Investing 101 – Part 4: Accounts You Can Invest In (Canada Edition)

Hellooo there and welcome to the Canadian edition of the different accounts you can invest in.  If you missed out on the first 3 posts in this Investing 101 Series, you can find them here: 

• Investing 101 – Part 1: Introduction
• Investing 101 – Part 2: Compound Interest
• Investing 101 – Part 3: Accounts You Can Invest In (US Edition) 

O Canada

First off, let’s go over some Canadian slang for any non-Canadians following along so they can feel welcome here (because being nice is what Canadians do).  I sure wish I knew all of these terms before moving up here.  Let’s see how much of the following paragraph you can understand:

Come on, we’re going to be late for Jenny’s stagette! What’s that? There’s a moose on the loose! It’s about three klicks away.  Let’s call CAA, eh?  Oh come on, don’t be such a keener!  Grab your toque from your knapsack, you never know when we’re going to get some snow…this is Canada. Oh no, all I have packed are my thongs.  I heard there’s going to be a chinook coming in soon.  Who knows, we could be stranded out on Hwy 1 if the moose hangs out there.  I’m going to name her Zara (her name starts with zed).  It’s been confirmed, a family of moose have decided to call Hwy 1 home for the night.  Did you bring your lunch kit? I could use a coffee crisp.  Or even better, some KD.  Ah, sorry you should have told me sooner, mine ended up in the garburator. You have any loonies? I’m going to stop off at Timmies real quick and grab a box of Timbits.  I can’t be stranded out here without my double-double. Might as well grab a serviette while I’m here and stop off at the washroom.  The queue is going to be massive. Oh no, my car got stuck in a ditch. Let me put on my runners and push her out.  Give’er! Phew, got her going again… what a beauty.  Might as well head over to the LCBO while we’re at it to pick up a two-four. Actually, I’ll just grab a mickey – we’re keeping it low key tonight. Want to play a game while we wait for the moose to clear the road?  Sure, I don’t have any games with me (they are all under my chesterfield, not in my car) but I have some pencil crayons. Ah those crazy Canucks, eh?!

Any non-Canadians follow along???

Let’s break this down:

