You can use this designation for a spouse or common-law partner. As a successor holder, they become the new holder of the TFSA upon your death. They receive your TFSA assets sheltered within a TFSA. They can then transfer all or a portion of the deceased’s TFSA assets into their own existing TFSA account without impacting their own TFSA contribution room.
If you wish to designate someone other than a spouse or common-law partner to the value of your TFSA, you can name that person as a beneficiary. Upon your death, the TFSA is collapsed and the value goes to the beneficiary. While beneficiaries can contribute a portion or all of the deceased’s TFSA assets into their own TFSAs, they can only do so without penalty up to the limit of their own unused TFSA contribution room.
Registered Retirement Savings Plan (RRSP)
Did you know that an RRSP can have tax implications?
- An RRSP is a savings plan.
- RRSP contributions are tax deductible, so you can use these tax deductions to reduce your taxable income.
- Depending on your income level, it may make sense to maximize your TFSA before you contribute to your RRSP. I believe the TFSA is a gift all adult Canadians can take advantage of, regardless of their income level. Read on why I continue to max out my TFSA first every year here.
- RRSPs have contribution limits. One is 18% of earned income you reported on your tax return in the previous year. And that’s up to a maximum of $26,500 for the 2019 tax year and $27,230 for the 2020 tax year. Because of these limits, many Canadians don’t max out their contributions limit. This doesn’t mean you shouldn’t strive to do so though! Maxing out your TFSA and RRSP, if you can, are excellent goals to work towards. I’m trying to do that myself.
- Penalties are in place if you over-contribute to your RRSP. But, a small $2,000 lifetime over-contribution exemption does exist.
- You can carry forward unused RRSP contribution room for future tax years.
- The income you earn on investments inside the RRSP is tax deferred—while you keep the money in the RRSP.
- A common type of RRSP is an individual RRSP, registered in the name of the person contributing to it. There are also spousal RRSPs and group RRSPs.
- You can manage RRSPs yourself or with the help of an advisor.
- What if one spouse is in a different tax position than their partner? RRSP contributions can help lower the total amount of income taxes a couple must eventually pay (called income splitting).
- There is no limit on the number of RRSPs you can have. The limit is on the total amount you can contribute.However, most people find it simpler to have only one or at most two plans. The second could b with their employer-sponsored RRSP. This makes it easier to keep track of their RRSP investments.
- When you take money out of your RRSP, you have to pay tax. Some exceptions do apply: such as the first time home buyers plan and lifelong learning plan.
- You have to report the RRSP amount you withdraw as income on your tax return.
These are just some of the RRSP facts.
Why RRSPs should matter to you
I feel there are two fundamental things RRSPs provide Canadian investors:
- a tax deduction from your contribution, and
- tax-deferred growth.
These are two outstanding benefits for this account. The RRSP-generated tax deferral is great, but it’s temporary. You need to eventually pay tax on funds that were within the RRSP.
How can you protect your wealth?
For many Canadians, RRSP assets might be the largest post-mortem tax liability we own.
When you die, RRSPs are taxed as income, subject to tax at your marginal tax rate. Current Canada Revenue Agency (CRA) tax rules require that the fair market value of the RRSP, as of the date of death, must be in the deceased’s (final) terminal tax return.
I suggest naming an RRSP beneficiary.
RRSP qualified beneficiaries
- A spouse or common-law partner
A spouse rollover provision allows a beneficiary spouse to put the deceased’s RRSP assets into their own RRSP without any immediate tax consequences. This is what my wife and I have done. This way, either surviving one of us can use this rolled over money. And we maintain tax-deferred growth inside an RRSP account.
A spouse or common-law partner can also choose to take the deceased spouse’s RRSP assets as cash. In this case, RRSPs are taxed.
- A dependent child or grandchild
An RRSP owner can designate their financially dependent child or grandchild as their RRSP beneficiary. From there, depending upon the age and nature of the dependency, a number of options are available to the child or grandchild.
- Transfer the money to their RRSP.
- Purchase an annuity until age 18. While no tax is payable by the deceased on the RRSP assets, annuity payments are 100% taxable to the child.
- Rollover assets into a Registered Disability Savings Plan (RDSP).
Again, I’m just starting the conversation about RRSP beneficiaries – but these are some important things to consider.
