Can Registered Accounts Help You Save on Taxes? Yes! Here’s how.

In conversations about saving and investing, there are a few four-letter acronyms that are bound to come up.

We’re talking about TFSA, RRSP, RRIF, FHSA and more – the slate of registered investment accounts available for Canadian investors.

If you find their inner workings a little head-scratching, fret not. We’ve got you covered here. Taking time to understand different registered accounts may help you save on your taxes as you build your wealth. Whether you’re saving for a home, a vacation or planning for your retirement, registered accounts can help you reach your financial goals.

Different accounts for different needs

There are various account types that you can use to hold your investments — each with their own features, benefits and tax considerations. As you figure out your saving and investing strategies, it’s helpful to understand how to take advantage of their various features to help grow your wealth.

Here’s a primer on account types in Canada.

Registered vs. non-registered accounts

First things first. As Canadians, we have access to two main categories of investment accounts: registered and non-registered. Registered accounts, as the name implies, are registered with the government through the Canada Revenue Agency (CRA). To encourage saving, they provide advantages such as tax deferral or tax-sheltered growth (and in some cases, both!). These accounts do have certain rules and restrictions, including contribution limits and withdrawal procedures.

Non-registered accounts don’t have any limitations on contributions or withdrawals, which makes them more flexible. However, they don’t offer the tax advantages that registered accounts provide. You can invest as much as you want in a non-registered account, but if you buy investments such as stocks, bonds, mutual funds or GICs in a non-registered account, you will pay tax on any income generated (including dividends, interest and capital gains).

Let’s review the most common registered accounts.

Tax-Free Savings Account (TFSA)

With a TFSA, you pay no taxes on investment income and capital gains earned on qualified investments as you save up for any goal.

With a TSFA, you can:

• Earn tax-free investment income, such as interest, dividends or capital gains

• Invest for short or long-term goals

• Contribute up to an annual amount set by the Canadian government

Find out more about TFSAs here.

Registered Retirement Savings Plan (RRSP)

An RRSP helps you lower your tax bill today, by allowing you to deduct RRSP contributions from your taxable income. By the time you retire you will likely be in a lower tax bracket, so withdrawals are taxed at a lower rate than today. You can withdraw the money that’s not locked in at any time, but you’ll pay taxes based on your tax bracket when you withdraw.

With an RRSP, you can:

• Let your investments grow on a tax-sheltered basis until you withdraw later in life

• Reduce your taxable income today with income-tax deductions on your contributions

• Contribute up to 18 per cent of earned income in the previous year, or up to a maximum set by the government each year (whichever is lower)

Find out more about RRSPs here.

First Home Savings Account (FHSA)

The FHSA is aimed at Canadians saving to buy their first home and combines certain tax advantages of the RRSP and the TFSA.

With an FHSA, you can:

• Contribute up to $8,000 annually, up to a maximum of $40,000 in total

• Take advantage of the income tax deduction similar to an RRSP and the tax-free investment growth similar to a TFSA

• Use an FHSA in conjunction with the government’s existing Home Buyers’ Plan (HBP)

• Make tax-free withdrawals for a qualifying home purchase

Find out more about FHSAs here.

Registered Retirement Income Fund (RRIF)

A RRIF is like an extension of your RRSP. When you are ready to retire, converting your RRSP to a RRIF allows you to withdraw your savings as income. Your RRSP must be converted to a RRIF by the end of the year you turn 71.

With a RRIF, you can:

• Continue to let your investments grow on a tax-sheltered basis

• Decide how much to withdraw (as long as you take the required minimum amount)

• Enjoy some flexibility in your retirement income

Find out more about RRIFs here.

Registered Education Savings Plan (RESP)

RESPs allow you to save for a child’s post-secondary education and benefit from additional grant money provided by the government.

With an RESP, you can:

• Save for a child’s post-secondary education

• Contribute up to a lifetime limit of $50,000 per beneficiary

• Access government grant money and incentives that can increase your savings

Find out more about RESPs here.

Registered Disability Savings Plan (RDSP)

An RDSP is a registered savings plan that helps Canadians who are eligible for the Disability Tax Credit (DTC) and their families save for long-term financial needs.

With an RDSP, you can:

• Withdraw funds for any purpose that benefits the person with the disability

• Allow family and friends to contribute to the plan with the written consent of the plan holder

• Defer taxes on investment income, capital gains and government grants and bonds

• Contribute until the end of the year in which the beneficiary turns 59

• Contribute up to a lifetime limit of $200,000, though amounts transferred from one beneficiary’s RDSP to another RDSP with the same beneficiary do not count toward the $200,000 contribution limit.

• Access government grant and bond money that can increase your savings

Find out more about RDSPs here.

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