In Canada, Investing, Money

Investing Series: How and where do I get started to invest my retirement savings or money (Canada)?

This is a part of the Investing Series.

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Sometimes the very first step is the hardest one to take and to understand.

You’ve gone through all the hoops, you know what a mutual fund is, an index fund is, their differences between an exchange-traded fund (ETF), and you even know that the best kind of investing that is risky but not too risky for most people is index fund investing, and if you master all of the above, you might even start thinking about dividend-income investing strategies.

BUT WHERE AND HOW IN THE HELL DO YOU GET STARTED?

Sounds like a stupid question but it isn’t.

So I’ll go over a few basics that some people might not know about what plans you can take advantage of from the government.

If you already know all about RRSPs and TFSAs and want to get to the good stuff, click here on where I put my money in Canada for stocks, ETFs and/or index mutual funds.

DISCLAIMER: The following information is relevant as of today’s post date.

Don’t read this in 15 years and come back brandishing pitchforks because my rates were wrong/too low/etc etc etc.

I am also more in-tune with Canadian taxes and retirement plans (obviously), so I won’t be touching U.S. or American “how to get started” except to tell you what (little) I have learned so far.


flag-usa-canada

THE DIFFERENCE BETWEEN A TAX-DEFERRED AND A TAX-SHELTERED ACCOUNT

It really is as their names indicate:

Tax-Deferred: Delayed, or deferred taxes on your profits and gains until you retire.

Tax-Deferred plans generally don’t let you touch or borrow the money unless it’s for exceptional circumstances.

If you withdraw early from a tax-deferred plan, you get dinged with the taxes on the amount you withdrew, and a penalty for having touched it before the age of retirement (at age 65).

In exceptional circumstances, you can withdraw it for education funding or buying a home, but you will have to pay it all back on a set of schedule (usually in a number of years), or else you will get slapped with the taxes as if you withdrew it completely with no intention of putting the money back.

Plans that fall under this:

  • CANADA: Registered Retirement Savings Plan (RRSP)
  • U.S.A.: 401K, 403B, Individual Retirement Account (IRA)

Example on earning $50,000 a year:

You earned $50,000 this year.

You contributed a maximum of 18% which is $9000.

That $9000 becomes a tax credit against your taxable income of $50,000 and lowers it.

$50,000 – $9000 = $41,000 becomes your new taxable income.

Tax-Sheltered: You get taxed on the income in the year that you make it, but it gets sheltered from any future profits or gains.

Tax-Sheltered plans let you withdraw the money any time you want, and put it back any time you want (if you decide to at all).

You’ve already paid your pound of flesh (a.k.a. taxes) on it, so the government doesn’t care what happens to the money.

Plans that fall under this:

  • CANADA: Tax-Free Savings Account (TFSA)
  • U.S.A.: Roth IRA

Example on earning $50,000 a year:

You earned $50,000 this year in Canada.

You contributed a maximum of $5500 into your TFSA or for the tax year of 2013.

Your taxable income stays at $50,000.

WHICH ONE IS RIGHT FOR ME?

Ideally you max out both, but if that’s not possible, depending on your income and personal situation, here are a few general rules to think about:

TAX-DEFERRED IS GREAT FOR:

  • If you don’t plan on ever touching that money until you turn retire (rules on what age ‘retirement’ is for each account below). 
  • You plan on borrowing that money saved, and will REALLY be paying it back within the timeframe.
  • You want to LOWER your taxable income today.
  • Ideal/best suited for higher income earners who have a lot of taxes to pay, starting at around $60,000 – $70,000, it starts to make a difference in what taxes you pay.

TAX-SHELTERED IS GREAT FOR:

  • If you need the money sometime in the future, and it’s not for education or a house.
  • If you THINK you need the money sometime in the future, and basically use it like an emergency fund, and may not pay it back at all.
  • You don’t mind paying the full tax on your taxable income today.
  • Ideal/best suited for low income earners who tend to receive a refund or don’t have much tax to pay, if you’re earning under $60,000 – $70,000.

GOVERNMENT-STRUCTURED RETIREMENT SAVINGS OPTIONS

(There are other plans too, like ones for education which is the RESP or Retirement Education Savings Plan for children, or the RDSP, the Retirement Disability Savings Plan for the disabled, but I’ll just focus on strictly retirement-related info for now.)

CANADA Tax-Deferred: Registered Retirement Savings Plan (RRSP)

Calculated as 18% of your earned income to a maximum of $22,970

The $22,970 max works out to an income of $127,611.11).

