Introduction

Once you have your brokerage setup, you need to open an investing account. Think of the brokerage like a bank, and then you need to open an account, but instead of opening a chequing or savings account, you’re going to open an investment account. These are the 3 most popular types:

- Tax-Free Savings Account (TFSA)

- Registered Retirement Savings Plan (RRSP)

- Non-registered account (sometimes referred to as a Personal account)

If you're serious about investing and reaching your financial freedom, your main goal should be to max out your TFSA and RRSP. Max out means to contribute the maximum amount available to you. These accounts offer you fantastic tax advantages, to reduce the amount of money you have to pay in taxes. Alot of people don't really think much about taxes, since it's deducted from your pay cheque before it even gets deposited to your bank account, but do you realize how much money you pay in taxes EVERY year?

Example

Let's take an average Canadian salary of $56,500. The average tax rate for this person is around 22% which means they'll pay $12,430 in total taxes (includes federal tax, provincial tax, and CPP/EI premiums). Let me ask you something. How many things did you buy this year that costed you $12,430? For most people taxes is the largest expense they have, but they often don't even realize it!

On top of your regular employment income taxes, if you invest your money, and make a profit off it, you will have to pay taxes on the profits.

Luckily, there are tax advantages available to you with both the TFSA and RRSP. They both work a little differently. I could go on and on about all the specifics about these two types of account, but right now, I'm going to give you a high level overview:

TFSA

The Tax-Free Savings Account has annual contribution limits, it's currently $6,500 per year but on Jan 1, 2024 it will increase to $7,000 per year. You can use this free calculator to determine how much contribution room you have available to you: https://www.moneysense.ca/save/investing/tfsa-contribution-room-calculator/

When you buy investments and grow your money, you don't pay any taxes on your profits. Also, when you take money out of the account, you also don't pay any taxes.

RRSP

With the RRSP, it is a little more complicated. You can contribute 18% of your employment income (if you have a pension this number will be different for you), up to a maximum of $30,780.

If the person in our example, making $56,500 per year contributed the maximum amount allowed which is 18% of your income, that would be $10,170 in our example into their RRSP. The government designed the RRSP account as an incentive for Canadians to save and invest for their retirement, so as a result of this, the government actually will defer the taxes you need to pay on whatever amount you contribute to your RRSP, until you retire. That means this person in our example will pay 10,170 less in taxes this year. That's a saving of $2,500!

Since your employer automatically takes taxes off your paycheque, you would receive this money back in the form of a tax return in the spring. And you can do this every single year.

Don't forget this important step

Let me ask you another question, how many times has the government given you $2,500 of free money? I'm going to guess the answer is "never". Now, since you got some free money, it's really important that you PUT THIS MONEY TO WORK! Do not spend it. Put that into your TFSA (since we maxed out the RRSP in our example).

Now, on top of the tax benefits with the RRSP, I haven't even gotten to the part about how your investments grow TAX FREE inside of a TFSA and RRSP. So that means, if you invest $5000 and that grows to $5,500, you get to keep that $500 as profit, and if you make good investment choices (we'll talk about that in tomorrow's step, you can expect your money to grow alot bigger than that $500 profit.

Next steps

I generally recommend for people to prioritize a TFSA first, then to focus on the RRSP. Your ultimate goal should really be to maximum both of these accounts, and then start investing in a non-registered account, that's just a regular account with no tax benefits.

If you have any questions about these types of accounts, I encourage you to do some research online to learn more about them. And if you’re interested, you’re welcome to book a one-on-one call with me to talk more in depth about them and how they fit into your specific financial situation.

If you don’t know which account type to open, a Non-registered account is always a good default option. As you can always open a TFSA and RRSP in the future.

Go ahead and get your account setup, if you haven't signed up for Wealthsimple yet, you can do that below.

Tomorrow, I'm going to tell you about specific investments you can buy inside of your TFSA or RRSP account, and I'll share exactly what I'm personally invested in.

Until tomorrow,

Brendan @ Wealth Canada

brendan@wealthcanada.org