• Stagette: The Canadian version of the pre-wedding bachelor/bachelorette party. Stag would be used for males and stagette for females.
• Klicks: Kilometers.  You gotta get to know kilometers in Canada (and any other country besides the US really). Psst, Americans — one kilometer is approximately 0.6 miles!
• CAA: Canadian Automobile Association – it’s just like AAA in the states
• Eh: Pronounced “ay”. This word is the classic term used in everyday Canadian vernacular. It’s used to indicate that you don’t understand something, can’t believe something is true or if you want the person to respond. Similar to “huh”, “right?” and “what?” commonly found in U.S. vocabulary.  Also, if you used “huh?” or “what?” in Canada this would typically come off as being pretty rude as “pardon?” would be what’s used here instead.
• Keener: Used to refer to someone who tries hard to please others or is overly enthusiastic. Similar to “nerd”, “brown-noser” and “geek”.
• Toque: A toque is a knitted hat used to keep your head warm.  Most people in the States would refer to this as a beanie.  Calling it a beanie in Canada is a big no-no and a definite sign you are just visiting.  I’m pretty sure this word is only used in Canada – does any other country use this word??
• Kanpsack: What Canadians commonly refer to a backpack or rucksack as.
• Thongs: Sandals/Flip-flops people!
• Chinook: A warm wind that comes over the mountains in the dead of winter and instantly melts the snow and raises the temperature.  It’s an Inuit word for “the snow that melts”.  Chinooks are commonly talked about in Alberta (where we get these warm winds from the Canadian Rockies).  And yes, it’s true, we can get 2-3 inches one day and the next day its gone (we don’t typically get the days of 6+ inches of snow which is more common in the east).
• Zed: The letter “z” in the alphabet is pronounced as “zed” in Canada, not “zee”.
• Lunch Kit: A lunch box.
• Coffee Crisp: A Canadian chocolate bar consisting of alternating layers of vanilla wafer and coffee flavored soft candy.  There are TONS of different chocolate bars in Canada vs the States.  I’m not a huge chocolate person but some of them are Smarties, Aero bars, Eat More bars, Crunchie, Crispy Crunch, Mirage, Caramilk, etc.
• KD: Kraft Dinner.  It is NOT referred to as mac and cheese here.
• Garburator: This one gave me a chuckle when I first learned about it.  It’s the Canadian term used for a garbage disposal.  
• Loonie: The silliest word for currency on the planet, next to toonie.  A loonie is a one-dollar coin and a toonie is a two-dollar coin in Canada. Makes total sense for a country to come up with that name once they went from a one dollar bill to a one dollar coin, right?  No.  You have to look at a loonie for yourself and it will make more sense.  It has a picture of a Loon on it.  Ahhh.
• Timmies: Tim Hortons.  It’s the Starbucks of Canada.  You will find a Timmies in EVERY Canadian town.  Like Starbucks, it’s mediocre coffee that Canadians are mysteriously addicted to.
• Timbits: Donut holes from Timmies.  My fav is apple fritter.  Timbits are also little kids sports teams that Tim Hortons sponsors. 
• Double-Double: The standard coffee order by Canadians at Tims.  Two (double) sugar and two (double) cream.
• Serviette: A napkin.
• Washroom: What Canadian’s refer to the toilet as.  To Canadians, toilet seems a bit too vulgar.  And I agree, I like using the word washroom or restroom more.  Is washroom used outside of Canada anywhere? I know toilet and bathroom are common in the states and have heard of the loo and water closet/WC in Europe. 
• Queue: A line up.  If you’re at the grocery store, you’d say “look at the queue at that till”. Oh yea, that’s another one.  Till is the cash register.  
• Runners: Sneakers.  They are not called sneakers in Canada.  Another fun clothing one is Bunny Hug.  This is mostly used in Saskatchewan and is what others would refer to as a “hoodie”.
• Give’er: A slang term that means to give it all you got. Used when referring to work, drinking, sports and any other activity that requires you to buckle down and get it done.
• LCBO: Liquor Control Board Of. A Crown corporation that retails and distributes alcoholic beverages throughout the Canadian provinces.  The LCBO maintains a “quasi-monopoly” on alcoholic beverage sales in Ontario—Canada’s most populous province with over 13 million people, or almost 40% of the nation’s population—and as a result is one of the world’s largest purchasers of alcoholic beverages. Note that you cannot buy alcohol in grocery stores in Canada – it must be purchased at a designated liquor store (called a Liquor Board Store in some provinces).
• Two-four: A twenty four pack of beer.  (And beer is VERY expensive in Canada compared to the States (like double the price, no joke) thanks to the Canadian Sin Tax, which I’m personally in favor of.)
• Mickey: A 375 ml bottle of alcohol (like a flask size). 
• Chesterfield: A couch/sofa. Pretty sure this is British that stuck in Canada?
• Pencil Crayons: Colored pencils, love it 🙂 

Also, let’s remember that it’s spelled “cheque” not “check”, “colour” not “color”, “behaviour” not “behavior”, “cancelled” not “canceled”, “tonne” not “ton”, “neighbour” not “neighbor”, and “centre” not “center”.  There are MANY other words that Canadians use the British spelling for (I clearly am still using the US dictionary on this blog). Canadians do NOT “take” a shower or a nap, they “have” a shower or nap. They “phone” someone, not “call” someone.  They pronounce “process” like PRO-ciss.  Pasta is pronounced “past-a” whereas in the US it’s pronounced more like “pah-stah”. Same goes for drama. It’s grade seven, not seventh grade. College and university are not the same thing in Canada whereas both words typically refer to the same thing in the States. Also Toronto sounds more like “tronno” to Canadians.  Same thing for Calgary.  Outside of Canada, people would pronounce this “Cal-GAry” but Canadians mash it all up and say “Cal-gree”.

