When it comes to investing in Canada, there are many thousands of investment options out there to consider, with varying degrees of risk. Some investment options would include Guaranteed Interest Certificates, stocks, bonds, mutual funds, ETFs, etc.
There are also several different types of accounts. I like to think of the account type as the ‘basket,’ and the different investments go into the baskets. Each ‘basket’ or account type comes with its own set of rules, which are generally determined by the Canada Revenue Agency. They also each have their own list of pros and cons to consider, as well as tax consequences.
Today, let’s focus on the account types. Most people are familiar with the Registered Retirement Savings Plan, which has been around since 1957 and is currently utilized by 66% of eligible Canadians. Also, by now, most people are familiar with the Tax-Free Savings Account, which was introduced in 2009 and is currently being utilized by 63% of eligible Canadians.
There are some account types that are currently being underutilized in Canada, and so I thought I would briefly touch on those.
First Home Savings Account (FHSA)
The First Home Savings Account was introduced in 2023. This is a registered plan designed to help you save for your first home. The plan is available to Canadians who are 18 years of age and older, have a Social Insurance Number, and who have not owned a home or lived in a home owned by their spouse or common-law partner in the current calendar year and previous four calendar years. Contributions are tax-deductible, investment growth is tax-free within the account, and withdrawals are tax-free if they are used to purchase a qualifying home. Contribution amounts are $8,000 per year, to a maximum of $40,000. Unused contribution room can be carried forward, but it is important to note that contribution room only starts when you open the account and make a deposit.
Registered Disability Savings Plan (RDSP)
The Registered Disability Savings Plan is currently only being utilized by 35% of Canadians who are eligible to start one. This is mainly due to a lack of understanding of who qualifies for these plans and the complexity of the rules and restrictions on these plans. To qualify for a new plan, you must be a Canadian resident who is eligible for the Disability Tax Credit and aged 59 or under. The RDSP is a tax-deferred savings vehicle designed to help Canadians with disabilities and their families save for their long-term financial security. The lifetime contribution limit is $200,000. There are grants and bonds that may be paid into the account, ranging from 100% to 300% and based on family net income. Contributions are not tax-deductible, and investment growth is not taxed while held in the plan.
Registered Education Savings Plan (RESP)
The RESP is a tax-advantaged savings account designed to help families save for a child’s post-secondary education (university, college, trade schools, some apprenticeships). There is a lifetime contribution limit of $50,000 per beneficiary. There may be matching federal grant money of 20% on the first $2,500 per year of contributions, up to certain annual and lifetime limits. Contributions are not tax-deductible, and investment growth is tax-deferred. Family RESP accounts allow siblings to share some of the funds within the account.
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