Dividends as a salary for instance, do not count as ‘earned income’, and I take my salary in dividends, so I don’t get a lot of RRSP room.

What if I don’t use all my RRSP contribution room?

It carries forward, and keeps building; you don’t lose that contribution room if you didn’t contribute in previous years.

Where to find your contribution room

Look at your Canada Revenue Agency (CRA) tax slips for the previous tax year, or sign up for a CRA account to check your contribution room.

What can I buy under the RRSP plan?

Stocks, Bonds, Mutual Funds or GICS (guaranteed investment certificates)

Deadline to contribute:

March 1st of the next tax year to obtain the tax credits against the previous year.

E.g. if you are paying taxes for 2012, you have until March 1st 2013 to contribute to your RRSP.

When do I need to start taking out the money?

By the age of 71, you need to convert it to a registered retirement income fund (RRIF) or a lifetime annuity, that basically sets the percentage by which you should drain your savings by. 

Will this affect my government pensions such as Old Age Security (OAS) and Guaranteed Income Supplement (GIS) plans?

Yes.

Basically the more you have saved in here, the less the government will give you.

Stands to reason, but unfairly dings the Super Savers of our society for having been proactive.

What happens to my RRSP savings / money if I die?

There is a tax-free rollover to your spouse when you die, but your heirs (like your kids), will have that money taxed at the full amount before they receive the inheritance.

So if you die with $1,000,000 in your RRSP, your heirs will be taxed on that $1M in that year you pass the money on to them.

Does my money or contribution room “reset” itself if I have another RRSP set up with another employer?

No.

All RRSPs fall under one group or category, except for the portion your employer does a match for.

If you only have $10,000 in RRSP room in a year, you can put $5000 in your personal RRSP, and another $5000 to your employer RRSP.

If you switch employers mid-year and get a third RRSP account, you won’t be able to contribute any more in this year.

Your maximum personal room was $10,000 across all accounts.

(CANADA) Tax-Sheltered: Tax-Free Savings Account (TFSA)

$5000 a year (flat rate) for all Canadians, regardless of income, as long as they’re 18 or older.

Contribution room increased to $5500 in 2013.

What if I don’t use all my TFSA contribution room?

It carries forward, and keeps building; the TFSA has been around since 2009, so if we’re in year 2013, you have approximately $25,500 in contribution room if you haven’t contributed anything.

If you have contributed an amount, you need to know the base, book value or amount you contributed (e.g. $1000) and subtract it from the $25,500.

Don’t take the current market value.

Where to find your contribution room

Look at your Canada Revenue Agency (CRA) tax slips, or sign up for a CRA account to check your contribution room.

What can I buy under the TFSA plan?

Stocks, Bonds, Mutual Funds or GICS (guaranteed investment certificates)


What happens if I want to take out the money? Will I get taxed?

1. You can’t withdraw it and re-contribute in the same year!

E.g. if you put in $5000 on January 1st 2012, you can take it out January 2nd 2012 without penalties  but you can’t put back that same $5000 until next calendar year of 2013.

2. Your withdrawals are not taxed as earned income. You’ve already paid the taxes on it, remember?

Deadline to contribute:

December 31st of that tax year.

E.g. if you are paying taxes for 2012, your deadline to contribute for 2012, is December 31st 2012. Seems insignificant because TFSAs don’t lower your taxable income, but if you withdrew ALL your TFSA money on December 31st, and then re-deposited it on January 1st, you wouldn’t pay any penalties or have any problems.

When do I need to start taking out the money?

Never.

There’s no limit to how long you can keep that money in your TFSA.

Will this affect my government pensions such as Old Age Security (OAS) and Guaranteed Income Supplement (GIS) plans?

No.

What happens to my TFSA savings / money if I die?

There is a tax-free rollover to your spouse when you die; however unlike an RRSP your heirs (like your kids), will only be taxed on the increase of the TFSA in the year of your date of death.

So if your TFSA increased by $10,000 from the date you died until the day your heirs got the money, your heirs will only be taxed on that $10,000 increase, not on the total amount.

RETIREMENT PLANS ARE JUST ACCOUNT NAMES / SHELLS

Keep in mind that these retirement plans are just account names.

You can’t “buy an RRSP”, or “buy an IRA”. You have to set up an account called: Jane RRSP/IRA, which will then tell your government:

Hey, Jane is saving $5000 this year in her RRSP / 401K / IRA, so she is allowed to deduct that $5000 from her taxable income without looking shady.

