When planning for your financial future, choosing the right investment account is crucial. Whether you’re building wealth for retirement or cultivating financial security, selecting the appropriate type of account can significantly impact your investment strategy.

In this blog, we’ll explore the differences between registered and non-registered investment accounts and help you determine which option best suits your goals.

Key Takeaways:

• Registered and non-registered accounts both offer unique benefits that can enhance your financial growth.
• Registered accounts, such as RRSPs and TFSAs, provide tax advantages, whereas non-registered accounts offer more flexibility in terms of contribution limits and investment choices.
• Amur Capital’s mortgage fund options are available for both types of investment accounts, providing flexible, stable returns for Canadian investors.

What is an Investment Account?

An investment account is a financial account where you can hold various assets, such as stocks, bonds, and cash. Unlike regular bank accounts, the value of investments within these accounts fluctuates based on market conditions.

Think of investment accounts like soil for a garden. Just as different types of soil can affect plant growth, the type of account you choose influences how your investments will grow and develop. Some accounts may offer tax benefits, while others provide flexibility in terms of contributions and withdrawals.

Types of Investment Accounts

In Canada, there are two primary types of investment accounts: registered and non-registered. Each has its distinct advantages, and selecting the right one depends on your financial goals and preferences.

Registered Investment Accounts

Registered accounts are accounts that are officially recognized by the government and offer various tax benefits. With these accounts, you can defer or even eliminate taxes on your investment earnings. The most common types include:

1. Registered Retirement Savings Plan (RRSP)
   The RRSP is designed to help Canadians save for retirement. It allows you to contribute a percentage of your income each year and defer taxes on those contributions. Contributions to an RRSP are tax-deductible, meaning they reduce your taxable income. However, withdrawals are taxed at the time they are made, typically during retirement when your tax bracket may be lower.
2. Tax-Free Savings Account (TFSA)
   The TFSA is another popular account, offering tax-free growth on investments. Unlike an RRSP, contributions to a TFSA are not tax-deductible, but any income or capital gains earned within the account are not subject to tax, even upon withdrawal. This makes it an ideal account for those who expect to be in a higher tax bracket in the future.
3. Registered Retirement Income Fund (RRIF)
   The RRIF is an extension of the RRSP, designed to provide income during retirement. By the time you turn 71, you must convert your RRSP into a RRIF, where your investments continue to grow tax-free, but you are required to start making withdrawals based on a minimum percentage determined by the CRA.
4. Registered Education Savings Plan (RESP)
   The RESP is designed for saving for a child’s post-secondary education. Contributions to the RESP grow tax-free, and when withdrawn by the student, the funds are taxed at a lower rate, since students typically have a lower income. Additionally, the government offers grants to boost contributions.
5. First Home Savings Account (FHSA)
   A relatively new addition, the FHSA helps first-time homebuyers save for a down payment. It combines the benefits of both an RRSP and a TFSA: contributions are tax-deductible, and withdrawals are tax-free, making it a great option for first-time home buyers.

Non-Registered Investment Accounts

Non-registered accounts, unlike their registered counterparts, do not offer specific tax advantages. However, they provide greater flexibility. There are no contribution limits or restrictions, and you can withdraw funds at any time without penalty. Some common types include:

1. Cash Account
   A cash account allows you to invest in various assets like stocks and bonds. This account offers no tax deferral benefits, so the income generated (interest, dividends, or capital gains) is taxed in the year it’s earned. However, it provides full flexibility without any contribution limits.
2. Margin Account
   A margin account operates similarly to a cash account but with the added feature of leverage. This means you can borrow funds from a brokerage to invest in additional assets. While this increases your potential returns, it also amplifies your risk, making it a higher-risk option for some investors.

Choosing Between Registered and Non-Registered Accounts

Both registered and non-registered accounts offer unique advantages. Registered accounts, such as RRSPs and TFSAs, provide tax benefits that can help you grow your investments faster, either by deferring taxes or allowing for tax-free growth. Non-registered accounts, on the other hand, offer greater flexibility with no contribution limits, but you will need to pay taxes on any income earned.

Here are some reasons why you might choose one over the other:

Benefits of Registered Accounts:

• Tax Deferral: With accounts like the RRSP, you can defer taxes on your contributions, allowing your investments to grow without being taxed until you withdraw the funds.
• Tax-Free Growth: With a TFSA, your investments grow tax-free, and you don’t pay taxes on withdrawals.
• Faster Compounding: Because you’re not paying taxes on gains and dividends within registered accounts, your investments can compound faster.

Benefits of Non-Registered Accounts:

• No Contribution Limits: Unlike registered accounts, non-registered accounts have no annual contribution caps, giving you more flexibility to invest larger sums.
• Open to All Asset Classes: Non-registered accounts can hold a wide range of investments, including stocks, bonds, real estate, and cryptocurrencies, offering a broader range of investment opportunities.
• Tax-Loss Harvesting: If you sell investments at a loss, you can use those losses to offset gains, reducing your tax burden.

Which Investment Account Should You Choose?

The decision between registered and non-registered accounts depends on factors like your financial goals, investment strategy, and tax situation. For instance, if you are in a high-income tax bracket and want to save for retirement, an RRSP is an excellent option. On the other hand, if you want to maintain flexibility and invest in various asset classes, a non-registered account might be more suitable.

For those looking to invest in the real estate market without directly owning property, Mortgage Investment Corporations (MICs) offer a great solution. MICs are eligible for both registered and non-registered accounts, providing stable returns backed by mortgages on Canadian real estate.