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Retirement savings in Canada

Investment planning allows Canadians to invest and plan their taxes wisely. This article will help newcomers understand how registered saving account options can be beneficial for investment planning and building savings in Canada.

The Canadian government offers a variety of investment planning options such as registered saving account options. However,  many newcomers to Canada either do not know about registered savings options or do not understand these savings options.

Eventually, they lose the opportunity to optimize their taxes and create retirement savings in Canada.

Making investments wisely will help you as a newcomer to manage your money better. Over the long term, newcomers will be better placed financially as they start reaping the benefits of making informed decisions.

Investment Planning with Registered Accounts

What are registered accounts? As a new immigrant, you may often hear about registered plans or accounts in the context of investment and tax planning.

Registered accounts, simply put, are those accounts that the Canadian government has specifically given tax-deferred status. Non-registered accounts do not enjoy this status.

There are three registered accounts that you can use to invest and plan for your taxes. These accounts are:

1.  Registered Retirement Savings Plan (RRSP)

2.  Tax-Free Savings Account (TFSA), and

3.  Registered Education Savings Plan (RESP).

How the Three Registered Accounts Compare: 13 Important Questions to Consider

Below is a comparison of the three options: Registered Retirement Savings Plan (RRSP); Tax-Free Savings Account (TFSA); and the Registered Education Savings Plan (RESP). When you understand the key differences you can start investment and tax planning at the earliest opportunity.

1. What is the Purpose of the Registered Account?

RRSP: To help you save so that you have income during your retirement years.

TFSA: To help you save so that you can meet short- and long-term needs, including your retirement.

RESP: To help you save for your child’s post-secondary education.

2. Who Can Open the Registered Account?

RRSP: To open an RRSP, you must:

A. Earned income in the previous year

B. Reported this income to the Canada Revenue Agency

C. Not have turned 71.

TFSA: To open a TFSA, you must:

A. Be 18 years or older

B. Possess a valid Social Insurance Number (SIN).

RESP: A parent, grandparent, or any other family member or friend, or even a child care agency can open a RESP for a child.

Spouses or common-law partners may choose to open a RESP jointly.

3. Is There a Contribution Limit?

RRSP: The annual contribution is limited to the lower of the following two amounts:

A. RRSP dollar limit for the year as provided on www.canada.ca

B. 18% of prior year’s earned income plus prior years’ unused contribution room minus any pension adjustment.

TFSA: The annual contribution is limited to the sum of:

A. The annual TFSA dollar limit provide on www.canada.ca

B. Any unused contribution room of prior years, and

C. Any withdrawals from the TFSA in the previous year.

RESP: While there is no annual limit, your contribution to the RESP is subject to a lifetime limit of $50,000 per beneficiary.

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4. Can You Carry Forward the Unused Contribution Room?

RRSP: Yes, until the end of the year in which you turn 71

TFSA: Yes

RESP: Yes

5. Is There a Minimum Age Required to Contribute?

RRSP: No minimum age

TFSA: Must be at least 18 years old

RESP: No minimum age

6. What Age Can You Contribute Until?

RRSP: Until you reach 71 (or your spouse reaches 71 if it is a spousal RRSP)

TFSA: There is no age limit to make contributions

RESP: There is no age limit to make contributions

7. Are Contributions Deductible for Tax Purposes?

RRSP: Yes

TFSA: No

RESP: No

8. What are the Implications of Excess Contributions?

RRSP: Excess contributions of up to $2,000 can escape penalty. Contributions above this amount will attract penalty tax at 1% per month (or a part of the month) until the excess contribution is withdrawn.

Any income earned from the excess contribution could potentially be subject to 100% penalty.

TFSA: Excess contributions will attract penalty tax at the rate of 1% per month (or a part of the month) until withdrawn.

Any income earned from the excess contribution could potentially be subject to 100% penalty.

RESP: Contributions in excess of $50,000 will attract penalty tax at the rate of 1% per month (or a part of the month) until withdrawn.

9. Are Withdrawals from the Registered Account Subject to Taxes

RRSP: Withdrawals are taxable

TFSA: Withdrawals are not subject to taxes

RESP: Any return/refund of original contributions are not subject to taxes

10. Are Withdrawals Added Back to the Available Contribution Room?

RRSP: No

TFSA: No

RESP: No

11. Can You Claim a Deduction of Interest Expense on Funds Borrowed to Invest in this Account?

RRSP: No

TFSA: No

RESP: No

12. Can Assets from this Registered Account be Assigned as Collateral for a Loan?

RRSP: No

TFSA: Yes

RESP: No

13. Can U.S. Dividend Paying Stocks be Held in this Registered Account?

RRSP: Yes, and under the Canada-US tax treaty, US dividends paid to an RRSP will be exempt from withholding taxes.

TFSA: Yes, but U.S. dividends paid to a TFSA will attract withholding taxes.

RESP: Yes, but U.S. dividends paid to a RESP will attract withholding taxes.

Understanding the different registered savings options provides a good starting point for newcomers to build savings in Canada. With this information, newcomers can navigate the complexities of investment and tax planning in Canada.