Phew, ok. Everyone reading this is now Canadian. Send me your address and I’ll mail you your citizenship papers (because it is much sweeter to retire early here than in the States in my opinion, thank you Canadian social system where we will get free healthcare, Canada child benefit, CPP and OAS and GIS come typical retirement age). On to the good stuff (or maybe that was the good stuff….).

Moving On

Similar to Part 3 of the Investing 101 Series, you can keep your cash in dollars under the mattress (no thanks), open a checking or savings account with a big bank or online-only low fee bank (would recommend only to have enough in a checking account to cover your expenses for a 3-6 months), or open a high interest savings account (this is where I would hold money that I’m looking to access within 5 years – for example a new house down payment). As mentioned last week, we use Motive Super Savvy Saver which is a Canadian online-only bank and we’re earning 2.8% returns. And we can withdraw from these funds at anytime if we want/need the cash. This is WAY better than the 0.05% interest rate TD Bank offers for their TD Every Day Savings Account or whoop-di-do 0.5% interest in their TD High Interest Savings Account. Give me a break. Break free from the big banks!

But what comes next?

The following are other Canadian specific types of accounts that you can choose to open up if you so desire:

• TFSA
• RRSP
• Group RRSP
• Spousal RRSP
• RESP
• GIC
• Brokerage (aka Non Registered aka Taxable)

Again these are just the accounts. The type of funds that you can invest within these accounts will get covered in another post. Let’s dig in.

TFSA

A TFSA stands for a Tax Free Savings Account. Don’t let the words “Savings Account” at the end make you think this is like a savings account that you open up at a big bank like the TD example above to save cash which earns a measly 0.05% interest. The name for the TFSA is actually really bad and misleading. And online marketing doesn’t help. You don’t have to put your money in a savings account within a tax free savings account. And frankly, you shouldn’t be. You can earn a MUCH higher return if you instead invested elsewhere in other funds.

You can select ANY sort of funds to invest in a TFSA – be it stocks, bonds, ETFs, mutual funds, index funds, REITs, GICs, cash, etc. all under the TFSA umbrella. These investments will grow tax free until you take them out. The contribution amounts have varied each year since its inception in 2009 (see table below). If you are a Canadian resident and have been residing in Canada since the TFSA inception in 2009, you are entitled to the lifetime contributions for every year after you turned 18. This means, if you turned 18 in 2009 (or were older than 18 by then) and you have not opened up a TFSA yet, you have the FULL $63,500 of contribution room available to you in your TFSA.  And come 2020, your contribution limit will increase even more. (To know your limit, check the CRA website – it’s actually really easy to use as your login is based off your ID/Password from a major Canadian institution (like a bank) that you already have signed up – just keep in mind the CRA website does NOT account for any contributions that you have made in this current year.) The table below summarizes the annual contribution limits since the TFSA’s inception.

Years	TFSA Annual Limit	Cumulative Total
2009–2012	$5,000	$20,000
2013–2014	$5,500	$31,000
2015	$10,000	$41,000
2016–2018	$5,500	$57,500
2019	$6,000	$63,500

Again, ANY unused contribution room under the cap can be carried forward to subsequent years, without any upward limit. I cannot stress how amazing this is. If you have room in your TFSA (or RRSP) this where where you should be focusing your investments – not a taxable brokerage account (more on that below) where you do not receive any sort of tax advantage.

Within a TFSA, you will not pay taxes on any interest, dividends, or capital gains your money earns within the account. Canada gets a bad rap to it’s neighbors down south due to it’s high taxes but hey see Canada provides some tax relief to it’s citizens too! And I’d argue that the TFSA in Canada is much better than the Roth IRA in the States due to the unused contribution room rolling over year after year. There are NO penalties to withdraw and you can withdraw from it at any time.  This can be great for early retirees (woohoo!) but if you are not planning to retire anytime soon, you should be maximizing this power tool and not be withdrawing from it! Let the power of tax free compounding work in your favor! There is no maximum age limit or income requirement to be able to contribute to a TFSA.  It also is not tied to your income at all. Every single Canadian resident over 18 can open a TFSA today. (Since I am a dual US/CAN citizen, unfortunately Uncle Sam down in the States doesn’t view the TFSA as a tax-advantaged retirement account and thus I do not have a TFSA open as it can create a lot of headaches and paperwork.  Instead, we have Nic’s TFSA open (as she is solely a Canadian citizen) and will have that maxed out once we reach our FIRE date.)

