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Why do we have Money?
Money, like Canadian dollars “CAD”, and U.S. dollars “USD”, are federally regulated items of exchange that allows for quick and easy trade between individuals. They replace the need to have exact matches when trading (imagine you want to buy an iPhone but Apple only accepts truckloads of purple socks - very few people would be able to trade with them). Currency is a tool used in this process and it should be thought of as such for personal use and planning. The paper-based system that we use in Canada is called Fiat money - most if not all countries in the world use a Fiat system (it means implemented by decree or order by the government), and is regulated by the government.
Where do we put the money we have?
There are multiple ways to keep your money safe, depending on where you live. In Canada, we have a strong banking system. Due to this, keeping money digitally stored with a Bank in a chequing or savings account is likely the safest way to keep it. While you can store some cash in your house it might be best to leave it in unassuming places (funny enough - the safe is the first place a robber will go, and the sock drawer is probably second). Knowing where your money is, and that is safe can be just as important as making it.
A chequing account is one of the most common accounts you will use, though you’ll likely only ever have one or two. This account doesn’t usually pay interest but it does let you deposit and pay bills from it without fees. Instead of paying fees on transactions, there is typically a small monthly or annual cost.
A savings account is similarly one of the most common accounts offered and will usually pay interest on the money you’ve deposited. The flip side is that you usually only have a few free withdrawals each month. These accounts don’t typically have a monthly fee associated with them. With that in mind this, or a high-interest savings account, is where you will want to build and store your emergency fund. Different banks will pay a different interest rate - it’s encouraged to shop around to find a high-interest rate with a bank or broker you like.
What are registered accounts?
On the topic of places to keep your money safe: there are a handful of unique accounts that can do more than just hold money. Registered accounts are accounts typically held by a bank or broker that have special tax implications. These accounts exist to manage taxes and make certain life activities easier. The exhaustive list of registered accounts in Canada includes:
First Home Savings Account (FHSA)
Tax-Free Savings Account (TFSA)
Registered Education Savings Plan (RESP)
Registered Retirement Savings Plan (RRSP)
Registered Retirement Income Fund (RRIF)
Registered Disability Savings Plan (RDSP)
You can open them with a bank or broker, and begin depositing money into them. Importantly, these accounts do more than your normal chequing or savings where you can only hold cash.
Registered accounts can be thought of as umbrella accounts - within a single TFSA for example, you can have Cash, Stocks, ETFs, and/or Bonds (more on these in the investing article). The limit to these accounts is usually how much you can contribute. Below is a quick look at each account.
First Home Savings Account (FHSA)
Contribution: Everyone in Canada has the same flat amount they can contribute every year - at the time the program launches in Canada (2023) it is up to $8,000 per year, to a maximum of $40,000 over 5 years.
Benefits: This account is very cool - when you contribute the account is treated like an RRSP, where the amount you contribute is deducted from your taxable income for the year reducing your taxable income. Now, unlike the RRSP account, this is not a deferral if the funds withdrawn are used to purchase a house/condo for the first time. If that’s the case the funds withdrawn are then treated like a TFSA - on a tax-free basis. That means that contributions are pre-tax and withdrawals are tax-free, creating a powerful taxless process designed to help first-time home buyers access the home market.
Tax-Free Savings Account (TFSA)
Contribution: The amount you can deposit is set at a flat rate each year and is the same for everyone. You can view the contribution limits on the Government of Canada’s Website here.
Benefits: All money deposited into the account is after-tax dollars (you would have already been taxed on the income you received), and is now exempt from future tax. For example, if you deposit $500 into a TFSA and purchase a Stock, and in a few years that stock is now worth $650, that $150 difference between when you purchased and when you sold will not be taxed at all. This account is extremely useful and should be one of the first accounts you should try to max out for the younger readers who have lots of time to grow their net worth. Note that if your goal is buying a home, the First Time Savings Account is likely the more effective option.
Registered Education Savings Plan (RESP)
Contribution: There is no hard contribution limit per year but there is a lifetime limit of $50,000 per individual.
Benefit: The Government will match a portion of your deposits every year to a maximum of $500 when you deposit $2,500 - a very solid return right off the bat. There is a lifetime match of $7,200 at the time of writing and the dollars that grow every year in that account are not taxed. Rather, the tax is deferred or delayed until the beneficiary withdraws the funds (or the account hits its lifetime existence limit of 35 years).
Registered Retirement Savings Plan (RRSP)
Contribution: This one is a bit more challenging to figure out because there is a calculation involved. You can deposit 18% of your earned income for the year, up to a maximum of $31,560 (2023) plus any previously unused room. The CRA online account can help track this but it’s usually best to consult an accountant (CPA) or financial planner (CFP) if you aren't sure.
Benefit: Full tax deferral - much like the RESP all deposited funds aren’t taxed until you withdraw them later - any income or gain within the account is fully deferred until then. Additionally, all funds deposited reduce your income by the same amount, resulting in a reduction in total income and therefore taxes. This account is a double-sided approach to saving because you get both the tax refund on money in and don’t pay tax on the income until it’s withdrawn. It’s almost as good as the TFSA (and in some cases better!).
Registered Retirement Income Fund (RRIF)
Contribution: This account cannot be contributed to. It is a unique account that doesn’t exist until you turn 71 years old (or earlier if you choose). At that time the RRSP is automatically converted into a RRIF and you are obligated to withdraw, at a minimum, a specific percentage of the total funds in the account. That specific amount changes based on your age.
Benefit: you are forced to enjoy the hard work you put into saving money in your RRSP - it’s okay to enjoy the money you make, and as you age that becomes more important.
Registered Disability Savings Plan (RDSP)
Contribution: This is another unique account that is only available if you also qualify for the Disability Tax Credit (DTC). There is no annual contribution limit but there is a lifetime limit of $200,000.
Benefit: The funds withdrawn by the beneficiary are not included as taxable income and therefore are not subject to tax. This is a great benefit to help support individuals that might have had difficulty saving on their own.
Remember this is a brief look at the registered accounts and there are consequences or penalties that apply to incorrect or inappropriate use. Talking with an Accountant (CPA) or Financial Planner (CFP) would be the best place to start.
Do
Go onto your bank’s website and see what accounts they offer in addition to the ones you already have. Look at the price you currently pay for chequing accounts and how many transactions you’re allowed to have in a savings account. Finally, log on to your CRA online account and see what your contribution limit is for the FHSA, TFSA, and RRSP!