13 November, 2020 Retirement Wealth Management

How to Choose the Right Account Type

Written by Dan Bick

 

RRSP, TFSA, SRSP, RRIF, LIRA… the list of acronyms for account types is a long one. But what do they stand for, and which accounts are the right ones for you and your financial goals? 

 

Because each account comes with its own set of rules and features, it’s important to know what you’re signing up for so that you reap the benefits.

 

Here’s our simple guide to navigating the common account types out there.

What does it mean if an account is “registered” or not?

The major division between account types is whether or not they’re “registered” or “non-registered.”

 

A registered account is an investment account that is given tax-deferred or tax-sheltered status by the government. Income earned on the account is not taxed until withdrawal, or in the case of a Tax-Free Savings Account (TFSA), is never subject to taxation. These accounts are advantageous as they allow you to name beneficiaries.

 

A non-registered account doesn’t have any sort of tax-sheltered status. These are general investment accounts that allow you to invest in a wide range of assets. However, they require you to pay taxes annually on any income they generate.

What are the most common registered account types?

If you have long-term investing goals like creating your own pension plan for retirement, the RRSP, SRSP and TFSA are the most commonly used. 

 

  • The Registered Retirement Savings Plan (RRSP) allows you to contribute 18% of your pre-tax earned income or $26,500 — whichever is less. Whatever money you contribute to an RRSP is tax-deductible, and whatever annual interest or dividends you earn are sheltered from tax reporting. But, while the money you contribute is a tax deduction, whatever money you withdraw is subject to income tax for the year it’s withdrawn. And finally, by the time you’ve reached the age of 72, the RRSP changes into an RRIF. More on that below.
  • The Spousal Retirement Savings Plan (SRSP) is an RRSP that has been set up in the name of a spouse, then used as a way of income splitting. The account can be registered in the name of the lower-income spouse, but the contribution can be used against the higher-income partner. It has very similar rules to the RRSP.
  • Registered Retirement Income Funds (RRIF) and Spousal Retirement Income Funds (SRIF) are accounts registered with the federal government — with money taken from your RRSP — that give you a steady income during retirement. Before, you were putting money into your RRSP to accumulate savings for retirement. When you switch over to an RRIF or SRIF, you withdraw the same money, but as retirement income. These accounts have a set withdrawal that occurs each year once you reach the minimum age. You can open them at any time but must open them before you turn 72. While you withdraw taxable income to fund your retirement, the money that stays in the RRIF or SRIF continues to grow while sheltered from tax.
  • Tax-Free Savings Accounts (TFSA) are a new account type that appeared on the block in 2009 and have been gaining popularity ever since. The reason it’s so popular is that it allows for tax-free investment income. It differs from the RRSP in that its contributions aren’t tax-deductible. However, all growth in the account isn’t taxed. There are limits to the amount that can be contributed per year, with the current cumulative total since 2009 at $69,500 in 2020.
  • A Locked-In Retirement Account (LIRA) is designed to hold your pension money if you leave a company early. You are forced to open one of these accounts because both the federal and provincial governments do not allow you to convert your pension into cash. Similar to RRIFs, LIRAs turn into Life Income Funds (LIF) when you want to use them for taxable retirement income. 

What are some non-registered, “cash” or “open” account types?

Non-registered accounts, which are also called “cash” or “open” accounts, are called these terms because their income is taxable in the year generated — unless some special provisions are in place. Capital gains accumulate on investments in these accounts, which are then subject to tax.

 

As these accounts aren’t registered, there cannot have a named beneficiary. However, they can be jointly owned by two owners. Joint non-registered accounts should only be opened with careful consideration of the tax, ownership and estate planning consequences. 

 

Finally, there are also corporate accounts, which a corporation owner can use as a place to put retained earnings and then investing those earnings.


While all of these account summaries give you a good overview of account types, they just skim the surface! If you want to know more about how these accounts function and how they can support your retirement goals, please get in touch with one of our advisors.