Registered account types
Registered account types in Canada are registered with the federal government for tax purposes. There are rules about how much you can contribute or how much you can withdraw. For general advice on how to invest in a registered account, see portfolio design and construction. Details on what are qualified investments for these registered accounts are given by the Canada Revenue Agency.
The following account types are registered:
Registered Retirement Savings Plan (RRSP)
The primary purpose of a RRSP is saving and investing for retirement, as the name indicates. RRSPs are used by Canadians who do not have access to workplace pensions or who need to save in addition to these pensions to reach the required savings rate. An alternative for retirement saving is the Tax-Free Savings Account (TFSA).
In addition to individual RRSPs, other types are spousal RRSPs and Group RRSPs.
Until you turn 71, you may contribute up to 18% of your previous year's earned income to a RRSP, up to a yearly maximum, and taking into account any pension adjustments. Unused contribution room can be carried forward. You must close your RRSP in the year you turn 71, at which time you can withdraw your RRSP savings in cash (with tax consequences), convert it to a Registered Retirement Income Fund (RRIF) or buy an annuity.
Deductible RRSP contributions can be used to reduce your income tax for the year. Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan; you generally have to pay tax when you receive payments from the plan.
Registered Retirement Income Fund (RRIF)
Individuals use an RRIF to generate income from the savings accumulated under their RRSP. Like RRSPs, RRIFs are tax-advantaged savings plans that allow gains to compound, within the plan, without attracting tax. Establishing a RRIF can be done at anytime, but must be done no later than the year that one turns 71. Further contributions cannot be made to a RRIF.
Withdrawals from a RRIF, as with an RRSP, are taxed as ordinary income irrespective of whether they were originally characterized as capital gains, dividends, income or return of capital inside the registered account. There is a schedule of yearly minimum withdrawals as a function of age, but there is no maximum withdrawal from an RRIF.
Tax-Free Savings Account (TFSA)
TFSAs are available to residents 18 years and older who have a valid Canadian social insurance number. The contribution limit for 2017 is $5500, plus whatever contribution room has been carried forward from previous years.
Despite the term "savings" in the name of the account, it can also be used for investment, e.g. for retirement. Other popular uses include saving for a car, for a downpayment for a home, or as a place to park cash for an emergency fund.
Contribution are made with after-tax dollars, but then no tax is levied on income or capital gains inside these accounts, and there are no taxes due when you withdraw money from a TFSA. Withdrawals do not result in a loss of contribution room, since the amounts can be contributed back during a subsequent calendar year.
Registered Education Savings Plan (RESP)
A RESP is an effective way of financing post-secondary education for children. RESP contributions are made with after-tax dollars, but then the money grows tax-free in the account. Importantly, the federal government provides an incentive called the Canada Education Savings Grant (CESG), which adds 20% to contributions of up to $2500 per year, up to a lifetime maximum total grant of $7200. Some provinces also have their own incentives.
Registered Disability Savings Plan (RDSP)
A RDSP uses after-tax dollars to build up savings in a tax-deferred plan; the beneficiary, who must also be eligible for the disability tax credit to qualify, receives no upfront tax deduction. Rather, he or she draws down the savings, paying tax at a potentially lower income bracket.
The overall lifetime contribution limit for a particular beneficiary is $200,000. Contributions are permitted until the end of the year in which the beneficiary turns 59. Contributions can be supplemented by the Canada Disability Savings Grant and the Canada Disability Savings Bond programs.
Locked-in accounts hold funds originally accumulated through a workplace pension plan. Because locked-in accounts are meant to replicate the lifetime pension plan entitlements formerly enjoyed by the employee, there are strict limits on withdrawals.
Locked-in accounts include:
- Locked-In Retirement Account (LIRA)
- Locked-In Retirement Fund (LRIF)
- Life Income Fund (LIF)
- Prescribed RRIFs
- Ontario Securities Commission, How RRSPs work, viewed March 15, 2017
- Canada Revenue Agency, Registered Retirement Savings Plan (RRSP), viewed February 23, 2014.
- Tax-Free Savings Account (TFSA) for Individuals, viewed Feb 5, 2012
- Canada Revenue Agency, About Registered Disability Savings Plans (RDSPs), viewed August 16, 2012.
- Canada Revenue Agency, RDSP limits and transfers, viewed August 16, 2012.
- Bruce Cohen and Brian Fitzgerald, The Pension Puzzle, 3rd ed., Wiley, 2007, pp. 179-190