Thinking of saving? Consider government-registered plans

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Saving is a big part of smart financial planning. Whether you’re saving for your education, retirement, or for a loved one’s future, having secure financial instruments is crucial for your future.

There are many savings products you can choose from in Canada. But, it would be wise to start with government-registered plans and accounts. Aside from being secure, some instruments also allow you to grow your savings tax-free. Some help reduce your taxes. They provide additional benefits that are not offered commercially. They offer these features to encourage more Canadians to save.

Tax-Free Savings Account (TFSA)

A TFSA is a registered savings plan that lets you save money to reach any financial goal. The best thing about it is that your contributions and income earned are tax-free, even after you withdraw your savings.

Any resident of Canada who is at least 18 years old and has a SIN can open a TFSA. They can open one at any financial institution, credit union, or insurance company. The amount they can save per year is limited to the TFSA contribution room. However, if they don’t use up the contribution limit for the year, they can carry forward unused amounts.

Aside from cash, a TFSA can also hold investment products like Guaranteed Investment Certificates (GIC), mutual funds, stocks, bonds, Exchange Traded Funds (ETF), and others.

Learn more details about the TFSA here: Tax-Free Savings Account (TFSA), Guide for Individuals

Registered Retirement Savings Plan (RRSP)

This is a registered account that you can use to save for retirement and other goals. The RRSP has special tax advantages. You can deduct your RRSP contributions each year from your taxable income. It also stays tax-free as long as your money stays in the plan. Your RRSP account can hold cash, Guaranteed Investment Certificates (GIC), mutual funds, stocks, bonds, Exchange Traded Funds (ETF), and others. The kind of investments your RRSP can contain depends on the type you’ve chosen to set up.

There is no minimum age to open an RRSP. A minor can set it up with their parent or guardian’s consent. However, some financial institutions will require the customer to be at least 18 years old. Also, they may ask a T4 from their employer. An account holder can contribute to an RRSP up to 71 years old as long as they are a Canadian resident, have earned income, and file a tax return.

Learn more details about the RRSP here: Registered Retirement Savings Plan

Registered Education Savings Plan (RESP)

An RESP is a special savings account that can help you save for your child’s education after high school. Unlike the RRSP, contributions are not tax-deductible but the proceeds can be withdrawn tax-free.

When you open an RESP for your child, the Government of Canada helps you save through special incentives called the Canada Education Savings Grant, and the Canada Learning Bond. These grants provide additional money to help pay for your child’s education. Moreover, savings can grow tax-free, until the person named in the RESP enrolls in studies after high school.

There are different types of RESPs. It will depend on who the plan is for and who sets up the plan. You can open one in banks, credit unions, certified financial planners, or group plan dealers (here’s a list of RESP promoters in Canada). You will need a Social Insurance Number (SIN).

Learn more details about the RESP here: Registered Education Savings Plan

Registered Disability Savings Plan (RDSP)

A Registered Disability Savings Plan is intended to help Canadians with disabilities, or their parents, save for their future. Just like the RESP, government grants are also added to the savings, and the investments grow tax-free as long as the funds stay in the plan.

Canadian residents under the age of 60 who have long-term disability are eligible for an RDSP. To apply, they should also be eligible for the Disability Tax Credit and must have a SIN. RDSP savings can be held in various investments, depending on where the plan is opened. It can hold savings accounts, GICs, stocks, bonds, and mutual funds.

Learn more details about the RESP here: Registered Disability Savings Plan

First Home Savings Account (FHSA)

This is Canada’s newest registered savings plan. Launched in April 2023, the FHSA is for those saving up for a down payment on their first home.

Like the TFSA, an FHSA’s earnings and withdrawals are tax-free. And like the RRSP, your FHSA contributions are tax-deductible. Canadian residents who are 18 to 71 years old can open an FHSA from banks or other financial institutions. You can make annual contributions of $8,000. There is a $40,000 lifetime limit and the account stays open for 15 years. You can even use the FHSA together with the Home Buyers’ Plan to make it easier for you to afford your first home.

Learn more details about the FHSA here: First Home Savings Account

Understanding the mechanics of each plan can be overwhelming. It may help to get in touch with a registered investment advisor. They have the expertise to guide you so you can make the best decision. It’s important to tell the advisor your savings and investment goals so that they can customize plans tailored to your needs. Regular consultations are also essential to stay updated on contribution limits, tax advantages, and other plan mechanics.

Sources: Savings and investments for newcomers in Canada: What you need to know, Arrive; Types of Savings Plans, Canadian Securities Administrators; and Government of Canada. Accessed November 3, 2023.

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