Account Type vs Investment Type

There always seems to be a lot of confusion about what an account type is and what an investment type is. People seem to think that the only thing they can get is an RRSP savings account or an RRSP GIC and don’t fully understand how those are different than a regular Savings account or GIC. Hopefully this will clarify the differences for people.

Account type:

Registered Retirement Savings Plan (RRSP) - This is a federal government registered plan that defers taxes until the future. The money you place in this account is pre-tax dollars and your money grows tax-free. You only being to pay taxes once you start making withdrawals from the account.

Registered Education Savings Plan (RESP) - This is a federal government registered plan that defers taxes until the future. You grow money in this account tax free in order to pay for a child’s education in the future. You will being to pay taxes once the money is withdrawn for education purposes.

Registered Retirement Income Fund (RRIF) - This plan is similar to an RRSP in that it allows you to continue to grow your money tax free. The difference is that there are forced scheduled withdrawals. The purpose of this plan is to provide income during your retirement years, but allow the remaining amount to continue to grow tax-free. With this account the government can start collecting on some of their deferred tax income.

Tax-Free Savings Account (TFSA) - This is newest of in the arsenal of federal government provided account and one of the most misleading. This account is funded with your money after it has been taxed and just like an RRSP the money is allowed to grow tax-free. The key to this account is that you are allowed to then withdrawal the money tax-free. You pay absolutely no taxes on any money made in this account

Other - These account types have no preferential tax treatment at all. Whatever money you make in these accounts the government will tax.

Investment Type:

Savings - Thats right, that simple savings account you set up is technically an investment. You have lent the bank your money and in return they are paying you interest. Generally the interest in these accounts change with the Canadian interest rates but can vary from bank to bank.

Guaranteed Investment Certificates (GIC) - When you place money into a GIC investment you must choose a term date. A term date is an agreed amount of time that you will leave the money in the investment. In exchange for keeping your money at the bank for a set period, the bank will pay interest at a locked-in rate (the locked-in rate is usually at a premium to current rates). No matter what happens to Canadian interest rates, whether they go up or down, your GIC rate will always remain the same.

Mutual Funds - Mutual funds is a pool of investor money which is managed by a professional investor. The investor chooses what to invested in weather it is a stocks, bonds or some other time of investment

Stocks - Is a certificate declaring that you own a share of a company. When you buy stocks you are buying a part of a company and not an electronic ticker symbol.

When it’s all said and done you can hold pretty much any investment type in any account type. That means you can buy stocks in your RRSP or you place your money in a GIC in your TFSA. The key thing to understand is that an RRSP savings account is not one entity but rather you decided to invest the money you had set aside for your RRSP account into savings, stock, mutual funds or a GIC. Hopefully this clears things up for new people trying to sort out their personal finances.

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Please note that these are just basic definitions to clarify the difference between an account and an investment