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Registered accounts are safe tax havens where savings and investments can compound and grow over time. Understanding TFSAs, RRSPs, and RESPs is an important part of financial planning, but which to choose? Find out which ones work for you.

Most income — whether it is from a job, self-employment, pension, bank interest, or investments — is taxable in Canada, with a slice of your earnings going to the government each year. There is a significant exception, however, for income earned on investments held inside a registered account, such as an RRSP, TFSA, or RESP. Think of these accounts as safe tax havens where your savings and investments can compound and grow over time to maximum effect.

But not all registered accounts are the same. To help you make the most of your savings, we’ve broken down the differences between RRSPs, TFSAs and RESPs, with guidelines as to how and when to use each of these investment vehicles. Understanding TFSAs, RRSPs, and RESPs is an important part of financial planning, so read on to learn more.

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Registered Retirement Savings Plans (RRSPs)

What Are RRSPs?

An RRSP is a type of retirement savings plan. This type of registered account is probably the best known in Canada, in part because it is the only one that offers a tax deduction on contributions in addition to the tax-free growth on investment earnings. That means when you put money into an RRSP (also sometimes referred to as an RSP), you lower your taxable income for the year by that same amount.

So, for example, if you made $5,000 worth of RRSP contributions in 2019, and your total income for the year was $70,000, you would lower your taxable income to $65,000. That saves you approximately $1,500 in income tax, depending on your province where you live.

The catch? You pay income tax later when you draw from these funds in retirement, which is one of the determining factors for when to use an RRSP compared with other registered accounts. More about this is explained below, or read more about RSP vs.RRSP: What’s the Difference Between the Two Retirement Plans?

What’s The Best Way to Invest in an RRSP?

The best strategy for long-term investments, including retirement funds, is a diversified mix of stocks and bonds that encompass many different industries, sectors, geographical regions and company sizes.

If you are young and have many years to weather market ups and downs, you can afford to take on more risk by investing more heavily in equities. While more volatile, they offer greater average returns over time. Someone who is retired and relies on their investment income to make ends meet, however, should put more money into lower-risk fixed-income investments, such as bonds and GICs, because they don’t have time to let markets recover if there’s a downturn.

The other main factor to consider is investment fees. By using an online discount brokerage, such as Questrade or Wealthsimple Trade, you’ll pay rock-bottom fees on purchases and trades, leaving more money in your account to compound and grow over time. If you sign up for Questrade, you’ll get $50 in free trades as a new customer.

If you aren’t comfortable choosing your own investments, a robo advisor such as Wealthsimple will automatically create a diversified, balanced portfolio of low-fee exchange-traded funds (ETFs) and index funds for you, which takes into consideration your age, investment goals and risk tolerance. Now is a great time to sign up because Wealthsimple is offering Young and Thrifty readers an exclusive deal: get a $75 cash bonus when you open and fund a new Wealthsimple Invest account with $1000 within 45 days.

The amount you can contribute annually to an RRSP is limited to 18% of your previous year’s earned income (to a maximum of $27,230 in 2020), plus any unused amounts from previous years.
If you expect your income to be about the same or lower in retirement than it is now, it makes sense to invest in an RRSP because the tax savings you enjoy on your contributions outweigh the amount in taxes you’ll pay in retirement. On the other hand, if you are near the start of your career and expect to be in a higher tax bracket in retirement than you’re in now, you’ll end up paying more in taxes when you withdraw the funds than you’ll save by making the contribution. In that case, you’d be wise to invest your money in a different type of registered account, such as a TFSA. The exception to this rule is for those who plan to use the Home Buyers’ Plan or Lifelong Learning Plan to borrow against their RRSPs to buy a house or fund their education since these withdrawals (up to $35,000 and $20,000, respectively) can be made tax-free.

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Tax-Free Savings Accounts (TFSAs)

Understanding TFSAs

Created in 2009, TFSAs are the newest registered account in Canada. Similar to RRSPs, they can hold most investment assets including cash, GICs, mutual funds, stocks and bonds. The income earned in these accounts — bank interest, dividend payments, equities growth, etc. — is completely tax-sheltered. You never pay tax on those earnings. The interest compounds tax-free over time. Unlike RRSPs, you don’t get a tax deduction on contributions, but you also don’t pay income tax when you withdraw funds from your TFSA. Read more about The Best TFSA Investment in Canada.

What’s the Best Way to Invest in a TFSA?

In part, how you invest in a TFSA depends on what you’re saving for. If you have a short-term goal – perhaps finishing your basement within the next year or two – you’ll want to stick to the best low-risk fixed-income investments, such as bonds, GICs, or high-interest savings accounts. That way, you won’t have to worry that your investment may be in the red when it comes time to withdraw.

If, on the other hand, you’re in it for the long haul, you can treat your TFSA just like an RRSP, with a diversified portfolio of low-fee investments designed to match your risk tolerance and maximize your returns. If you prefer to hand off the work of designing and managing your portfolio, open an account with one of the best robo advisors in Canada. Our top choice is Wealthsimple because of its competitive fees and intuitive platform. Here’s another excellent reason to sign-up: new customers who open and fund a Wealthsimple account with $1,000 will get a $75 cash bonus.

However, if you feel savvy enough to DIY your own investment portfolio, give Wealthsimple Trade or Questrade a try. Plus, you can take advantage of our exclusive promo offer: open a new Wealthsimple Trade account, and get a $10 cash bonus + $0 commission trades. All you have to do is deposit $100 and buy $100 worth of stock within the first 45 days. With Questrade, you’ll get $50 in free trades as a new customer.