The next question we frequently hear is, “where do you open a TFSA (or any account for that matter)?”.  The simple answer is any financial institution that offers one.  We have Nic’s TFSA opened up with our favorite online low-fee brokerage Questrade.

So what’s the downside? If you over contribute, you will have to pay some taxes and fees for your over contribution.

RRSP

A RRSP stands for a Registered Retirement Savings Plan and it’s a great companion to the TFSA. And like the TFSA, every Canadian should have a RRSP because again, tax savings.

Like a TFSA, an RRSP does NOT have to be a savings account with a big bank. And I’d suggest you looking at an online low-fee brokerage, again like Questrade, instead of a larger financial institution for ALL of your investment accounts. Just like a TFSA, you can hold any kind of investment within the RRSP umbrella. In a RRSP, your money is not tax free but it is tax deferred (similar for a traditional account in the States). This means that you do not pay income taxes on the money that you contribute towards an RRSP in the year you contributed it. But you will pay taxes on the income when you withdraw it depending on your income level and tax bracket at the time of withdrawal.

Unlike the TFSA, there is no minimum age requirement to open a RRSP. This means if you are 14 working part time at Timmies, you can (and should) open an RRSP today. You can contribute up to 18% of your gross income to your RRSP each year (max of $26,500 for 2019). If you can’t afford to contribute 18% of your income in a given year that’s ok, like the TFSA, you can carry any unused contribution room forward to future years when you can play catch up. These carry forward perks are so golden, especially to a dual US/CAD citizen like me who did not have such perks while living in the States. Morale of the story, take advantage of your contribution room within both your TFSA and RRSP!

TFSA or RRSP?

It’s hard to say how beneficial an RRSP is to you compared to a TFSA as it depends on your income this year compared to your expected income in retirement. Hopefully you’re a FIRE badass (you are reading this blog so I assume so!) and have a 50+% savings rate and are earning more now than you plan to spend come retirement (same idea applies even if you are saving 5% of your income, not 50%). If you expect your income in retirement to be lower than your current income, it makes sense to contribute into your RRSP to reap the tax benefits today while you are in a higher tax bracket. Pro tip – you can contribute to your RRSP and then when you file taxes and get a refund you can throw that refund money into your TFSA. Double whammy!

However, a TFSA really is an incredible account as your withdrawals as not considered income which is huge when you’re trying to optimize taxes come time to receive CPP, OAS, GIS, and/or a pension later in life.  You also are not subject to whatever tax changes occur over the years.

My greatest advice on this topic of TFSA vs RRSP (or 401k vs IRA vs Roth IRA) is to just choose one!  If you are just starting out, there really is no wrong answer.  The wrong answer is hemming and hawing and staying on the sidelines and not starting your investment journey NOW.  Again, compounding interest is the 8th wonder of the world and you don’t want to be missing out on that.  Pick a tax advantaged account, and go for it.  As you get more and more comfortable over time, you can work on your strategy.  Knowing nothing about you and your set up, I’d say start with a TFSA but again it really depends on your set up as to which really is the best.

This YouTube video provides a simple explanation of differences between an RRSP and a TFSA. As mentioned in our Investing 101 – Part 3 post, we will be going into more detail on these tax advantaged US and Canadian accounts so stay tuned for our Investing 101 Part 5 post on that. I do want to dig a little further here and talk about Group RRSPs and Spousal RRSPs on this post.

