Investing account types explained

In investing, there are a lot of choices to make – how to invest, what to invest in, and who to invest with. There’s also a seemingly endless array of account types. Confused? We’ve got you. In this article, we’ll walk you through:

• Registered versus non-registered accounts
• An overview of registered account types and their purpose
• A comparison of RRSPs and TFSAs, the most popular registered accounts
• Tips on how to choose the right account for you

What kinds of investing accounts are available?

In investing, there is a wide range of account types to suit your individual needs. There are two main categories of accounts:

1. Non-registered accounts
2. Registered accounts

A non-registered account is one in which your investment earnings (interest, dividends and capital gains) are taxable. At Qtrade Direct Investing, non-registered accounts are available as individual or joint accounts, and in U.S. or Canadian currencies. Non-registered account types are:

• A cash account is a general-purpose trading account that allows you to buy and sell stocks, bonds, mutual funds, exchange-traded funds (ETFs) and a range of other investments.
• A margin account is a trading account that allows you to borrow funds from your broker using cash and securities in your account as collateral for the loan. Because margin trading comes with more risk, this type of account is suited to more experienced investors.

A registered account is one that is registered with the Canadian government and provides some sort of government tax incentive that is designed to encourage Canadians to save. The most common registered account types are:

• Registered retirement savings plan (RRSP or RSP)
• Tax-free savings account (TFSA)
• Registered education savings plan (RESP)
• Registered retirement income fund (RRIF or RIF)

What do these accounts allow me to invest in?

Regardless of the type of account you open, you have access to a wide range of investment options to choose from – stocks, bonds, mutual funds, ETFs, GICs and cash.

There are a few restrictions for registered accounts to be aware of. Anything held in a registered account must be an “investment in properties (except real property), including money, guaranteed investment certificates, government and corporate bonds, mutual funds, and securities listed on a designated stock exchange.” For more details on what the Canadian government considers a “qualified investment” for registered accounts, please visit their website.

How do registered accounts work?

Registered accounts include valuable tax benefits, and as such, they tend to be subject to more complex rules and limitations. Below is a quick summary of highlights for each of the registered account types:

RRSP

An RRSP is an account designed to help you save for your retirement. It’s one of the most popular accounts because contributions provide a tax deduction on your current earnings, and the investment income in the RRSP remains tax sheltered until you withdraw the funds. The aim is to defer taxes payable on your income until retirement, when you are usually in a lower tax bracket. Ideally, with an RRSP contribution, you save on your taxes now and then save on them later, too.

Your annual RRSP contribution limit is the lower of:

1. 18% of your earned income from the previous year
2. The maximum limit set by the government (in 2022, the maximum RRSP contribution is $29,210)
3. The remaining limit after any employer-sponsored pension plan contribution (known as your “pension adjustment”, found on your T4 or T4A slip).

If there are income-earning years in which you did not make an RRSP contribution, you can use that room to catch up on your contributions. Your excess RRSP contribution room is listed on your previous year’s Notice of Assessment, or by logging in to the Government of Canada’s My Account.

There is no minimum age requirement to contribute to an RRSP, but you must have earned income and have filed a tax return. As of December 31 of the year you turn 71 years old, you have to close your RRSP and transfer to a RRIF, an annuity, or withdraw the amount in cash. In the case of a cash withdrawal, the entire amount withdrawn will be taxable in the year you withdraw it, which may be a significant financial burden.

Spousal RRSPs

You can also contribute to an RRSP for your spouse (including common-law) to help them save for retirement and potentially reduce your combined tax bill. When you make a contribution to your spouse’s RRSP, you reduce your own contribution limit, but receive the deduction on your taxes. If your spouse earns a significantly lower income than you, that deduction could make a bigger difference on your tax return than on theirs.

Locked In RRSPs

If you leave a job that included pension plan savings, you can transfer those pension funds to a locked-in retirement account (LIRA) or locked-in RSP (LRSP). These plans can hold the same types of investments as regular RRSPs, but you can’t make any further contributions to them. You also cannot withdraw funds under normal circumstances, as they are designed to help fund your life in retirement. Depending on your pension jurisdiction, there may be provisions that allow for early withdrawal from locked-in plans. For more information, please refer to the pension board for your pension’s jurisdiction.

