- Non-registered accounts are assets that deposit-taking institutions keep secure, such as a bank account.
- Registered accounts are Tax-Free Savings Accounts (TFSAs), Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs), which allow your investments to grow tax-free. The government encourages Canadians to save more of their income through the incentives included with these accounts.
TFSAs and RRSPs both have contribution limits that are calculated in different ways.
If you have never contributed to your TFSA and you are over 28 years old, you have a TFSA contribution limit of $69,500 as of 2020. (Your contribution room started accumulating after you turned 18.)
Your RRSP contribution limit is calculated based on 18% of earned income that you reported on your tax return in the previous year, for a maximum limit that changes each year. For instance, the maximum is $27,230 for income earned in 2020, $26,500 for 2019, and $26,230 for 2018. Company pension plan contributions reduce your limit; this is the government’s way of ensuring that Canadians with workplace pension plan don’t have an unfair advantage in saving for retirement over those who don’t.
The biggest difference between using these two savings vehicles is that you have to pay tax when withdrawing assets, including GICs, from an RRSP, but not when taking them out of a TFSA. Withdrawals from a TFSA are completely tax-free, and when you make a withdrawal, you regain that same amount of contribution room the following year.
GIC laddering is when you buy GICs that mature at different times, allowing you to collect a steady stream of income that includes both interest and principal repayments. An example of this is buying a one-year GIC, a two-year GIC and a three-year GIC all on the same day.
The benefits of laddering are twofold:
- Laddering gives you greater access to your funds without any penalties, as you have the option to do so every time that one of them matures. Or you can simply choose to reinvest the funds.
- When you are invested in GICs with a range of maturity dates, your interest-rate risk is reduced because you have more opportunities to renegotiate.
GICs vs high-interest savings accounts
We’ve already touched upon how GICs stack up against keeping money in a bank account; but how do GICs compare to high-interest savings accounts? Generally speaking, both are considered safe investments with low-risk interest returns. They are what you would call “guaranteed investments,” as long as you keep the money invested for the specified term, of course.
When you buy a GIC, the terms and the interest rate are defined. But with a high-interest savings account, you have access to that money. Note that the transaction fees, which are higher than the typical savings or chequing account, are meant to deter you from withdrawing money. Also, check with your bank about a required minimum balance. GICs have costly penalties for cashing in on your investment before maturity. Another difference is that the rates on high-interest savings accounts can fluctuate with market conditions and interest rate decisions by the Bank of Canada. (Get a better understanding of interest rates with this primer.) The interest rates for GICs are set and guaranteed when you buy.