Young Canadian Investor #4 – The Privilege of Registered Investment Accounts
One of the great things about living in Canada is that the government allows you to open investment accounts where you can either, 1) defer your taxable income to much later in life, or 2) buy investments that can grow without you ever having to pay taxes on them period.
Any money you invest in your RRSP, or Registered Retirement Savings Plan, will minimize your taxable income for that year by that amount. So if you contribute $5000, your taxable income for that year will be reduced by $5000. Your investments will also grow tax-free, meaning you receive dividends and capital gains in full. But when you withdraw any money, you’ll be taxed on it as income at whatever rate applies to you at that time.
RRSP contribution limits rise every year with inflation. For 2019, you may contribute up to 18% of your taxable income for the year up to a maximum of $27,830.
Any money you invest in your TFSA, or Tax-Free Savings Account, will grow tax-free and can be withdrawn without cost at any time. The contribution limit goes up every year with inflation and currently sits at $6000.
If you’re 18 or older, and a Canadian citizen, you can contribute an amount equivalent to the total contribution room that has accumulated since TFSAs came into existence in 2009. That total is $69,500.
Any withdrawals you make will give you an equivalent amount of contribution room come January 1st of the following year. So if you take $2000 out this year, you’ll get $2000 of contribution room in 2021 on top of the limit the government imposes.
These accounts are ways to park money and let it grow while you focus on living your life. Every major bank offers them and all you have to do to open one is ask. Seeing that a globally diversified portfolio of index funds will earn you 7% a year as a long-term average, there’s no good reason not to invest your excess cash and let it multiply while you’re young.
When you really need the money, whether because of illness, lack of work, or not wanting to work anymore, it’ll be there to give you optionality and make for easier decisions.
Any questions? Drop em in the comments!
Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.