TFSA

Since the introduction of TFSAs in 2009, they’ve fast become a favourite account with Canadians. A TFSA lets you earn tax-free investment income, allowing your investments to grow and earn income tax-free. Because contributions are made with after-tax income, withdrawals from a TFSA are not subject to tax.

To open a TFSA you must have reached the age of majority in your province (either 18 or 19 years of age) and must have a Social Insurance Number. Unlike an RRSP, there is no maximum age limit on TFSAs, so you can keep your investment income tax sheltered for as long as you want.

Each year, the government sets an annual contribution limit – for 2023 the contribution limit is $6,500 – and allows investors to carry forward indefinitely any contribution room they haven’t used. Even if you withdraw funds from your TFSA, you can re-contribute that amount in the following year. You can have as many TFSAs as you like, but make sure you keep track of your contributions. The penalty for overcontribution is hefty – 1% per month.

To calculate your TFSA contribution room, please refer to How much can you contribute to your TFSA?, or learn more in our Guide to TFSA investing.

RESP

An RESP is an account designed to help you save for post-secondary education, usually for your child or grandchild, but it can also be an education savings account for yourself. There are no annual contribution limits, but rather a lifetime contribution limit of $50,000 per beneficiary/child. Investments within an RESP grow tax-free, and are only taxable at the beneficiary’s tax rate when withdrawn.

RESPs also have the advantage of the Canada Education Savings Grant (CESG), a free grant from the government that kicks in 20% of your contributions annually (to a maximum of $500 per year to a lifetime maximum of $7,200) per beneficiary.

Learn more about RESPs in our Guide to RESPs and education savings.

RRIF

A RRIF account is designed to pay back your RRSP savings as income. You must close out your RRSPs by the end of the year you turn 71 years old, and often a RRIF is the most tax-advantaged option. RRIFs have a minimum withdrawal percentage based on your age. Payments from your RRIF are taxable as income in the year you receive them. 

Spousal RRIF

This is account that holds funds converted from a spousal RRSP. Payments from a spousal RRIF are taxable to you (the contributor) if the spousal RRSP contribution was made within three years of the withdrawal. Otherwise, the payment will be taxable to your spouse at your spouse’s tax rate.

Locked in RRIF

If you hold a LIRA or LRSP, these must be transferred to a locked-in RIF (LRIF) or life income fund (LIF) by the end of the year in which you turn 71 years of age. These plans are designed to pay back your pension funds to you as income and can hold the same types of investments as regular RRIFs. LRIFs and LIFs have a minimum withdrawal percentage based on your age, and also a maximum allowable annual payment amount. Payments from your LRIF or LIF are taxable as income in the year you receive them.

RRSP versus TFSA

Most accounts are relatively straightforward, but when it comes to the choice between making a TFSA or RRSP contribution, many Canadians are uncertain. The right choice for you depends on your financial situation and your investing goals. Because of their many tax advantages, many Canadian investors contribute to both an RRSP and a TFSA.

It’s also possible to benefit from both the tax-deferral benefit of an RRSP and the tax-shelter benefit of a TFSA at the same time. If you contribute to your RRSP and receive a refund from your tax return, you can then contribute your refund to your TFSA.

Both types of account can hold a wide variety of investments, but it’s important to understand the main differences between them. For more information, check out our handy references:

• RRSP versus TFSA: What’s the difference?
• RRSP versus TFSA: Find the right balance
• A guide to TFSA investing

Which account should I start with?

Which account(s) you choose depends entirely on your investing needs. Because of their tax benefits, many investors begin with registered accounts and add other accounts as their needs expand or change. It’s okay to have more than one account!

• If you want to save for your child’s education, an RESP is the right account.
• If you want to save for your retirement, an RRSP or TFSA might suit your needs.
• If you’ve maximized your registered account contributions but have more to invest, you’ll need a cash account.
• If you want to be able to offset capital gains with capital losses, you’ll need a non-registered cash or margin account.
• If you’re investing shorter term, and may need to withdraw your money, you may prefer to use a cash account or TFSA because RRSP withdrawals are subject to withholding tax. 

Once you’ve decided which account is best for you, it’s easy to open an account at Qtrade Direct Investing.