Group RRSP

A group RRSP is a company-sponsored plan that an employer offers to all eligible employees (not all Canadian companies offer a Group RRSP). A group RRSP is similar to an individual RRSP except it is administered on a group basis by the employer. This means that you likely have a select list of funds to invest in rather than selecting ANY investment of your choice. (And these select funds likely come with a higher fee than if you opened up an individual RRSP with a low fee brokerage.) Contributions are made by pay-roll deduction, on a pre-tax basis, through a Group RRSP administrator. If your employer offers a company match to a Group RRSP and you are not contributing up to the match, you are giving away FREE money. This is very similar to the 401k company match we discussed in the US edition of this Investing 101 Series.

If you leave your employer, you can transfer the money within your group RRSP into an individual RRSP in your name (no tax consequences for such a transfer – again, we recommend opening a DIY brokerage like Questrade for their low fees) or if there is no locked-in requirements, you can withdraw the money as cash. If you do withdraw from your Group RRSP to cash, it will be taxed as income in the year you receive it and the tax owed will be based off your income tax bracket. Again, this is because an RRSP is a deferred account, not a tax-free account. So instead of doing this, we would recommend rolling it over into an individual RRSP until you retire and are in a lower tax bracket.  

Note that if your company offers a Group RRSP but it does not include a company match, I would opt to open an individual RRSP in Questrade instead where you are able to access more funds and likely at a lower fee.  If you do receive a company match but the fund options aren’t great, you can also contribute into the Group RRSP, get the match, then roll those funds over to your Individual RRSP where you’ll have access to more options and lower fees while still employed with that employer.

Spousal RRSP

A spousal RRSP is a great way for couples to split retirement income, especially if their income is quite different from each other. Just like any other RRSP mentioned above, the money you put into a Spousal RRSP is allowed to grow tax deferred, meaning you do not pay income tax on it until you take it out of the plan. The main advantage is that it can even the playing field of your RRSP account with your partner so that when you withdraw (and pay taxes) you can each withdraw as close to the same amount in a given year to keep your individual tax brackets lower than if just one individual was withdrawing the full amount. Put another way, should one person have a lot of money in their RRSP and the other has less then that amount come retirement, the person with more in the RRSP (and withdrawing more) will end up paying more income tax. Had each person evened out their contributions, they could have potentially paid less income tax in retirement by being in a lower tax bracket overall.

That may be a little confusing so let’s look at an example:

Say you earn $100,000 and your partner earns $50,000. As mentioned above, individual RRSP limits are 18% of your income from the prior year’s taxes, up to a maximum dollar amount that changes annually (for 2019 it $26,500). If you both had RRSPs to which only the owner could contribute, the person earning $100,000 could put in $18,000 into their individual RRSP (18% of their income) while the spouse earning $50,000 could contribute the same 18% of their income, which comes out to $9,000 into their individual RRSP. When you open a Spousal RRSP you can even the playing field out a bit. The person earning more money can contribute $13,500 to their own individual RRSP and $4,500 into their partner’s Spousal RRSP (still the total of $18,000 which they are allowed – note that you still must remain within the overall RRSP contribution limits for the year – meaning you cannot contribute 18% of your income into your individual RRSP PLUS another 18% into your Spousal RRSP!). The lower income partner would continue to contribute their full 18% limit of $9,000 into their individual RRSP. So now they both have $13,500 growing within their RRSPs. The higher income partner can still take the total $18,000 deduction on their income tax for the year and the other spouse will take the deduction on the $9,000 that they contributed. The difference is that both partners have the same amount in their name when it comes time to withdrawing in the future. How this works logistically is that the lower income earner would open the Spousal RRSP and the higher income earner would be the one claiming the contributions on their side when it comes to filing taxes.

