RRSP vs RSP vs RESP vs TFSA: The Types of Investment Accounts in Canada

So, you’ve got some capital and you’re ready to invest.  Great!  But you take a look around and you start to feel overwhelmed.  There are many different type of investment accounts you can open and many different investments you can hold within them.  This article will try to help you gain a basic understanding of the different types of investment accounts you can hold in Canada.

An RRSP, or a Registered Retirement Savings Plan, is a retirement savings plan that has been registered with the CRA (Canada Revenue Agency).  You can make annual compensations with cash (and other investments) to this plan to help you avoid, or more accurately, delay taxes for another day.  You can contribute a certain percentage of your income each year into an RRSP and this income is not taxed until the time where you withdraw it from your RRSPs.  What’s more, when you withdraw it, you’re taxed at your current rate.  Presumably, when you’re hold and retired, you will have a lower income than you do when you’re in your prime and working.  Unless you’re a billionaire like me, and your dividends are compounding to astronomical heights

You may have used the term RSP, or Retirement Savings Plan, used interchangeably with RRSP, but they may or may not be the same thing.  You should always verify such things before you invest.  If it’s a retirement plan, it may not be registered with the CRA and therefore contributions may not be tax exempt.

A TFSA, or a Tax Free Savings Account, is another investment account that you can hold that will help you avoid paying taxes.  A TFSA is a more recent creation and is, by far, the best type of account to invest with.  They allow you to contribute a set amount of money annually that is never taxed no matter how much you make (not entirely true.  If you manage to make millions, the taxman might come calling).   The amount you can contribute is set and it’s cumulative going back to the inception of the program.  At time of writing, in 2018, the current maximum is $57,500 and is increasing by $5000 annually.  Most people that are aware of TFSAs, think that they are only able to open a TFSA as a bank account, but, in reality, you can open one with a brokerage firm and hold nearly any type of investment within.

An RESP is another animal entirely. The intention of an RESP is to allow you to save up money for post-secondary education.  Whether it be for yourself or your child, it functions much like an RRSP, except the money can be withdrawn tax-free for the purpose of paying for an education.