Money Wise Mom

This Investing ABCs series is for anyone who wants to start investing, but doesn’t know the first thing about how to begin. You don’t need to read this series in order, but you should read and learn all the ABCs before venturing forth to buy investment products.

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This is a continuation of my post Investing ABCs: Investment Accounts

Why This Stuff is Important

One of the biggest barriers to managing your own investments is all the acronyms floating around. All those letters (TFSA, RRSP, FHSA) are confusing, overwhelming, and intimidating. It’s not easy or intuitive to understand the different types of investment products or how they help you. I am here to tell you that it’s definitely not you, it’s the financial system.

I can’t say that the confusing nature of the financial system is by design, per say. However, it certainly keeps you dependent on “financial experts”. Unfortunately, there is a big lack of transparency from everybody. Most “experts” are actually salespeople who have incentives and an unspoken agenda that is not obvious or disclosed. Banks offer a service, but they also want to increase their profits. Financial platforms, like Robinhood , Questrade, and Wealthsimple, offer similar services as well as incentives, but they also want to sell you their products to increase their profits.

The best I can do is arm you with knowledge. A little bit of knowledge will help develop your “gut”. My mother used to tell me when I was growing up: “Always trust your gut!”. I think it was pretty sound advice.

And here is my advice to you: Never do anything with your money that you don’t understand!

A Quick Recap

Here’s a quick review the four types of investment accounts we’ve already introduced.

• TFSA – Tax Free Savings Account. You put in money you’ve already paid taxes on but you never pay income tax again on that money or the money earned inside your TFSA. You are only allowed to contribute when you are 18 or older and only up to your total contribution allowance, which increments annually and is tracked by the CRA.
  
• RRSP – Registered Retirement Savings Plan. You put in money you’ve already paid taxes but then the CRA gives you tax money back through your income tax return, so you have actually contributed pre-tax money. The total amount you can contribute each year is based on a percentage of your income and is tracked by the CRA. Every dollar you contribute reduces your taxable income for the current year. Money invested inside your RRSP ideally grows over time until you decide to retire and need to start withdrawing your money. Those withdrawals are taxable income. Typically you will be in a lower income tax bracket when you are retired. You no longer have employment income. Since you are making a lot less when retired, you should be in a lower tax bracket than when you were working. By contributing to an RRSP, you can reduce the total income tax you’ll have to pay over your life time while squirrelling away money for the future.
  
• RESP – Registered Education Savings Plan. You contribute to an RESP for someone else, typically your kid or a grandkid. The Canadian government will match a percentage of your contributions with grants. The withdrawn funds may only be used to pay for eligible education expenses.
  
• Non Registered Account – These accounts are not registered with CRA and have no contribution limits. They do not give you any tax advantages or refunds. You are always investing with after tax money. You typically only want to open a non registered account after leveraging registered accounts, as registered accounts provide financial benefits, each in their own special way.

Even More Investment Account Types

Yup, there are EVEN MORE Investment Account types. Many of these are less talked about but it’s beneficial to be familiar with them.

Remember, these are just account types. They are not investment products. After you open an investment account, for most of these, you still then need to buy investment products using your contributed money.

Account Type	Description	Requirements	Pros	Cons	How To Use
FHSA	First Home Savings Account Tax-free savings account for a first home	• Canadian resident • First-time home buyer • Age 18–71	• Contributions are tax-deductible • Qualifying withdrawals are tax-free • Unused funds can transfer to an RRSP	• Annual and lifetime contribution limits • Must be used for a qualifying home (scroll to Qualifying Home here)	• Contribute and invest • Withdraw tax-free for an eligible home purchase
Pension Plan through an Employer	Retirement plan funded by an employer and/or employee	• Must work for a participating employer • Follow the plan’s eligibility rules	• Employer contributions • Regular retirement income • Possible investment and tax advantages	• Limited investment control • Benefits may be restricted when leaving the job • Contributions reduce take-home pay	• Enrol through your employer • Make required contributions • Receive a pension or transfer the value when leaving
LIRA	Locked-In Retirement Account Locked-in account holding money transferred from an employer pension	• You don’t open an LIRA directly, you convert a Pension Plan into an LIRA (for example when you leave a company) • Cannot normally make new contributions	• Tax-deferred growth • Control over investments • Pension funds remain protected for retirement	• Withdrawals are locked in • Limited early-access options • Must eventually convert to a LIF or annuity	• Transfer eligible pension funds into a LIRA • Invest until retirement • Convert to a LIF or annuity
RRIF	Registered Retirement Income Fund Account that converts retirement savings into income	• You don’t open an RRIF directly, you convert an RRSP into an RRIF • Must be opened by the end of the year you turn 71	• Flexible withdrawals • Tax-deferred growth • No maximum annual withdrawal	• Annual minimum withdrawals are required • Withdrawals are taxable • Large withdrawals may increase tax or affect benefits	• Transfer RRSP funds to a RRIF • Withdraw at least the required minimum each year
LIF	Life Income Fund Retirement-income account for locked-in pension funds; similar to a RRIF	• You don’t open an LIF directly, you convert an LIRA into an LIF • Must follow provincial or federal pension rules	• Tax-deferred growth • Investment choice • Provides retirement income	• Annual minimum and maximum withdrawals • Withdrawals are taxable • Rules vary by jurisdiction	• Convert a LIRA to a LIF at retirement • Withdraw within the permitted annual limits
Annuity	• Insurance contract that provides regular income, often for life	• Purchase with a lump sum • May use RRSP, RRIF, or locked-in pension funds	• Predictable income • Can provide lifetime payments • Reduces investment-management responsibility	• Limited access to the original money • Less flexibility than investment accounts • Inflation may reduce purchasing power • Payments may be taxable	• Use retirement savings to purchase an annuity • Choose lifetime or fixed-term payments • Receive regular income according to the contract

Clear as Mud

Congratulations on making it this far! I know it’s a lot.

Remember, your goal is not to be a financial expert (yet!). You do not need to memorize all this stuff. The first step is to just be familiar with the menu of different investment account types. Over time you will grow into a better understanding of what each account type is and how you can use them to boost your net worth over time.

We have now reviewed ten different investment account types. You won’t need to use them all. However, savvy Canadians will use a variety of these within their lifetime to reduce their income tax burden and increase their wealth.

I want to here from you

I want some honest feedback. Leave me a comment. Did you learn anything from this post? Or did it all fly over your head?