Which investing account types are right for me?

First, ask yourself some questions.

• What’s going on in your life? For example, are you planning to buy your first home, or saving for retirement?
• Do you have any financial goals? For example, are you paying off a debt or thinking of buying and selling investments like stocks and ETFs?
• How much time (in years) do you have to invest?
• Are you looking for tax benefits?

The answers to these questions help you decide which investing account(s) to open.

Four common investment account types are:

• TFSA – Tax-Free Savings Account
• FHSA – First Home Savings Account
• RRSP – Registered Retirement Savings Account
• Cash Account 

The account names hint at how they might meet your goals or match where you’re at in life. But before we get into the details and benefits of each account type, it helps to understand the difference between registered and non-registered accounts. Each of the four accounts above fits into one of these two groups, which define how they work. 

A registered account is connected to your Social Insurance Number (SIN) and registered with the Canada Revenue Agency (CRA). A non-registered or “taxable” account isn’t registered with the CRA.

Registered accounts may offer tax advantages subject to account rules, eligibility and personal tax circumstances. They also have limits on how much you can put in and take out. For example, you’re allowed to contribute a certain amount each year (TFSA and FHSA), or a certain percentage of your income every year up to a limit (RRSP).

Non-registered accounts like a Cash Account don’t have any limits on what you can put in or take out. But, all your investment earnings (such as realized capital gains, interest or dividends) are taxable.

Let’s look at three core registered account types – TFSA, FHSA, and RRSP – and one core non-registered account type, Cash.

TFSAs are flexible, tax-free accounts that let you take a “save now, use whenever” approach. If you’re saving money for a short-term purchase, like a trip or a new e-bike, or a longer-term goal, like paying off a loan, a registered TFSA might be right for you. And when you take money out, you don’t pay tax on the growth.

TFSA’s can also be used for investing, not limited to cash savings. You can hold stocks, ETFs and more inside a TFSA for tax-free growth to build your investments or even to save for retirement. 

Some TFSA features and rules:

• Grow your money, tax-free
• Take money out, anytime, for any reason, tax-free
• Keep track of how much you put in – there’s a yearly limit and a penalty if you go over
• Carry forward unused contribution amounts – any contribution room you don't use in one year can be carried forward to the next.
• Withdrawn contribution - if you take out money in one year you can recontribute it the next or subsequent years (in addition to the yearly limit)
• Don’t worry about “claw backs:” Money you take out of a TFSA isn’t considered income (unlike RRSP withdrawals). That means that if you’re close to retirement, taking money out won’t impact your government benefits, such as Old Age Security

You can open a TFSA if:

• You’re a Canadian resident
• You’re the age of majority in your province, and 
• You have a valid Social Insurance Number (SIN)

As the name says, an RRSP is for retirement savings, but you can also use it to grow your investments. Plus, contributions may have income tax benefits and RRSPs can potentially be used to purchase a home or pay for education.

Some RRSP features and rules:

• Potential tax reduction: Contributions can be used to reduce taxable income and lower your income tax payable.
• Build savings: you can contribute up to 18 percent of your income from the previous year (up to an annual dollar limit;  You may also have some carryforward room. Check for your personal contribution limit by logging into “My Account” on the CRA website)
• Tax-deferred growth: Investments can grow on a tax-deferred basis while held in the account. At retirement, your income will likely be lower, so withdrawals from your RRSP will generally be taxed at a lower marginal tax rate. Help buy a home: the Home Buyer’s Plan within an RRSP lets you borrow money, interest free, to buy or build a home and then pay back the amounts withdrawn within a 15-year period.
• Pay for education: The Lifelong Learning Program lets you borrow money out of your RRSP tax-free to pay for full-time training or education and pay it back within 10 years.
• Stop contributing at 71: the last day to add money to your RRSP is December 31 of the year you turn 71.
• Pay tax when you withdraw: Withdrawals from an RRSP are considered income and are subject to income tax. But if you’re retired, your income  is likely to be lower than when you were employed, which may mean you are subject to a lower marginal tax rate.

You can open an RRSP if:

• You’re a Canadian resident
• You’re the age of majority in your province, and 
• You have a valid Social Insurance Number (SIN)
• You’ve earned income in the previous year and you file an income tax return in Canada

Are you ready to save for a down payment on your first home? Open an FHSA and save tax-free. And if you’re a parent, family member or family friend who’d like to help someone else save for a first home by “gifting” them money, get them to open an FHSA. 

Some FHSA features and rules:

• Grow or take out your money, tax-free: like a TFSA,  the money you withdraw to purchase a qualifying home, can be withdrawn tax-free, including any earnings or growth.
• Cut your tax bill: like an RRSP, contributions to an FHSA can lower your  taxable income and save you money
• Contribute up to (and no more than) $8,000 in your first year: your FHSA participation room starts when you officially open your first account. Each year afterwards you get another $8,000 of room to a lifetime maximum of $40,000. But be careful – you have to stay within your limit each year
• Contribute for up to 15 years: the lifetime contribution period is 15 years (based on the date on which you open your first FHSA) or until you turn 71 years of age, whichever is earlier.
• Transfer unused funds: money you save in your FHSA that you don’t use to buy a home can be withdrawn on a taxable basis, or  moved into a qualifying registered account, such as an RRSP

You can open an FHSA if:

• You haven’t lived in a home that you owned, or shared ownership of, in the past four years
• You are a Canadian resident 
• And you are the age of majority in the province you reside in

If your common-law partner or spouse owned a home in the past four years, and you lived with them, you may not be eligible to open an FHSA. Learn more about FHSA eligibility.

Want a clear visual lesson about registered accounts? Watch this video: TFSA, RRSP, or FHSA? Find your perfect match