Read more about The Best TFSA Investments in Canada.

Anyone age 18 or older gets a set amount of TFSA contribution room each year. For 2020, that amount is $6,000. Any unused amounts are carried forward into the following year, so those who were born in 1991 or earlier would now have a maximum cumulative limit of $69,500.
TFSAs are ideal for short-term investments, like saving up for a wedding, car or home renovation, because they can be withdrawn at any time tax-free. They are also an excellent alternative to RRSPs for long-term investments if you are young, have an income on the lower end and expect to be in a higher tax bracket in retirement. That’s because the taxes you’d save now by making an RRSP contribution would be minimal, but the money you’ll save by drawing tax-free income from a TFSA in retirement will be significant.

Registered Education Savings Plan

What Are RESPs?

These registered investment accounts allow you to save for a child’s post-secondary education or training and your money grows tax-free. While you don’t get a tax deduction on RESP contributions, the government will kick in an extra 20% (up to $500 annually and a lifetime total $7,200 per child) in the form of a Canada Education Savings Grant (CESG).

Yes, that’s free money – as long as the child ends up using it for expenses related to eligible college, university or apprenticeship programs. When the child withdraws the grant money and/or investment income, they will pay income tax at their marginal rate, but all your original contributions can be withdrawn tax-free. Read more about RESP in Canada: How Does the RESP Work?

What’s the Best Way to Invest in an RESP?

A low-fee diversified portfolio is still your best bet. If your child is young and you have lots of time to let your money grow, you can take more risk by holding more equities than fixed-income assets. Conversely, as the child approaches graduation (assuming he/she wants to go directly from high school to post-secondary), you should re-adjust your portfolio to include lower-risk investments.

You can open an RESP with any of the best robo advisors in Canada, including our top choice, Wealthsimple, which offers competitive fees and an easy-to-use platform. Plus, you can take advantage of our exclusive promo offer: open and fund a new Wealthsimple Invest account with $1000 within 45 days, and get a $75 cash bonus deposited into your account.

Alternatively, Justwealth even has a unique RESP service called Education Target Date Portfolios. It automatically aligns your investment allocation with the year your child will begin his or her post-secondary studies. This feature makes it stand-out above the competition.

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There is no annual limit on RESP contributions, but there is a lifetime limit of $50,000 per child. Having said that, if you want to maximize the amount of grant money you receive, it would be wise to contribute $2,500 per year to get the full $500 annual CESG – at least until you hit the $7,200 lifetime maximum.
Anyone who wants to save for a child’s future education would benefit from investing in an RESP, given it’s the only account option that includes a government-matching program. There are even additional funds called Canada Learning Bonds for eligible low-income families. An RESP can remain open for 35 years, so the child has plenty of time to make use of the money. If they decide to forgo higher learning/training altogether, you will have to pay back any grant money received, but you can transfer the rest to your RRSP if you have contribution room remaining.

Choosing Between an RRSP vs. TFSA vs. RESP

The holy grail of investing is to make use of all your allowable contribution room for all three of these registered accounts. For many, that’s just not possible. Instead, you’ll have to prioritize.

In terms of TFSA vs. RRSP for long-term retirement savings, contributions to an RRSP will provide the greatest tax advantage when your current income is higher than you expect it to be in retirement. RRSPs can also be beneficial for those who are saving for a down payment on a house or to go back to school, as there are government programs that allow you to withdraw money from your RRSP tax-free for these purposes.

If you’re in a low tax bracket, or you’re investing for a shorter-term goal, a TFSA is your best bet. If you’re still unsure, read our in-depth article about TFSA vs. RRSP: Which to Choose?

For a child’s education, you can’t do better than an RESP due to the government grant money. Once you’ve hit the lifetime maximum grant total of $7,200, investing in a TFSA is just as good – assuming you’re disciplined enough not to dip into it yourself instead of holding on to the money for your child’s education.

If you’re really having a tough time choosing between accounts, invest in an RRSP –and if you get your tax refund, invest that money in a TFSA or RESP. That gives you a double hit of tax-free investing.

Still struggling to decide between the options? Read our article about RESP vs. RRSP: Which to Choose?

The Last Word

If your income is unaffected by the coronavirus pandemic and you can find money in your budget to set aside, it is a great time to start investing online. For one, the sooner you start investing the better, due to the magic of compounding returns. Second, the recent market downturn means you can buy investments on the cheap, following the first rule of investing: buy low, sell high.

You can grow your savings even further by investing in registered accounts, such as RRSPs, TFSAs and RESPs, as you’ll shelter that income from taxes. Last, but certainly not least, use a low-fee online brokerage or robo advisor to make sure you’re not losing a big chunk of your investment returns to management fees.

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Article comments

2 comments
Zee says:

Hi Tamar

I am a new immigrant to the country (been here on PR for 2 years). Thanks to Y&T I didn’t need to start from scratch in my investigation and I have maxed out my TFSA and RRSP with two of your recommended robo advisors.

However, as an immigrant, I have very tight caps on my TFSA and RRSP. I am cashing in my retirement funds in South Africa and would like to bring it over. What are my options to minimize taxes?

Robb Engen says:

Hi Zee, the best thing you can do for tax management is continue maxing out your RRSP and TFSA room each year. If you’re bringing over a sizeable amount from South Africa you may wish to speak to an accountant who can look at your particular situation and offer the best recommendation.