In Canada we have the options to choose from various types of investment accounts. Below are a list of common investment accounts that you may find yourself investing in over the years. There is no such thing as “the best account” as your choice would depend on your goals, account ownership needs and eligibility.
Types of Investment Accounts
Registered Retirement Savings Plan
RRSPs are registered investment accounts with the Canadian government which allow you to defer paying tax on money deposited into it. They’re a great way for saving for retirement as when you contribute into an RRSP, you get a tax deduction for the amount contributed which reduces your taxable income for the year. Withdrawals are subject to withholding tax. The greater your tax rate, the greater your tax savings.
Registered Retirement Income Fund
At the end of the year you turn 71, your RRSP matures and you must convert it to a Registered Retirement Income Fund, an annuity or withdraw it as a lump sum. The gist of a Registered Retirement Income Fund is to provide you with a regular stream of income as a minimum percentage must be withdrawn each year.
Tax Free Savings Account
Tax Free Savings Accounts or ‘TFSAs’ are investment accounts that allow Canadians who are 18 years of age or older to invest money tax-free. Any investment income, capital gains or other earnings are not subject to tax. You may also withdraw your funds at any time. The program started in 2009 with a $5,000 limit and over the years, the limit has increased each year. As of 2020, the limit is $69,500.
Cash/Non Registered Account
A non-registered account also known as a cash account is a investment account that is not registered with the Canadian government. These type of accounts do not provide tax-deferred growth and are utilized by Canadians when they’ve maxed out their registered accounts such as an RRSP or a TFSA. There is no limit on the amount of money you can deposit into a non-registered account but withdrawals might be subject to capital gains.
Registered Education Savings Plan
A Registered Education Savings Plan, also known as an RESP is a savings account for parents who want to save for their child’s education. Its an investment vehicle that allows investment income to accumulate on a tax deferred basis. Funds within an RESP are used to pay for post secondary education and related expenses. RESPs are popular investment vehicles.
Spousal Registered Savings Plan
Spousal Registered Retirement Savings Plan also known as a Spousal RRSP is a savings account registered with the CRA for the purpose of saving for your spouse or common law partner. Spousal RRSPs are similar to regular RRSPs and are known to be effectively used when there is an income disparity between spouses.
Locked-in Retirement Account
A Locked In Retirement Account also known as a LIRA is a registered retirement savings account in which you would transfer your locked-in work pension into. If you are participating in a pension plan at your current company, either a Defined Benefit Plan or a Defined Contribution Plan, and quit the company, you will have the option to transfer your pension into a LIRA or LRSP.
Life Income Fund
A Life Income Fund is a locked-in investment savings account that is designed to provide retirement income. LIFs are considered an extension of Locked In Retirement Accounts as the periodic payments that are generally paid out came to be from locked-in pension funds. LIFs can be either provincial or federal depending on where the locked-in pension funds originated from
Registered Disability Savings Plan
Registered Disability Savings Plans registered investment accounts that aim to help families save on a tax deferred basis for loved ones diagnosed with severe or prolonged disability. Introduced in December 2008, RDSPs have been well received and applauded by the international community as Canada was the first country to introduce such type of account.
Deferred-Profit Sharing Plan
Deferred Profit Sharing Plans (DPSP) are registered investment accounts set up by the employer for the benefit of the employees. The plan encourages employers to share the business’s profits with employees by contributing into the DPSP on a periodic basis. Employee contributions are not permitted. Contributions into DPSPs affect your RRSP contribution room and have vesting requirements.
Retirement Compensation Arrangement
A Retirement Compensation Arrangement (RCA) is a pension plan where a custodian holds funds contributed by an employer for the purpose of distributing it to the employee in retirement. RCAs are often catered to high net worth or high earners who are seeking retirement income in excess of what’s provided by a Retirement Pension Plan.
Individual Pension Plan
Individual Pension Plans are investment accounts that have similar features to an RRSPs as they both provide tax deferred growth and creditor protection but they different in how much you could contribute. An IPP provides greater accumulation and has a higher contribution limit than an RRSP.