Without this Spousal RRSP magic, the higher earning partner would have say $1 million in savings within their RRSP and the lower income partner would have say $500,000. If both individuals were withdrawing 4% from their respective RRSPs each year to fund their retirement this means the higher earner would be withdrawing $40,000/year whereas the lower earner would be withdrawing $20,000/year. The $40,000 withdrawals would be subject to a higher tax bracket than the $20,000 annual withdrawals. By opening a Spousal RRSP, you can even things out a bit in hopes that each partner has closer to $750,000 come retirement in their RRSPs and are withdrawing $30,000/year each which would bump up the tax bracket for the lower income earner but lower the net overall taxes for the couple as the higher income earner pays less taxes.

There’s another nice thing about Spousal RRSPs. They aren’t just for retirement. Say one person decides to go back to school or become a stay at home parent or retire early before their spouse decides to pull the plug. If you contributed to your Spousal RRSP in advance, the partner who is no longer working can now withdraw from their RRSP while unemployed and pay very little taxes on it. Thanks to the Federal Basic Personal Amount, an individual can pay $0 taxes if only earning $12,069 or less in 2019 (although it sounds like the Federal Basic Personal Amount is going to get bumped up to $15,000 after the recent election results– woo hoo this is great news for us!). Similarly, provinces have their own Basic Personal Amounts and Alberta (where we live) offers the highest personal amount of $19,369 in 2019.

And you better believe that this is part of our FIRE plans! We have a Spousal RRSP set up currently since I am still working part time but my wife is no longer bringing in an income. I can withdraw $12,000 from my accounts and my wife can withdraw $12,000 from her accounts and we can pay $0 in taxes for the year. (Also, any withdrawals from our TFSAs don’t count as we already paid our fair share of taxes in the past on the money in these accounts so we can combo withdrawals from our TFSA with our RRSP/taxable accounts to get us to our annual expenditure without paying taxes since we keep our annual expenses low!  Although we are not planning to do this, instead we plan to use our TFSA to optimize our OAS and GIS withdrawals thanks to the 8 year GIS strategy we learned about from Ed Rempel). For any Albertans following along, you can play around with this fun Alberta Personal Income Tax Calculator to estimate your taxes or any Canadian can also play around with this Canada Simple Tax Calculator. If using the Alberta Personal Income Tax Calculator, we selected Spouse 1 = $15,000, Spouse 2=$10,000 and children=2 (we are only planning to withdraw $25,000/year even though we will be spending $35,000 annually in retirement as we will also be receiving ~$12,000 in tax-free money thanks to the Canadian Child Tax Benefit). You can see on the screen shot below the bottom left shows that we will each owe $0 in federal taxes and on the bottom right shows that we will each owe $0 in provincial taxes.

OK I went off on a tangent here (sorry not sorry) and can write an entire post just on our tax strategy so I’ll reign things back a bit here and move on 🙂 Point is, Spousal RRSP can help even the playing field come withdraw time for tax purposes.

RESP

An RESP stands for a Registered Education Savings Account and it’s an investment vehicle offered to Canadian parents/caregivers to save for their child’s future post-secondary education. Like the TFSA and RRSP, the RESP is a tax sheltered account to help your wealth grow.

The MAJOR UNICORN AMAZING FEATURE of the RESP is the incentive offered by the Canadian government to encourage you to open and save/invest in a RESP. The main one is called the Canada Education Savings Grant (CESG) which MATCHES 20% OF YOUR CONTRIBUTIONS UP TO A MAXIMUM TOTAL OF $500 EXTRA YEAR. This means that if you put $2,500/year (or $208/month) into your child’s RESP (what we are doing) the government will give you an automatic $500 top up meaning you will AUTOMATICALLY SEE A 20% RETURN ON YOUR INVESTMENT. (You are welcome to contribute more, but the 20% grant is only matched by the government up to $2,500 of your contributions per year.) The lifetime maximum of the CESG grant is $7,200… again, this is FREE MONEY. If the caps and bold weren’t enough I’ll highlight it again, this is AMAZING! Where else can you see an automatic 20% return?!?!

