A Brief Summary of Registered Accounts
In Canada, there are two categories of accounts for saving money in: registered accounts and non-registered accounts. Registered accounts like a RRSP, TFSA, and RESP are registered with the government and need to follow certain rules in exchange for specific tax breaks or government grants. Non-registered accounts include basic savings and checking accounts and investment accounts. Below is a summary of the main kinds of registered accounts and how they work.
Tax Free Savings Account (TFSA)
A TFSA account allows a person to make investment income tax free. Contributions are made with after-tax money (unlike the RRSP) and the maximum contribution room increases yearly for everyone over age 18. If money is withdrawn one year, the contribution room comes back the next year so they can put the money back in again. It is a great tool for saving for a big purchase or even for retirement. To find your TFSA contribution room, log in to your CRA My Account. If you are a US citizen, you should not open a TFSA because the US does not recognize it and will still tax you on any income made in it.
Registered Retirement Savings Plan (RRSP)
RRSP and Locked-In Retirement Accounts (LIRA) are a way to defer some of your income from your working years to your retirement years. The maximum you can contribute to these accounts is 18% of your earnings up to an amount that the government sets yearly. Contributions are a deduction from taxable income and withdrawals are an addition to taxable income. The difference between the two accounts is that a LIRA or LIF account is a locked-in fund meaning that only a set maximum can be withdrawn every year based on age. An RRSP, on the other hand, has no maximum withdrawal cap and can be drawn from at any time, even before retirement. A RRSP must be converted into a RRIF at the end of the year the person turns 71. After that, a minimum amount must be drawn yearly based on age. Your personal RRSP contribution limit can be found on your notice of assessment or your CRA My Account. If your employer is contributing to a pension plan for you, your RRSP contribution limit will be reduced by those amounts.
Registered Education Savings Plan (RESP)
A RESP account allows someone to save for the future education of a family member or even themselves. Government grants are available if the RESP is set up for someone under 18 with a valid SIN number living in Canada. The province of BC also offers a one time grant for children between 6 and 9 years of age. There is a lifetime maximum of $50,000 per child that can be contributed to an RESP. If the child doesn’t attend post-secondary education and there is no sibling to transfer the money to, the plan can be wound up and the money given back to the contributor, but the government grants will need to be repaid.
Registered Disability Savings Plan (RDSP)
A RDSP account is particularly for individuals who qualify for the disability tax credit and have long-term disabilities. The government provides grants to help match what is contributed to the individual’s plan up to a certain amount a year. A lifetime maximum of $200,000 can be contributed to a RDSP. Contributions can be made up until the beneficiary turns 60. Family members’ RRSP accounts can be rolled in to an RDSP account without the usual tax consequences at death, but RRSP rollovers are not eligible for matching government grants.