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Guide to savings accounts in Canada

By Michelle Boon

Posted on June 21, 2021
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Being a newcomer in Canada comes with a lot of upfront expenses. As you settle into your new surroundings and gain a more flexible budget, you can start saving for the future.

There are many different kinds of accounts available to help you save money. Here is a basic overview of common savings accounts in Canada.

Registered Education Savings Plan (RESP)

This account is most popular for parents looking to set aside money for post-secondary education for their children. These funds apply to university, college, trade school, and apprenticeships.  Despite having “savings” in the title, the RESP is not necessarily a savings account. It is an investment account. In a regular savings account, you can set aside money, usually with a low tax rate and high interest rate. An investment account allows you to buy assets such as stocks, bonds, mutual funds, or real estate, to create income.

You do not necessarily need to make investments with an RESP. You can treat this account like a regular savings account and exclusively make monthly contributions. Through an RESP, you can also gain money through government grants.

The Canada Education Savings Grant (CESG) will match your contributions by 20 per cent, with a maximum of $500 per year, per child. The maximum amount of CESG funds you can receive is $7200 per child. There is no yearly maximum for contributions; however, there is a lifetime limit of $50 000 per child across all RESP accounts if you have more than one. Low-income families are also eligible for the Canada Learning Bond, which is a government grant of up to $2000.

This is a tax-sheltered account, which means that you do not have to pay taxes if you profit from your investments. Keep in mind, money made through an RESP is not entirely tax free. Once your child accesses and uses these funds for tuition, housing, books, or living expenses, they are responsible for the taxes. As students, their taxes will likely be low. Some students don’t end up paying taxes on their RESP money at all.

If you child decides not to pursue post-secondary education, you have a few options:

  • RESP accounts can remain open for 36 years. You can leave it open the entire time in case your child changes their mind and does pursue further education.
  • If you have more than one child, you can move this money into their sibling’s RESP.
  • Reclaim the money and return all government grants. In this event, any gains from investments become taxable income.

You can open an RESP through your bank, credit union, a mutual fund company, or investment dealer. You can start an RESP for free; all that is required is a Social Insurance Number for you and your child, as well as identification, like a birth certificate.

Tax-free Savings Account (TFSA)

A TFSA is the most common account for people over the age of 18 for saving money. Like RESP accounts, a TFSA is not just a savings account, but an investment account. You can invest money in stocks or mutual funds to gain income. You can also keep things simple and treat your TFSA like a regular savings account. Multiple TFSAs can be open at once and used for investment or strictly for savings.

There is a limit to how much you can deposit into your TFSA, which is called contribution room. This varies depending on the year. For example, in 2015 people could contribute up to $10 000, whereas in 2020 TFSA holders had $6000 of contribution room.

TFSA contribution room also includes any unused TFSA contribution room from previous years as well as any withdrawals made in the previous year. If you only contributed $3000 in a year with a limit of $5000, you have an extra $2000 in contribution room the following year. Additionally, if you made a withdrawal of $1000 last year, this year you can recontribute that amount on top of the yearly limit.

To open a TFSA account, contact your bank, credit union, or insurance company. Usually, a Social Insurance Number and your date of birth are the only requirements.
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Registered Retirement Saving Plan (RRSP)

An RRSP is a great option for newcomers looking forward to retirement. This plan is a way to set money aside or to use as an investment account.

One of the major benefits of an RRSP, is that contributions are tax deductible. Whatever money you put into your RRSP is subtracted from your income, therefore reducing your taxes for that year. You can use this to your advantage if you earn a lot of money one year, and your taxes increase. It might be a good idea to contribute that excess money into an RRSP.

Your yearly contribution limit is 18 per cent of your income from the previous year. If your net income of last year was $50 000, you can contribute up to $9000 to your RRSP this year.

You are not avoiding taxes all together with an RRSP, but you do defer tax payments until you withdraw the funds at retirement age. You can access your RRSP funds at any time, but you must start withdrawing money by age 71.

You can start an RRSP through your bank, credit union, or an insurance company like Desjardins or Sunlife.

Whether it’s saving up for a rainy day or saving for your future, there are many accounts available to help you reach your financial goals.

More information about RESPs, RRSPs, or TFSAs is available at Canada.ca.

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