Registered Education Savings Plan (RESP)
Did you know that an RESP is eventually taxable?
- The RESP is a tax-deferred investment plan (that can help parents plan to fund their children’s post-secondary education).
- The government chips in with 20% on every dollar parents contribute. That’s to a maximum benefit of $500 per year. The lifetime maximum supplement of $7,200 (free government money per se)! The government contribution portion is the Canada Education Savings Grant (CESG). It’s available until your child turns 17.
- When your child enrolls in an eligible post-secondary program, they can withdraw funds from their RESP to pay for school.
- To qualify for the full CESG, parents need to contribute $2,500 per year. That amount qualifies for the full annual $500 maximum benefit (not that there are provisions for catch-up contributions.)
- 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 per child in total contributions to an RESP (excluding government grant money).
- What if your child decides to not pursue post-secondary education? You can transfer funds to another child’s RESP, move to your RRSP or withdraw as cash.
- Investment options for an RESP are similar to those acceptable in an RRSP or TFSA.
Why RESPs should matter to you
I feel there are two fundamental benefits from the RESP that parents need to consider:
- Tax-deferred growth for your children’s education, and
- Government contributions to take advantage of to help pay for the education.
What about non-registered investments?
I think most Canadians should ignore investing in a taxable account, unless they can maximize contributions to their
- TFSA (think tax-free growth for decades to come),
- RRSP (think tax-deferred growth with tax-deductible contributions), and
- children’s RESP (think tax-deferred growth with a dose of free government money).
Non-registered accounts are more flexible than registered ones and have fewer restrictions on them. That’s why they’re non-registered.
I believe if you can pay down your mortgage (or making timely rent payments) AND max out contributions to your TFSA, RRSP, and RESP.
These are MASSIVE financial accomplishments.
Do you really want to understand how you could invest inside a taxable account? And what tax-savvy considerations you should be thinking about? Please check out my comprehensive post here.
Registered investing is both wealth building and tax smart
There are many factors to consider when it comes to investing. TFSAs, RRSPs and RESPs are tools every Canadian should consider using to build and preserve wealth.
Thanks to my partners at Sun Life for helping me with the facts in this post. I look forward to sharing more ways you and your family can get wealthy in future articles.
And if you live in Quebec you also can get this
Québec Education Savings Incentive
The Québec education savings incentive (QESI) is a tax measure that encourages Québec families to start saving early for the post-secondary education of their children and grandchildren.
This measure, which took effect on February 21, 2007, consists of a refundable tax credit that is paid directly into a registered education savings plan (RESP) opened with an RESP provider that offers the QESI.
For the credit to be paid into a child’s RESP, the trustee of the RESP must apply for it with Revenu Québec.
An extra $250 per child per year
Excellent addition and information!
A follow-up to my comment above. If you rely on the CRA information be aware that CRA does not update their records for your TFSA contribution until the following year. In my case my full 2018 contribution made in January 2018 was not updated on CRA website until February 15, 2019. That’s because my financial institution does not report calendar year transactions I have made until the following year. As a result of this delay, my 2019 contribution made in January 2019 and my 2020 contribution made in January 2020, have not been reflected in my CRA account. I know I have no contribution room yet CRA says my room is $12,000 along with various caveats. Hopefully by later in February 2020, CRA will have updated their records for 2019 transactions. This may make it easier for you to determine your 2020 limit.
Ya, I’ve always kept track of my own TFSA contributions for partly that reason Ron. I want to be sure of what was contributed and have few delays on the reporting side.
CRA will tell you what your contribution limit is.
Actually I would not trust the CRA. They will tell you an amount, with a disclaimer that it could be wrong.
In both mine and my husband’s case, we have contributed every year, I know that for certain, yet the CRA tells me that we have more contribution room.
They also did that with my husband’s RRSP room one year. So he made a contribution and then said “sorry, we made a mistake” and part of it was disallowed.
Is there a sure fire way to know if you have maxed out your TFSA? For example the GF has contributed monthly for many years, then got a lump sum amount of money and would like to put as much in the account as she can. Is there some way to track this without keeping year by year meticulous contribution records?
Between your bank, CRA and yourself, not sure what else folks can do Paul. I know I keep a simple spreadsheet to know what I’ve contributed and because we save up for a year, then deposit it all at once it’s pretty easy for us to figure out.
