If you've taken time to glean some basic information on how to start saving, it’s time to discover what account options are available to meet your saving needs, hooray!
Keep in mind that the accounts covered are 100% insurable up to a minimum of $100,000 by the Canada Credit Insurance Corporation, and can reach upwards of $400,000 per account depending on the institution you bank with.
Without further ado, let's begin!
Youth Savings Account
Usually feeless in every aspect, a youth savings account is designed to teach children how to save. Whether it’s for a new shiny toy, a future car, or an exciting adventure, a youth savings account is a great way to instill the importance of financial responsibility in children young, without the burden of banking fees. The interest earned is usually very low (0.30%~), but it’s better than nothing!
Basic Savings Account
A basic savings account is a low-cost place to store money, as they usually are free to open and maintain. They’re typically accompanied by a low interest rate (<0.1%), and are not ideal for long-term savings, but they are useful for saving up for purchases in the short-term, like for a new piece of furniture, a laptop, or a fun event, or an expected short-term expense.
They’re also useful for holding cashable GICs in, for things like your emergency fund, or for when you max out your TFSA, as there are usually no fees for the amount of cash transfers you can make per month in a basic savings account. Keep in mind however, that you will have to pay income tax on any interest earned on contributions.
High-Yield Savings Account
A high-yield savings account is a savings account that is accompanied by a higher interest rate (sometimes 3% or more), but may offer limited transfer flexibility without charging fees, in order to incentivize savers to keep their money parked.
Savers also don’t get any added benefit by keeping their GICs in one, and the rates on savings accounts are subject to change, whereas you can lock in a GIC rate for several years. So high-yield savings accounts don't super interest (she's a comic) me.
Joint Savings Account
A joint savings account is a place for couples to nestle their shared savings, for things like tracking household expenses, or for something planned, like a fun party or getaway.
Like a basic savings account, a joint savings account is usually accompanied by a low interest rate. It’s also important to ensure that there are limited or no fees on contributions or withdrawals, to allow you flexibility and protection from incurring avoidable costs.
Tax-Free Savings Account (TFSA)
A TFSA is a darling creation. It's where you can earn on your investments tax-free, up to a certain contribution limit each year. It’s a godsend for the small saver, and a great vehicle for saving for retirement, or a major purchase that may take several years to save for, like a house.
This is because withdrawing from your TFSA doesn’t permanently impact your contribution room. You can simply recontribute withdrawn amounts in future years.
And if you are unable to max out for TFSA in a given year, the difference accrues to future years.
This means, that if you have never contributed to your TFSA, you could have a contribution room that allows for deposits worth tens of thousands of dollars, even though the contribution room for 2023 is $6,500.
You can check your allowable contribution on your CRA account page, which is accessible through the CRA’s website. You may also access a list of historical contribution limits by year here.
Registered Retirement Savings Plan (RRSP)
RRSPs are the primary vehicle for retirement funds in Canada, which is ideal for people who struggle to keep their savings, and for those who are trying to save explicitly for retirement in a tax friendly way.
An RRSP is a tax-deferred savings vehicle, which means that any money you contribute to your RRSP in a given year is exempt from income taxes. When you eventually withdraw the money, your contributions will be taxed in relation to your tax bracket upon withdrawal, which is a great incentive for savers to leave their RRSPs alone.
So unless it makes sense to withdraw, it’s best to keep funds invested until it’s tax-efficient to do so, which is usually after you’ve retired and have been bumped to a lower income tax bracket.
Registered Retirement Income Fund (RRIF)
By age 71, your RRSP reaches maturity, and must be dealt with, which most commonly involves its full withdrawal, or conversion to an RRIF.
An RRIF is a vehicle that pays retirees income, but allows them to avoid paying a big chunk of tax in the case of a full RRSP withdrawal.
By converting your RRSP to an RRIF at retirement, your investments may continue to grow tax-free, but you will be required to make minimum annual withdrawals depending on your account size, which will be subject to income tax.
You may convert your RRSP to an RRIF at any age, but it’s best to do this when you’ve retired to a lower tax bracket to avoid needlessly paying taxes beforehand.
Unless you want to fully withdraw your RRSP and live it up, an RRIF is a good way to defer having to pay tax on the full amount of your RRSP, while still benefiting from the tax-free appreciation of your investments.
Alternatively, you may also use your RRSP to purchase an annuity, but let’s keep it simple for now.
Registered Education Savings Plan (RESP)
An RESP is a great savings vehicle for people who want to save for their child’s post-secondary education, up to a maximum contribution amount of $50,000 per student.
Similar to an RRSP, the funds in an RESP are only taxable upon withdrawal. But unlike an RRSP, RESP contributions are not tax deductible against your income tax. That said, when the student makes withdrawals, taxes are likely to be minimal as they will be in the student’s name, and students don’t tend to make a lot of income!
The Canadian government also matches 20% for the first $2,500 of an annual contribution through the Canada Education Savings Grant, up to a maximum of $500 annually, which is pretty neat! The grant also carries forward for one year, in case you don’t receive it in a given year. So if you’re only able to contribute $1,000 in year one, but are able to contribute $5,000 in year two, the grant you will receive will be $1,000 instead of $500, wowie!
Registered Disability Savings Plan (RDSP)
Last but not least, the RDSP is a plan that was designed for people living with a disability, to provide them with funds to help ensure their long-term needs are met.
Like the RESP, the funds contributed may not be deducted against the saver’s income, but the funds contributed won’t be subject to tax unless withdrawn, which make it a great mechanism to grow savings tax-free.
The Canadian government is pretty supportive of RDSPs too, and will match as much as $1 for every $3 contributed, up to a lifetime maximum of $70,000.
In addition, any beneficiary who meets the status of a low-income earner is eligible to receive $1,000 annual grants from the government, up to a lifetime maximum of $20,000.
And there's another neat thing! Private contributions made to the beneficiary's RDSP by parents or friends are considered gifts, whereby the funds are not taxable, even upon withdrawal. Only the funds that the beneficiary contributes themselves, as well as government contributions, are taxable on withdrawal. So an RDSP really has the potential to grow into a substantial size over its lifetime, and to offer the beneficiary a very tax-advantaged means to help their needs get met.
Self-Directed and Managed Accounts for Registered Plans
All of the registered savings vehicles covered may be self-directed, or managed. This means that you can choose to invest and manage the funds yourself (self-directed), or delegate the job to a money manager or financial advisor (managed).
Both options have pros and cons, depending on what your goals are. If you’re interested in only owning non-volatile, insured investments, like guaranteed investment certificates (GICs), the job is probably best handled by yourself, as there is no point paying fees on an investment where the funds are fully insured.
But if you’re someone who’s wanting to achieve a higher rate of return than what GICs have to offer, but are overwhelmed by the thought of independently managing a portfolio of investments that are subject to volatility, like preferred shares and bonds, passing management to a skilled professional may be a good idea.
The manager should have a proven, long-term track record of providing sound, after-fee results that meet your long-term goals. They should also charge minimal or no penalties for withdrawals. Also, the lower the management fee, the better, as every percentage point counts when it comes to growing your savings!
Keep in mind that volatile securities are not a generally advisable investment vehicle for those saving for a large purchase, like a house. GICs are a much more prudent option, as you won't have to worry about selling your investments at a potential loss when the time for purchase comes.