BJK Financial Group Blog

Lately, my soon-to-be graduating high school co-op student has been thinking a lot about savings and investing her my future and with that the different types of financial accounts available in Canada. We all know how important it is to save, but navigating through the options can sometimes feel like a maze. Whether you’re saving for your education, retirement, your first home, or even helping a loved one with disabilities, each account has its own specific purpose. But how do they differ? I'll explore the different options below. 

RRSP: The Classic for Retirement. 

Most of us have heard of the Registered Retirement Savings Plan (RRSP), this is tax-deductible at the time of contribution to the account meaning you lower the income taxes you need to pay as long as you remain in the plan. However, it is important to remember that this account does not eliminate taxes but rather defers them to the time of withdrawal for the account. The benefit here is that when you withdraw this amount you’ll be retired and have a smaller income so overall your income taxes will also be lower. A downside for this account is that your contributions depend on your income meaning there is a limit, specifically 18% of your income earned the previous year. " Overall, your savings depends on your income and the tax bracket you find yourself in.  

RRIF: The Transition into Retirement 

This account is called the Registered Retirement Income Fund, it will receive its funds from the RRSP and when that transition happens no more contributions can be made, and investment growth will cease. The money withdrawn from this account is also taxable and will be taxed as income. The requirement for this account is to convert your RRSP to RRIF by December 31st the year you turn 71, however, you can choose to convert your RRSP for withdrawal as early as 55 but here there will be a required annual withdrawal amount. A benefit here is that the RRIF allows you to spread your savings across your retirement years, but make sure to plan carefully if you intend to use this account so you don't outlive your funds. 

LIRA: Retirement Focused Option Like RRSP… 

The Locked In Retirement Account, this option is less flexible as the name suggests, where your funds are locked in meaning you can't withdraw money until you reach the age of 55 without facing severe penalties. The difference and advantage with the RRSP over this one is that you can withdraw money if needed but there will be a withholding tax penalty starting with 10% on 5,000 $ " , whereas with the LIRA you cannot. Similar to an RRSP you will not be taxed on any growth but an advantage of this account over RRSP would be that you and your previous employer can also contribute to this account unlike the RRSP. This account defers taxes on your income and is taxed at a lower rate once the money is withdrawn. 

LIF: The RIF For the LIRA Account

A Life Income Fund (LIF) is similar to a RRIF but specifically designed for LIRA accounts. Once you reach the appropriate age and begin withdrawing from your LIRA, those funds are transferred to a LIF. Like the RRIF, your withdrawals are taxed as income, but you must stick to minimum and maximum withdrawal limits annually. This is also one of the differences compared to the RRIF where there is only a minimum withdrawal and no maximum. These limits can ensure a steady stream of income over your retirement years, though it limits how much you can take out at any given time. In most provinces, these withdrawals are taxed as regular income, which could affect your overall tax planning in retirement by potentially putting you in a higher tax bracket.

RDSP: Special Savings for Disability 

This account is the Registered Disability Savings Plan and is made only for individuals with disabilities and their families to help them save long-term and have that financial security. While the amounts contributed are not tax-deductible like the RRSP, the contributions will grow tax free until they are withdrawn by the beneficiary. Another benefit of this option will be the government contribution opportunity, where the government of Canada can provide a grant based on the contributions made to such an account, besides that there are bonds that the government can also provide for low- and modest-income individuals regardless of private income. " 

TFSA: Flexibility and Freedom 

This account is the Tax-Free Savings Account that offers lots of flexibility, where you can choose to invest in various financial products such as: GIC’s, bonds, stocks, mutual funds and any other investment products. While contributions are not tax-deductible all withdrawals will be tax-free, and this account can be ideal for both short term and long-term investments. Here unlike other accounts, there is no age restriction for withdrawals so this money can be taken out in case of an emergency or kept as savings for any purposes like dream vacation.  

RESP: The student-oriented option 

The Registered Education Savings Plan is made for post-secondary education savings. This one is similar to the RDSP where government contributions such as grants can be made matching personal contributions to the account which can significantly boost savings. Here the contributions are not tax- deductible however any investments and grants grow tax-free until the student begins withdrawing the funds for their education. This account offers an advantage for parents to structure a way to save for their child’s future without the burden of taxes cutting into the savings process. 

FHSA: The First Time Homeowner

 The First Home Savings Account is a newer investment and savings account option that is aimed to help Canadians save for a house down payment. This account allows investments in stocks, EFTs and other assets, and at the time of withdrawal the money for your first home will be tax-free. There are however contribution limits being 8000$ a year or up to 40,000 $ as the lifetime maximum."   Unlike most of the other accounts the FHSA is designed for single use and short-term goals, such as home ownership. 

Ultimately, the best account for you depends on personal financial goals and savings needs. It’s also important to think about how these accounts can work together, many Canadians use a mix of RRSP, TFSA and others to balance their tax savings and investments.