What type of investment account is best for you?

January 4, 2016

Here's what you should know when choosing an investment account. 

You have many account options to choose from when saving for your future, with each offering plenty of advantages … as well as some restrictions.

Know your options

Everyone knows when they walk into a bank to open an account that they’ll be asked to choose between a chequing and a savings account. Both come with distinct advantages, as well as certain restrictions.

Similarly, when working with your advisor to create a plan for your financial future, you’ll be able to choose between a few different types of accounts, each with their own features. Some of these features are very important for you to know, including tax deferral and withdrawal restrictions, and can impact your ability to grow your savings over longer periods of time.

Your two main account options are non-registered and registered accounts.

Non-registered accounts don’t tend to offer the same tax-deferral or tax-reduction benefits as registered accounts, but have few or no restrictions in terms of how much you can deposit or how often you can access your savings. Often, these types of accounts are best to use after you have maximized your contribution limits in your registered accounts or when you know you will need short-term access to this money.

Registered accounts such as Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs) and Registered Education Savings Plans (RESPs) usually have some restrictions in terms of the amounts you can contribute each year and how much you can withdraw but tend to offer attractive tax deferral or savings incentives that are important to consider. These accounts tend to be good choices for your longer-term savings needs such as post-secondary education, retirement savings, etc.

Registered accounts also have a number of additional features you should be aware of. For instance, with RRSPs you have the ability to take money out (tax free) under certain conditions, including buying your first home or funding an education program. RRSPs also allow you to defer paying tax on the amount you contribute, as well as on any income payments or investment growth achieved within your RRSPIt’s important to understand all of the rules and features of registered plans to determine what account type is best for you. 

That said, you will have to pay tax on your withdrawals when you start using those savings. Taking a lump sum from your RRSP savings at retirement will result in a sizeable tax hit. A good alternative strategy to consider is to convert your RRSP into a RRIF at retirement, and then withdraw smaller sums at regular intervals, which can help reduce the tax you pay on these withdrawals.

One other type of registered account, the Tax-Free Savings Account (TFSA), is similar to RRSPs and RESPs because TFSAs have rules and restrictions regarding contributions and withdrawals. However, TFSAs are different from RRSPs or RESPs because they are funded using after-tax dollars. The trade-off is that any growth within your TFSA is not subject to tax, and when you withdraw funds from this account, the amount is also not taxable.

Talk to your financial advisor to find out which account type is right for you, and visit AGF.com.

The contents of this Web site are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances.

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