They are just names to indicate what you’ve done and how the government should treat and tax your savings (if at all).

Think of them as empty shells, ready to be filled with savings if you will, but in the money world, they call these retirement plans “investment vehicles“.

You can choose to buy whatever you want under them like mutual funds, stocks, bonds or GICs.

canada-rolled-up-money-cash-bills

FOR CANADIAN INVESTING AND HOW TO GET STARTED

Now that you know the whole gamut of retirement account options for Canadians, you can open accounts at any of these places that I personally have experience with.

I am sure there might be better banks based on your situation, so do your research before blindly following me.

MUTUAL FUNDS (INDEX AND OTHER HIGHER-COST MUTUAL FUNDS)

Your bank probably offers them. Ask them. Then check their MERs.

However the cheapest I have found for index mutual funds (in terms of Management Expense Ratios or MERs) is at Toronto-Dominion (TD) Bank, with their E-Series Mutual Funds.

E-Series just means you have to do the buying, selling and exchanging yourself online and they always try to scare you by saying:

“You will get NO TD Canada Trust help AT ALL with an E-Series account!

You are on your own!

Dun dun dunnnnnnnnnn!!”

*insert ominous, scary face*

However, it’s pretty easy to learn, and shouldn’t deter you from getting access to the so much cheaper E-Series mutual funds.

Read this on how to get an TD E-Series Mutual Funds Account at TD Canada Trust for either for your RRSP, TFSA, RESP, or Non-Registered accounts — you can convert all of them without changing account numbers, it’s SO EASY*!!!!).

*Easy-ish. You’ll have to nag them a bit.

STOCKS (ACTUAL INDIVIDUAL COMPANY STOCKS)

Questrade is a very low-cost brokerage that I deal with.

Their democratic pricing is a fixed base charge of $4.95 for each trade at $0.01 per share (buying or selling), and then $0.01 for each stock up to a maximum of $9.95 as a charge.

So…

If you buy or sell 200 shares, it’ll cost you $4.95. (flat minimum)

If you buy or sell 495 shares, it’ll cost you $4.95. (flat minimum)

If you sell or buy 500 shares, it’ll cost you $5. ($0.01 per stock kicks in)

If you buy or sell 990 shares, it’ll cost you $9.90. ($0.01 per stock kicks in)

If you buy or sell 995 shares, it’ll cost you $9.95 (maximum charge).

If you buy or sell 1500 shares, it’ll cost you $9.95 (flat maximum).

Got it?

You can buy stocks, and ETFs with them.

If yo don’t like that, your bank probably lets you buy them or has a third-party or sister company that does.

I’m with TD Bank, and they have the regular TD Canada Trust (banking), and something called TD Waterhouse, which is a separate investing institution.

The two don’t talk or exchange info. It becomes a mess if you aren’t used to it.

You cannot buy individual stocks with TD Canada Trust, you’d have to open a TD Waterhouse account.

….But you can buy E-Series Mutual Funds at TD Canada Trust without a TD Waterhouse account.

Read this on how to get an TD E-Series Mutual Funds Account at TD Canada Trust.

This is the email I got valid as of this post:

Investors executing more than 150 trades per quarter will pay a flat rate of only $7.00 per Canadian or US equity trade.

Investors executing 30 – 149 trades per quarter will pay a flat rate of only $9.99 per Canadian or US equity trade.

No matter how often you trade.

Clients with household assets of $50,000 or more with TD Waterhouse Discount Brokerage will pay a flat rate of $9.99 per Canadian or US equity trade.

You must also sign up for eServices to qualify for this rate.

Trades for Canadian or US Options will be subject to the same flat rates plus $1.25 per contract.

$50,000 in household assets at TD Waterhouse means all of your accounts — RRSP, TFSA, Non-Registered, all under family members who live at the same address.

See TD Waterhouse Direct Investing Commissions and Fees here.

They are more expensive than Questrade (especially if you’re a small trader under 700 shares each time), but if you like convenience and a big bank.. I guess you wouldn’t mind paying more with them.

EXCHANGE-TRADED FUNDS

(ETFs act like mutual funds. Read this.)

Questrade is a very low-cost brokerage that I deal with. They don’t charge commissions on buying ETFs as of Feb 2013.

If you sell ETFs, it’s another story, but BUYING? Free.

I don’t go with anyone else.

They’re just so much cheaper especially if you’re someone who buys ETFs.

