Which Accounts Should Canadians Open First?

Updated: Feb 2

When beginning to invest, a lot of Canadians are curious which accounts they should fund/open first. However, before we even get into that, take a look at your finances. Do you have any consumer debt? This includes things like credit cards, pay-day loans or amounts in collections. Before investing, pay these off first! What about an emergency fund? Do you have enough to last you for 3-6 months in case of an emergency or loss of job/income? If not, save up enough to cover at least 3 months worth of expenses first.


If your finances are in good shape and you're ready to invest, but don’t know where to start, consider the below:



RRSP Employer-matched Contributions


If your employer matches RRSP contributions up to a specific percent of your salary, this is a no-brainer, fund your RRSP first up to the maximum contribution that your employer provides. This might be 5% of your salary, for example. So if you earn 60,000 annually, your employer will match your contribution up to $3,000 per year. In other words if you contribute $3,000 then your employer will also contribute $3,000 – this is basically a raise (but it goes into your RRSP). This is generally done through payroll and your contribution will be deducted from your pay cheque. Make sure to check with your HR department to see if your company offers this benefit, and also keep this in mind when looking for a new job or negotiating your compensation package.



RRSP vs TFSA


The next account you will want to contribute to really depends on your financial situation and your goals. Generally, if you earn more than $60,000 it’s worthwhile to continue contributing towards your RRSP until you reach your maximum, if saving for retirement is your top priority. If you earn less than $60,000 or if you are saving for a more short-term goal (such as a car or home renovation), then it makes more sense to contribute to your TFSA first, until you meet your short-term goal or until you reach your maximum contribution limit.


If you earn more than $60,000, max out your RRSP and then your TFSA. If you earn less than $60,000, max out your TFSA and then your RRSP. Check your CRA notice of assessment or log on to CRA My Account to check your contribution limits for your TFSA and RRSP. DO NOT over-contribute to either one, or you will have to pay penalties.



RESP


If you have children, start saving for their post-secondary education by opening an RESP. Almost every institution in Canada supports this type of account and as a bonus, there are government matching programs to help fund your account (subject to a maximum amount).


No need to worry if your children don't attend post-secondary education as there are options available for withdrawals/transfers.



Cash/Margin Account


If you have maxed-out all of the above options, then open a cash/margin account. While all the above accounts are tax-sheltered (you don’t pay tax on any profit you make), a cash account is a non-registered account which is not tax-sheltered. This means that you will have to pay a capital gains tax (tax on your profit). For this reason, you should only open this type of account after you have maximized contributions to all the registered accounts. In a cash or margin account, half (50%) of any profits you make will be taxed at your marginal tax rate. However, if you lose money, you can carry forward your losses to offset any gains in the future.



Hedge Funds, Managed Accounts, Private Equity and Venture Capital


If you're a high net worth individual who has exhausted the above options and are looking for alternatives there are more options. The types of investments listed in this heading are common for those with significant excess capital. These options are not available to everyone. There are restrictions such as investment expertise, minimum capital contributions, lock-up periods (a period before you can withdraw anything) and gated withdrawals (a maximum amount that you can withdraw at a time).

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