Investing is a crucial aspect of every financially-driven person who wants to grow their money, reach their life goals, and get that liberty that they always desire. There are several investment options in Canada to choose from. It can get confusing at some point, and even the word ‘Investing’ stresses some people out.
This article is both for experienced and newcomer investors in Canada, and pan out all the lucrative investment options that are available for them to thrive upon.
Different Investment Accounts to Open
The broad spectrum of investment accounts majorly consists of registered and non-registered accounts. The registered ones are good for saving on the taxes and growing the money. The most common accounts in this category are:
- Tax-free savings plan (TFSA)
- Registered retirement savings plan (RRSP)
- Registered education savings plan (RESP)
The tax savings for each plan differs in one way or another. For instance, in an RRSP, the contributions are tax-deductible and you will be paying no taxes on the returns of your portfolio. Once you withdraw funds in the future, they will be taxed on a marginal basis. This is also referred to as the classic tax deferral tactic. In a TFSA, the contributions are done with after-tax income, hence you will be imposed with no taxes for your portfolio, and if you make a withdrawal, the tax becomes due. Hence, it is named the tax-free plan.
Registered Investment Accounts to Invest
Non-registered accounts are good, however, the rookies in the investment world should concentrate on growing their portfolio through registered accounts first. Here are the things you need to know about.
RRSP or Registered Retirement Savings Plan
This account exists to aid the savings for retirement. Once can contribute 18% of their last year’s income to this account. In 2021, the maximum contribution limit for an RRSP was $27,830, and for 2022, it will be $29,210. If there is still unused contribution space, you can carry it to the next year and this can continue until you are 71 years old.
The taxes on this account are tax-deductible, hence you will be paying fewer taxes when you contribute. Unless you make withdrawals, the earnings in this account like dividends, interest, income, and capital gains will be tax-free.
Once you turn 71, you have to close this account and transform it into the RRIF or the Registered Retirement Income Fund (RRIF).
TFSA or Tax-Free Savings Account
Canadian residents of 18 years or more, can create this account and be tax-free on capital gains, dividends, interest, or withdrawals.
The contribution is decided each year for this account. In 2021, it was $6,000. While for 2022, it remains the same. In case you have been contributing to this account since 2009, you can contribute up to $75,000 in 2021 and $81,500 in 2022.
If you cannot complete the contribution in a year, you can do so in the coming year. When you cash out from this account, you are also allowed to re-contribute.
The investors can use this account for different savings goals, like buying a home, vacation, car or vehicle purchase, retirement, etc. Overcontribution and investment through non-qualified investments are penalized.
RESP or Registered Education Savings Plan
This account is utilized by parents to save up money for their child’s post-secondary education. The contribution room is $50,000 for each child and you can utilize a family or individual RESP account.
This account does not levy tax, and in the future, a very negligible rate is imposed, if your child withdraws funds for the school.
The government also matched the amount of your RESP for 20 cents per $1 for $500 each year via the CESG or (Canada Education Savings Grant). The families in the low or mid-income slabs can get more government benefits through this and Canada Learning Bond (CLB).
This grant money becomes eligible for use once your child becomes 18 years of age. The max CESG benefits stand at $7,200 and $2,000 CLB benefits.
Some other registered investment accounts in Canada include:
- Locked-in Retirement Savings Plan
- Registered Retirement Income Fund
- Life Income Fund (LIF)
Read: What are GICs in Canada?
Non-registered Investment Accounts
Once you have met the contribution limit for the registered account, but you still have money that you want to grow, a non-registered account is a way to go. This account comes with zero contribution bounds and is hence desirable by many people.
- Cash Accounts: This account can be utilized to buy investments with cash in your account during a transaction.
- Margin Accounts: Margin accounts equip the investor to buy more investments with the funds that they borrow from the broker.
Alternatives Investment Options in Canada
In Canada, you can choose from a vast variety of investment options to fulfill your goals, match your risk tolerance, and the experience that you carry.
This means you are buying a part of the company’s capital. This share renders ownership to a big or small part of the company and you also get dividends from the profits of the company. Additionally, if you sell the stock for more price than you bought it for, you also get capital gains.
A bond is a loan for the government or a business which renders investment income to the lender or the person that holds the bonds. Once you buy a bond, you lend money expecting that the principal will be given back to you after a period with some interest.
ETF (Exchange Traded Funds)
ETF is a combination of ETFs including bonds, mutual funds, commodities, stocks into a single asset. They help investors to diversify their portfolios without investing a large amount for every investment asset individually. The ETFs are great for diversification with low risk. Owning a single stock makes you the owner of many stocks.
All-in-one ETF portfolios
This is a more flexible option for new investors. You don’t need rebalancing and there is more management needed on your behalf.
A mutual fund is a collection of investments like stocks and bonds that investors can buy from the exchange platforms. These funds are managed actively with the help of the portfolio manager and the fee is levied as per the MER (Management Expense Ratio), hence mutual funds cost more than ETF.
You can get this fund from credit unions, banks, or brokers. This has a verified degree of risk based on growth, conservative, or balanced portfolio.
High-interest Savings and GICs
Cash can also be held in investment accounts. The reason is that you save more for the goals in the short term and you don’t want to lose your capital, or you have a low-risk tolerance.
You can hold the HISA in TFSA or RRSP. You can also acquire a GIC Guaranteed Investment Certificate) that secures your principal amount and also yields more interest over time. The rate of interest on the savings and term deposits is lower than your investment in stocks. They carry a very low-risk degree and are also insured by CDIC $100,000 per head or insured provincially.