Investing is about working toward financial goals, whether that’s retirement, purchasing a home, or funding education. The account you use can have a significant impact on how efficiently you reach those goals. Choosing the right combination of accounts is an important part of building a strong financial plan.
How to Choose the Right Account
Choosing the right account begins with identifying your goal.
Once your goal is clear, you can begin with accounts designed for that purpose. From there, additional accounts can be used to support your strategy. The goal is to build a plan that balances short-term needs with long-term goals and adapts to life changes.
Registered Accounts
In Canada, registered accounts are set up with the federal government and tied to specific goals, such as retirement, education, or home ownership. They provide tax advantages or access to government incentives, and each type of account has its own rules, contribution limits, and tax treatment. In most cases, it makes sense to start with registered accounts and take advantage of the benefits they provide.
Non-Registered Accounts
Non-registered accounts (also referred to as cash or open accounts) do not offer the same advantages as registered accounts. Contributions are not tax-deductible, and investment income, such as interest, dividends, and capital gains, is taxable. However, they often allow for certain expenses and management fees to be deducted. Their advantage is flexibility, as they can be adapted to any goal.
Most Common Account Types
Several types of investment accounts can be used within your plan:
- RRSP (Registered Retirement Savings Plan): Designed for retirement savings. Contributions are tax-deductible, and investments grow on a tax-deferred basis until withdrawn. However, withdrawals are taxed as income.
- TFSA (Tax-Free Savings Account): Allows for tax-free growth and tax-free withdrawals, making it a flexible option for a variety of goals.
- FHSA (First Home Savings Account): Helps first-time home buyers save in a tax-efficient way, combining features of both RRSPs and TFSAs.
- RESP (Registered Education Savings Plan): Designed to help save for education, with access to government grants.
- RDSP (Registered Disability Savings Plan): Supports long-term savings for individuals with disabilities, with government grants available.
- Pensions: Employer-sponsored retirement plans with features that vary by plan provider.
- Non-registered account: A flexible investment account with no contribution limits, but taxable investment income.
Why Account Type Matters
Most people benefit from using a combination of account types rather than relying on one.
The right mix can build an efficient and flexible strategy and make your plan more adaptable
to life’s changes.
For example, when saving for retirement, an RRSP or pension is often a starting point due to their tax benefits. Since withdrawals from RRSPs are taxable, a TFSA can be used alongside them to provide tax-free income in retirement.
As your goals and circumstances evolve, your mix of accounts should evolve with you. Regularly reviewing your plan with your KLT Wealth Advisor and your Q Wealth Portfolio Manager keeps you on track.
To review your accounts, contact KLT Wealth Management.