You can also buy ETFs with TD Waterhouse, but they charge you $7 – $9 per trade as a “flat rate” no matter how much you buy or don’t buy. Ouch.

money-bills-usa-cash

FOR U.S. RETIREMENT ACCOUNTS AND HOW TO GET STARTED

I noticed that 401Ks (and presumably 403Bs as well)  in the U.S. acted the same way as RRSPs.

I was only able to choose the mutual funds given to me by my employer, and I wasn’t able to take the money and put it somewhere else.

Therefore, whatever plan you have with your employer, and whatever mutual funds they have chosen, are the only options to put your 401K money.

For Individual Retirement Accounts (IRAs), you can put your money anywhere you want, so you can open up an account at Vanguard, and buy their very low-cost index mutual funds.

For stocks, bonds and GICs, you can look into plans at your own bank, or browse American blogs to figure out which brokerages are cheap (and good).

SUMMARY

  • Tax-deferred means you don’t pay taxes on your money until retirement (whatever that minimum age is); and you get a tax credit in the year that you put your money in
  • Tax-sheltered means you pay taxes right away in the year you contribute your money, but your earnings grow tax-free until forever
  • There are different tax and withdrawal implications for both tax-deferred and tax-sheltered
  • Tax-deferred is generally better for people earning $60,000 or more.
  • Tax-sheltered is generally better for people earning less than $60,000.
  • Retirement plans are just account names to let the government know how to tax (or not tax) you.
  • You have to still buy stocks, bonds, GICs or mutual funds in / under your retirement plan
  • You can pretty much buy any of the above with almost any bank or brokerage in Canada or the U.S.
  • In Canada, I suggest Questrade for stocks & index ETFs, and TD Canada Trust E-Series for index mutual funds
  • In the U.S. I suggest Vanguard for index ETFs

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Sherry of Save. Spend. Splurge.

Am my own Sugar Daddy. Am a millionaire at 36 after getting out of $60K of student debt in 18 months, a little over a decade earlier, using TheBudgetingTool.com. I have worked 50% of my career (taking 1-2 year breaks), and quadrupled my income within 2 years of graduating, going from $65K to $260K with an average lifetime savings rate of 50%. I have 11 side incomes that are on track in 2020 to make me $50K - $75K. I could retire today if I wanted, but love my work-life balance as a freelancing consultant in STEM (Science, Technology, Engineering, Math). I am all about balance - between time and money, and also enjoying my money. I also post daily on Instagram @saverspender.

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5 Comments

  1. Jane Savers @ The Money Puzzle

    I am dividing my little pool of investment money 70% RRSP and 30% TFSA. I will be lower income when I retire so I am not as concerned with the tax I will pay when I begin withdrawing the money. The RRSP is in a mutual fund and the TFSA is in individual dividend paying stocks.

    I max the match with my employer’s plan (many do not contribute at all) and I put some money in my RRSP to lower my current taxable income.

    I am still dealing with debt and the distribution between RRSP and TFSA will shift when the money I put towards debt is available to invest.

    Reply
    1. saverspender @ save. spend. splurge.

      For me, I keep my RRSPs full with bonds and index funds (ETFs and before, mutual funds) as I don’t touch them, and let them grow over the long term.

      My TFSAs are full with the same — but no bonds, just index funds.

      My separate investing account outside retirement is with stocks I hope to get capital gains on (if I lose, I can claim it against my taxes, if I win, I only pay taxes on 50% of my profit), and dividend-paying stocks (I have them on a DRIP, but if I do change it to get dividends in my pocket each year, I am taxed very favourably and pay less than $200 in taxes for $50,000 of income.

      I still hold true that anyone who is in the lower income brackets, is better off treating their TFSA like an emergency fund/tax-deferred vehicle, as they didn’t pay much taxes on their savings to begin with (unlike higher income earners).

      So if you can put the amount you have available from paying off your debt into your RRSP until your taxes are lowered to a $50K threshhold (I play around with the UFile tax program to see this, or you can use TaxTips.ca), and then I’d put the rest into TFSA to treat it like your EF.

      Reply
  2. squasher55

    Hi Mochimac,

    This is an outstanding article. I lived for 50 yrs in Canada, but now in the USA. So it is important for me to understand both systems. You have done a great job here in outlining the basics, plus tax considerations. There are so many people who need to read this, but they likely will not.

    You are correct, the first step is the hardest. And so many people never take that first step…..very sad.

    Reply
    1. saverspender @ save. spend. splurge.

      Thank you very much! It is very kind of you to say so.

      The system in the U.S. is about the same as the one in Canada, but it has different names. 401K = RRSP, Roth IRA = TFSA.

      Reply

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