You can contribute a lifetime maximum of $50,000 per beneficiary to an RESP but it can grow to much more than that if invested wisely. Again, like a TFSA or RRSP, you do not need to keep an RESP in a savings account earning very low interest. You can open an RESP with a low fee brokerage like Questrade and buy mutual funds, ETFs, index funds, individual stocks, individual bonds, etc. Because your child will not be tapping into this account until they have completed high school (or later), there is a lot of time for this investment to compound and grow. For example if you are contributing $2,500/year for 17 years and the government is contributing $500/year (up to $7,200 – meaning $500/year for 14 years and then $200 in year 15) and you are investing that money in a stock market index fund earning 7% annually, your child will have close to $100,000 towards their post-secondary education ($42,500 came from you the other half came from the government and compound interest).

We understand that post-secondary education is continuing to rise but this account should be able to account for your child’s education costs in Canada. And if not, it will SIGNIFICANTLY help them none the less. Even if you cannot invest the max, every dollar helps. Set aside $50/paycheck and you’ll still earn that 20% government match. When it comes to paying for post-secondary education, everything you can contribute to your child’s education saves them from having to take out student loans and take out debt.

If your child decides not to go to university after high school, don’t give up on them yet. An RESP can stay open for 36 years. This means if your 18 year old decides they do not want to go to university now, they may change their minds when they turn 22 or heck even until 30 and can make use of the funds within the RESP then (ad it’s likely the account be worth more too again thanks to compounding interest). An RESP can also be used for part time education programs or trade schools (more on why I’m pro trade schools later). Also, an RESP can be transferred to a sibling as long they have contribution room. Lastly, if none of the above apply, you can withdraw your contributions tax free (since it was contributed with after tax dollars) and the gains can be transfer to your RRSP tax free as long as you have contribution room.  You’ll lose the government matches but that is because the money was intended to go to education and it never did. 

God I love RESPs, can you tell?  I was honored to be featured as a guest host on the Explore FI Canada podcast where we broke down way more information on RESPs over two podcast episodes.  

• Explore FI Canada Episode 32: All About RESPs (Part 1) | Money in Your Tea and Modern FImily
• Explore FI Canada Episode 33: All About RESPs (Part 2) | Money in Your Tea and Modern FImily

GIC

Similar to a CD (Certificate of Deposit) in the States, a GIC is a Guaranteed Investment Certificate, and yet another type of Canadian investment account that offers a guaranteed rate of return over a fixed period of time. Due to its low risk profile, the return is generally less than other investments such as stocks, bonds, or mutual funds. Typically these investment accounts are invest “$xx” for “yy” months and received “zz” interest rate. In most cases, funds invested in GICs are locked in, meaning the investor can’t access the deposited money until the term is complete. Funds removed prematurely are subject to an early withdrawal penalty aka a GIC is NOT to be viewed as an emergency fund as you cannot access these funds easily if an emergency comes up. 

I’m not a huge fan of GICs and would prefer to invest in high interest savings accounts (mentioned above) which tend to offer very similar interest rates these days and do not lock up your money for a certain amount of time. A quick google search shows that some of the best GICs offered today are in the upper 2% range. Call me cray, but I would rather be earning 2.8% in my Motive Savvy Saver High Interest Savings Account where I can access/withdraw funds whenever I want. If GICs suddenly start to offer 2 times the interest that high interest savings account offer, that’s another story. But if the interest rates are similar, I’m team high interest savings account all day.

Brokerage/Non-Registered

Lastly, we have the taxable non-registered brokerage account. This is the account you want to open up last once you’ve maxed out all of your tax advantaged accounts listed above. A brokerage account is another type of investment account that you open up with a brokerage firm – be it a big bank like TD or RBC or CBIC or an online-only brokerage like Questrade, Qtrade, Wealthsimple, Interactive Brokers, etc. – again…we are team Questrade for our taxable account. Again, do your own research but know that not all brokerage accounts are equal.  Some charge higher fees to both buy and sell funds within your accounts while others only charge a fee to sell (and if you’re investing for the LONG term this should be very minimal).  Some charge higher Management Expense Ratios (MERs) than others for very similar funds and while a 1% additional management fee may not sound like much, IT IS when it comes to long term compounding earning potential – for those too lazy to read this article by Nerd Wallet, see the table below for the Cole Notes (Canada)/Cliff Notes (US) version. Again, I’m going off on a tangent and this is for a whole other post.

