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Hello, my friends. This month, I write to you from a COVID isolation hotel. I travelled to visit my grandparents, tested positive the next day, and had to quarantine. Luckily, the Ontario government has put aside some funding towards these isolation centres for those of us who don’t have the space to quarantine at home safely, so I was able to escape to this hotel, where I’ve been living for the past few days. Let me know if you’d be interested in a review of how the experience has been. This hasn’t exactly been the week I was expecting, but I’m thankful to be slowly recovering from the virus while staying away from family and friends. That being said, being stuck in a room by yourself day in and day out isn’t exactly the most fun, so I thought I’d pop out a blog post while I’m here.
There are a lot of personal investing videos out there, mostly geared towards the American audience. Since I live in Canada and the investment accounts are slightly different, I thought I’d explain the main investment accounts on this side of the Niagara falls as well as how I prioritize putting money into each of them.
Note: this post focuses on investment accounts, but before investing, I always make sure I have a fully-funded emergency fund that’s in cash and readily available.
Priority #1: Registered Retirement Savings Account (RRSP)
An RRSP is a savings account where any contributions you put in are not taxed, but any withdrawals are taxed as income. As a general rule, it would be beneficial to contribute to an RRSP when you’re in a higher tax bracket than you expect to be in your retirement age, so you can defer paying tax to when you are in a lower tax bracket. RRSP limits are determined as the lower of 18% of your prior year’s earned income, and an RRSP limit that’s determined by the Canada Revenue Agency (CRA) every year. RRSP contribution room rolls over every year – you don’t lose it if you don’t contribute. However, you lose the contribution room if you withdraw from your RRSP before retirement (some exceptions for withdrawing to buy your first home with repayment clauses).
The reason I prioritize contributing to my RRSP is because I get a partial employer match for my contributions. If I don’t max out the contributions my employer will match, I’m essentially losing out on additional income. This is the only reason I prioritize my RRSP over my TFSA (explained below), because otherwise, a TFSA would be arguable more beneficial for me as I could leave open RRSP contribution room for future years as my income increases further.
Priority #2: Tax-Free Savings Account (TFSA)
A TFSA is an account in which you are putting in cash which has already been taxed, but your investments are able to grow tax-free within the account – you are not taxed on any dividends or capital gains. That being said, the account is designed to be used for passive investing rather than day trading, and if you are found to be abusing your account by using it to day trade, your gains could become taxable. From the age you turn 18, you get TFSA contribution room every year. Similar to an RRSP, your contribution room rolls forward if you don’t contribute to it. If you withdraw from your TFSA, you gain back that contribution room the following year.
The TFSA is my favourite investment account because of its flexibility. I like that the tax aspect is already taken care of and I know that every cent in that account is mine to use. Now that I’ve maxed this account out, I don’t get to do too much with it other than top up the contribution room once a year, which I do as soon as the room is available.
Priority #3: Brokerage Account
TFSA and RRSP are the primary “tax-free” investment solutions. Since I’ll often have money after maxing out these two accounts, I started a regular brokerage account to invest the remainder of my savings. I’ll use this account to make investments TFSA and RRSP accounts won’t let me do. For example, right now I’m using my brokerage account to trade futures contracts, which has been a great learning experience. (Let me know if you’d like a future post on my experience with futures.)
And that’s it! I hope this post was helpful and it inspires you to max out your investment accounts. Thanks for hanging with me; going to head off to have another coughing fit and chug some Listerine now.