At least a third of our lives before retirement are spent earning; at least half of our waking hours spent building our wealth. We often set a finite amount of time to earn, but a somewhat indefinite time to spend in retirement, with an often unclear conception of what our financial needs may be. If we choose to support our children through post-secondary education, how do we ensure that we will be prepared? While each individual has varying needs and wants, the following is intended to both inform and spark a disruptive flame – is your money working as efficiently as you are?
Registered investment accounts
Registered investment accounts are tools given to us by the Canadian government to reduce our tax burdens and incentivise us to save and invest our assets. There are three main types of registered investment accounts that we use to save, and we should be making the best use of what we have available to us. Below is a brief explanation of each:
Registered Retirement Savings Plans (RRSP)
RRSP type investment accounts allow you to invest 18% of your annual income up to a maximum dollar value ($26,010 for 2017) while deferring the income tax that would be payable on the income you’ve contributed. This means that you get a tax credit in the year of your contribution, and pay income taxes when you withdraw your money later. For example, assuming a 40% marginal tax rate, a $3,000 contribution to an RSP would provide a $1,200 tax reduction ($3,000 x 40%). Further, any growth that takes place within the plan does so “tax-free”. For every hard–working Canadian, a reduction in taxes payable is desirable. As the name would imply, these plans are typically used for retirement, but can be used for other specific uses as well. Your RRSP can be used without paying income taxes on your withdrawal if they are used as part of the first time Home Buyer’s Plan for the down payment on your first home or the Lifelong Learning Plan to further your education (subject to certain constraints).
Tax Free Savings Accounts (TFSA)
TFSA type investment accounts have distinct dollar value limits for each year. A TFSA grows tax-free, just like an RRSP, but income tax is not deferred. If you don’t contribute the maximum amount to your TFSA each year, your contribution room is carried forward to the following year (subject to certain restrictions). The TFSA was created in 2009 and was done so to incentivise savings and investment, especially for those individuals that have utilized the RRSP.
Registered Education Savings Plans (RESP)
RESP type investment accounts are typically slated for children’s post-secondary educations. If a minimum amount is contributed each year, the government will contribute a specific amount as well (subject to maximum amounts and conditions). Currently, the government will provide a grant of $500 on the first $2,500 invested per calendar year, per beneficiary. The funds in the account can then be used towards post-secondary education for the children, or if the children decide not to attend post-secondary education, the government portion is simply repaid, without interest or any investment gains, and the remainder can be withdrawn by the account holder (subject to restrictions).
Bottom Line
While it is best to take advantage of all of these tax-saving accounts, the portion of our contributions that we apply to each will be unique to individual situations. For example, a single individual with no children will not need to contribute to an RESP, a couple looking to use assets in their RRSPs for a down payment on a home may contribute more to their RRSPs, etc. An investment professional can help you decide how to best take advantage of each type of registered account in order to meet your individual needs.
Types of Investments
What type of investment vehicle is right for each individual, goal, or purpose? This is a question that requires individualized discussion and planning. As a preamble to this discussion, a short description of how multiple common types of investment vehicles work will follow.
Guaranteed Investment Certificates (GICs)
GICs come in cashable or non-cashable forms, and are fixed investments that earn a guaranteed rate of return. GICs vary greatly in rate, term, and conditions. Due to the guaranteed nature of GICs, they tend to have lower rates of return in comparison to other investment vehicles.
Mutual Funds
Mutual funds are large pools of assets (stocks, bonds, commodities) managed by an individual or group of professional Fund Managers. These Fund Managers usually work for large institutions, such as a Bank or a Mutual Fund Company (Fidelity Investments). Monies contributed by investors are used by fund managers to buy and sell (trade) the pools of assets inside the fund. The value of the mutual fund tracks the value of the underlying investments that the managers have purchased for the fund. If the investments that the fund managers have purchased go up in value, so does the unit value of the mutual fund. Smaller stakes (or units) are allocated to investors based on the amount of funds they have contributed. Investors generally do not work directly with a Fund Manager – Fund Managers manage the Funds and usually use an intermediary, like an Advisor, to interact and sell the units with investors. Mutual Funds provide investors with access to a high level of diversification for smaller investments amounts.
Stocks
Have you ever heard that a company is going public? When a company decides to issue an initial public offering (IPO or ‘going public’), they are selling a portion of their business to public investors like you. To ensure a fair and efficient market, shares (stocks) that are being sold are done so on a regulated stock exchange (stock market). Stock markets have specific rules and regulations, that public companies must adhere to in order to let their shares trade on the exchange. Investors initially buy the shares on the stock exchange, then buy and sell them to each other later on the same exchange. When the value of these companies changes, so does the value of their shares.
Types of Brokerages
There are many different ways to invest – whether you value the advice of an advisor, you are confident enough to manage your own wealth, or somewhere in between, different types of brokerages offer vastly different experiences.
Investment Advisor or Financial Advisor
When it comes to having your own advisor, their licensing and accreditations matter. Pay attention to what your advisor is licensed to provide and, more importantly, to the education and certifications that your advisor has attained. When it comes to licensing, some may be “fully” licensed ( stocks, bonds, GICs, mutual funds and insurance), while others may only be licensed to provide mutual funds and/or insurance. Make sure you ask your advisor which types of investments will be available to you. This helps to ensure impartial advice. Advisors will give advice and assistance in their area of expertise, and most will point you in the direction of other professionals for advice in other areas, such as accounting and advanced tax planning. Advisors charge a fee in exchange for their aid. Advisors provide an educated person to talk to and discuss strategies, feelings, goals, etc. Advisors will work with you to determine what paths will best suit your individual and/or family goals.
Roboadvisor
Roboadvisors (i.e. Questrade, Wealthsimple, Nest, etc.) have you perform a survey to put you into a category that will determine what type of investments you are to hold. Investment options are fairly constrained and less personalized. These types of accounts offer lower fees than a traditional advisor, but do not provide the same level of advice that is available from a seasoned advisor. The main advantage to this type of investing is the cost, which is generally less expensive than a traditional advisor relationship.
Discount Brokerages
Discount brokerages (RBC Direct Investing, Scotia iTrade, etc.) allow you to decide what you want to invest in. You will not receive advice or direction, but these types of investment accounts offer you low fees.
These types of accounts are for people confident enough to manage their own investment and rely on their own knowledge without the help of an advisor – robo or otherwise.
You work hard for your money, we all do. Smart investing can allow you to earn more of it, so we should be doing all we can to maximize our earning potential. Whether you are confident enough to maximize your potential on your own, or you prefer to enlist the expertise of an advisor, it is imperative that we use our resources to the fullest to achieve our goals. No matter your age—and how far away retirement is—you want to enjoy your life and do the things you want without having to worry about money. To help you achieve that, start investing today.
Written by David W. Spinney B.A., M.A.(Econ.), CIM, FCSI