A brokerage account enables you to buy stocks, bonds, ETFs, etc. with money you deposit into your account. Within Questrade we have our tax-advantaged accounts (TFSA, RRSP, and RESP) as well as our taxable brokerage account. Some other brokerage account options are managed brokerage accounts with investment management, either from a human investment advisor or a robo advisor (again, see the table above why I personally am not a fan of these but I understand the lure of robo advisors for some people who want a completely hands off approach).

Many brokers allow you to open an account online. You can fund the brokerage account by transferring money from your checking or savings account. You can also roll over funds from one brokerage account to another if you decide to change brokerage firms. We did this when we transferred our RESP from TD to Questrade (thanks Questrade for paying for the transfer fees!) and when we transferred my Group RRSP from Great West to an Individual RRSP in Questrade when I recently left my previous employer (goodbye 1.65% MER fees, holy!). In a taxable account, the main benefit is that you can sell the investments and withdraw your money at any time (no fees/penalties for withdrawing is one of the perks) but since it is a taxable account you will have to pay capital gains on the earned interest (although in Canada you only pay taxes on 50% of the capital gains earned which is another nice perk for Canadian investors.  And then there are eligible Canadian dividend stocks that have even more perks but we prefer to stick with index investing).

Nervous About Investing?

I get it. You’re putting your hard earned cash into the hands of a market that can go up, down, or stay flat and there’s nothing you can do to control it (other than identifying your risk tolerance). However, given a long time horizon, money in the stock market can grow tenfold, compared to cash under your mattress or sitting in a low interest checking or savings account. We are going to continue to chip about at the Investing 101 Series to hopefully make you more comfortable with the idea of investing. The reality is, when you’re investing for a long term goal like retirement, not investing is actually what’s risky. How can you keep up with inflation which makes your cash less valuable year over year?

My general rule for investing is if you need to access this money within 5 years (say for a house down payment you’re saving up for), I would stick with a high interest savings account. If you are looking to invest for the long term, I would invest in a tax-advantaged account and then once that is maxed then a taxable brokerage account.

While everyone should have some emergency cash on hand (we suggest at least 6 months of living expenses in either a checking, savings, or high interest savings account), anyone who keeps excess cash is doing so at a cost.

Hope you enjoyed today’s post and learned something (even if it was just Canadian slang!). Stay tuned for Part 5 of the Investing 101 Series where we will dig further into the different tax advantaged accounts both in the US (401k and IRA) and in Canada (TFSA and RRSP).  Any Canadians tuning in that noticed I may have missed something? If so, please let me know, we’re always trying to learn over here!

Want to check out the rest of the Investing 101 Series?

• Investing 101 – Part 1: Introduction
• Investing 101 – Part 2: Compound Interest
• Investing 101 – Part 3: Accounts You Can Invest In (US Edition) 

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We believe in stacking up life hacks to keep your enjoyment levels to the max without depleting your bank account.  Here are some ways to further educate yourself and save thousands of dollars over your lifetime by making some simple adjustments:

• How much are you paying for your phone plan?  Canadians, learn more about Public Mobile, and see how we are paying $3/mo for our cell phone plan.
• How much are you paying for internet?  Canadians, learn more about the various Independent Service Providers out there to see who services your area so you can lower your monthly bills.
• How much are you paying for home insurance?  We were able to reduce our rates by 25% by switching over to Square One Insurance.  If you live in BC, AB, SK, MB, and ON, check out Square One for your home insurance, landlord insurance, and/or tenant insurance.  Use this link to receive an extra $15 off your quote.  (Note that you must use this link to start the process to get the $15 off even if you prefer to pay over the phone.)
• How much are you paying for your monthly utility bills?  See how you can likely save on this monthly expense.

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