Great post, I honestly wish that the government should have called the TFSA a Tax Free Investment Account. It creates too much misinformation with a lot of people thinking it’s just a savings account like any other at a bank. Big banks have been known to take advantage by offer “high” interest rates on these TFSA deposits.
Ya, I went as far to suggest some name changes to various accounts a few years ago:
I keep my cash in a savings account. Other than $10-$15k at a time I’m 100% invested. Just me. That said, I hope to start full-on retirement with a cash wedge of sorts of ~1 year of full living expenses or about $50k.
The DTC is the Holy Grail of the RDSP. Get that and you’re golden. Some conditions/cases are a shoe in. I can speak from experience that dialysis is a given. Still the same forms, but there is no wiggle room by CRA. If a person is on dialysis, they qualify and get the DTC, period. Other cases may be more problematic and need a good Doctor that knows the routine. My wife’s DTC took some paperwork but wasn’t a huge issue. I’ve read of others that had more difficulties. One thing we learned right from the get go. When you walk into a doctor’s office and they ask you how you are doing, even in conversation, never, never, never, say “fine” or “good”.
Getting the actual RDSP account was simple. The staff at my local TD branch had no problems opening the account and registering it. We had a self-directed Plan and any contributions were reported by TD and the matching funds showed up within a few months of every new year. Collapsing it was just as easy. Provide TD with the appropriate document and they returned the government grant money to the government. We had a designated beneficiary and that was handled with no difficulty. I can’t speak to the use of the Plan as an income as we never got that far.
All in all it is a great plan I thank Mr Jim Flaherty for this program. The background I’ve read is that he drove this concept.
Lloyd, yes it was Jim Flaherty’s program. It was personal for him, he has triplet sons. So very sad to lose such a great man at such a young age. A good friend of mine is a friend of his wife’s family, she had a funny story how in university days the extremely beautiful and brilliant Christine brought home this nerdy, gawky boyfriend (Jim) and they were all going “whaaat???” lol.
Good story 🙂
Yes, I recall Flaherty has someone in his family that had a disability (?) so it was a cause near and dear to his heart back then. Kudos to him.
I should write a detailed post about the RDSP at some point. Add to the pile of ideas 🙂
There is also the RDSP. Not as commonly used but a GREAT program for those that might need it.
Indeed and great addition for a future post.
A registered disability savings plan (RDSP) can help parents (or others) save for the long term financial security of a person who is eligible for the disability tax credit (DTC). While contributions to RDSP are not tax deductible they can be made until the end of the year in which the beneficiary turns 59 and contributions that are withdrawn are not included as income (to the beneficiary).
I didn’t include because it is not commonly used as much as TFSA, RRSP, RESP should be but undoubtedly a great program for those who need it.
And there is the Canada Disability Savings Grant and Canada Disability Savings Bond as part of the RDSP.
Indeed. Anything they could streamline in those programs in your opinion?
Great review, thanks.
Although the RDSP is lesser known than the other programs you have reviewed, it is vitally important to qualified individuals and their caregivers.
There are a lot of rules around this program that are poorly understood.
Could we get you to review these details such as investment vehicles, contributions and withdrawals restrictions in a future post?
Another great reason to do a deeper dive on this Steve. Thanks for the encouragement. Will add to list for coming months and see if I can get an expert to discuss the finer details.
In order to open a Registered Disability Savings Plan, you have to be in receipt of the Disability Tax Credit.
The rules regarding the RDSP are quite tricky to understand and have changed again this past year. Bank officials can tell you the wrong thing, so don’t rely on them, understand it yourself.
One point to understand is that the government can change the rules about the Disability Tax Credit at any time, and if you lose this credit, you will have to collapse your RDSP–or maybe not right away, this is what gets tweaked.
I don’t think the ins and outs of this program are something that Mark should attempt to cover, due to their fluidity. Current rules are on the government website.
I should tackle that Barbara at some point. I think it would be enabler to others have you have mentioned.
Will add to my growing list of topics 🙂
Hope all is well.
Canajunfinances.com is another great Canadian blog that I read. He writes a lot about the RDSP and his personal experiences with it.
Yes, I might interview Alan. Good choice!