top of page

Untangling Investment Accounts: How Much Do You Contribute?

By Jacqueline Ozdemir, MBA, CFA, Financial Advisor

Ferguson Financial Planning

Assante Capital Management Ltd.


With so many different types of investment accounts available, it can be hard to know which one to contribute to, how much to contribute, and how to prioritize contributions if putting money into more than one. For Canadians, each different type of investment account carries different tax treatment. This means contributing to the wrong accounts at the wrong times, can have significant negative tax implications.


To help avoid paying more tax than you need to and ensuring your money is in the right accounts, I recommend considering the following when deciding where to place your money:

  1. What accounts are available to you?

  2. What is your goal for the money?

  3. What is your income now?

  4. How do you expect your income to change in the future, higher or lower?

  5. When do you need to access the money?


What Accounts Are Available to Canadians?

Before diving in, let’s recap the various types of investment accounts available to

Canadians, contribution limits and tax treatment.


A chart explaining the different types of investment accounts.

More on FHSA accounts and contribution limits can be found HERE.


In Summary:

  • A TFSA really has no tax implications, both when you put money in or take it out.

  • An RRSP or FHSA provides some tax relief when you put money into them.

  • A Non-Registered Account can attract taxes even before you take money out of it.


What Are Your Goals for the Money?

Everyone has different goals and each account has different benefits, thereby some accounts will work better than others, depending on the investor’s goal. Before deciding where to contribute, it is important to consider what it is you are saving for.


As we saw above, using your RRSP for a short- term goal, other than buying a house,

could have negative tax implications when you take the money out of it for example.


Example 1: Short-term Goal

If you are saving for a short-term goal (ie. less than 3 years) such as a car purchase,

trip or house repair, you may want to consider a TFSA. If you have run out of TFSA

contribution room, you could put additional savings into a Non-Registered Account. You can invest your money into these accounts and when you pull the money out to fund the goal, the tax implications will either be nil (if using a TFSA) or smaller from saving in a Non- Registered Account. If you had saved for a short- term goal in your RRSP, when you take the investments out to fund the goal, you may be hit with a very high tax bill.


Below is an example of how this could look:

A chart displaying savings for different investment accounts.

As you can see, for this investor, having saved in a TFSA produced the most favourable tax treatment, followed by the Non-Registered Account. Most significantly, the RRSP had the most taxes owing at time of withdrawal.


To find out your TFSA contribution room:

  • Go to Canada.ca Sign Into an account (CRA My Account) - Select the Sign in Option you normally use

  • Once you are signed in you should be able to scroll down and see “Savings and Pensions Plans”. Click on this.

  • Click on “View TFSA Details”

  • Contribution room for current tax year will be listed. Be sure to consider recent contributions which may not be posted here yet.


Example 2: Home Purchase Goal

If you are saving for a first-time home purchase, you may consider a RRSP or FHSA

Account.


You can invest your money into these accounts and when you pull the money out for the purpose of a first-time home purchase, you will not be taxed. However, with the RRSP, current CRA rules allow you to redeem up to $35,000 only for this purpose. This is known as the Home Buyers Plan Strategy. The most recent budget tabled in April 2024 has recommended increasing this limit to $60,000. Be sure to check with a tax professional on this rule at the time you make the withdrawal to see how the rules have changed. On the other hand, there is no obligation to pay money back to the FHSA account.


A TFSA and Non-Registered Account can also be used for the purpose of saving for a first-time home. Similarly, there is no obligation to pay back these accounts should you redeem from them for any purpose, including a home purchase.


For anyone looking to save for a first-time home purchase, I would recommend starting with the FHSA account before considering their RRSP, given the FHSA does not have the repayment terms tied to it.


Once the FHSA has been maximized, either a RRSP or TFSA could be considered. If

you are in a higher tax bracket, a RRSP could be better given the tax deduction it may provide. However, if you find yourself in a lower tax bracket, the TFSA may be a better choice.


Example 3: Long-term Goal

If you are saving for a long-term goal such as retirement, an RRSP complimented by

the other types of investment account should be considered.


You can invest your money into your RRSP and allow it to grow entirely tax sheltered

until you need to spend it. Similar investments in a Non-Registered account would

trigger taxes annually, so it makes sense that you would want to place your savings into a RRSP for investment to avoid these annual taxes. Since you do not plan to withdraw the funds until retirement, your tax bill may be smaller at that time, compared to if you took the money out during your working years.


The tax deferred status of an RRSP makes it a great long-term savings option. In

addition to your RRSP, your TFSA can also be used to fund retirement. It can provide

tax free income to you in the future, without impacting your tax rate or government

benefits you may be entitled to.


How Do You Expect Your Income to Change in the Future, Higher or Lower?

As we saw in the chart at the start of this article, each investment account has different tax treatment when money goes into the account, when it grows within the account and when it comes out of the account.


Tax is not the same for everyone, but rather related to your income level. In short, the higher your income, the more tax you pay on that higher income.


For lower income earners whose income is not secure, they might benefit from using a TFSA to save for their short-term and long-term goals. The TFSA provides a lot of flexibility towards how much you can put into it (recall everyone receives the same contribution room) and there are no taxes owing should you need to withdraw the money.


For lower income earners who foresee earning more in the future, they may still benefit from using a TFSA and then switching to a RRSP in the future when they will receive a larger benefit or tax reduction from making RRSP contributions while their income is at a higher level.


When Do You Need to Access the Money?

It’s helpful to have an idea of when you will need to access your savings, when

determining which account to invest in.


Example 1: Short-term Goal

I generally advise investors to start with a TFSA account. This will allow their

investments to grow in a tax-free manner and there won’t be any taxes owing at time of withdrawal. Just be careful not to treat your TFSA like a chequing account, with money flowing in and out on a regular basis. Consistently putting money in and then taking it out in the same calendar year may cause you to inadvertently over contribute.


Example 2: Home Purchase Goal

Consider using a FHSA account, followed by your RRSP. The lack of prepayment terms on the FHSA account make it much more appealing for something embarking on home ownership.


Example 3: Long-term Goal

Consider using an RRSP. In the future when you redeem the funds, there will be taxes

owing, but presumably less than what you already saved. This strategy works best for investors who anticipate they are making more during their working years than they are in retirement.


Conclusion

As Canadian investors we have numerous investments saving accounts available to us, each with their own unique characteristics. Having an understanding of your goals, income and when you will need the funds will be helpful to knowing which account to use.


While contribution limits and tax rates change over the years, the basic mechanics of each account have stayed the same. However, if you are unsure, an accountant or financial advisor will be able to help guide you on which account may be best.


 

A picture of the author.

Jacqueline Ozdemir is a Financial Advisor with Assante Capital Management Ltd. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. Please contact her at (905) 272-2750 or visit www.fergusonfinancialplanning.com to discuss your particular circumstances

prior to acting on the information above. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.







 

What’s Next?

You can follow us on Instagram, Pinterest and LinkedIn to see more content about women and money, personal finances and planning for your financial future. You can also check out our other blog posts here!


Ready to kickstart your financial independence journey? At Untangle Money, our mission is to provide inclusive support to women and individuals who may feel underrepresented in traditional financial spheres, often dominated by cisgender men. Committed to assisting individuals in achieving financial success, Untangle Money offers a comprehensive understanding of financial realities and expert guidance tailored to unique challenges. Our dedication to accessibility is reflected in our affordable options, ensuring broad availability of our services. Join the community of hundreds of other women looking to strengthen their financial well-being. You can check out our products and plans here or get in touch for a free consultation!

Comentários


bottom of page