Preparing to Invest: Get To Know The Available Account Types

RRSP, RDSP, RESP, TFSA, RRIF, DPSP! There are many types of accounts/plans available to help you grow your money faster. Get to know how they work, so you can make the best use of them and allocate your investments to the proper accounts from the get go.

Let's look at the RRSP and TFSA since they are probably the most common. The main benefit for both of the accounts is that growth in the accounts are not taxed while they stay in the plan. How about some of the differences?

• Contributions to an RRSP are tax deductible while TFSA contributions are not.
• Withdrawals from an RRSP are taxed as income while TFSA withdrawals are not taxed at all.

These two points mean that if you expect your tax rate to be lower after retirement, you will pay less tax using the RRSP. If the opposite is true and you expect your tax rate to be higher after retirement (not as likely), then the TFSA is more advantageous in this respect.

But that's not all! RRSP withdrawals before retirement incur an early withdrawal penalty while TFSAs do not. Check out the withholding tax chart for early RRSP withdrawals. (Note these are not exactly your final tax rates on these withdrawals. You might think that if you make 3 withdrawals of $5000 that you will be taxed only 10% instead of 30% on a lump sum withdrawal of $15,000, but since these withholding taxes are estimates, you will end up with a huge tax liability at tax filing time when your final tax rates are calculated.)

As you can tell, there are many rules and eligibility requirements. Get to know the different account types so that you can make good use of the benefits available!

In the general case (and remember, none of us is average, so adjust for your own situation!), for someone saving for retirement, I would recommend filling up an RRSP first. Of course, top up both accounts every year if you can!