A Season and A Reason for Your Investments

At one time or another, you may have heard the familiar Ecclesiastes verses, “There is a time for everything and a season for every activity under heaven: a time to be born and a time to die, a time to plant and a time to uproot.”   I bet you never thought this could apply to your investments. 

Throughout life’s journey, your reasons for saving will vary.  You save for a vehicle, children’s education, retirement, home renovations, and vacations.  No doubt your list is endless.   The important strategy is choosing the appropriate investment vehicle and type of investments.  This is where the confusion begins.  Investment vehicles are different from types of investments. Investment vehicles, Registered Retirement Plans, Tax Free Savings Accounts (TFSA), and Non-Registered Accounts, have specific features and benefits.  Once you understand their uniqueness, you can determine a suitable fit for you.  

One way to explain investment vehicles is to associate them with the automotive industry.  We understand the differences between a truck, car, and van.  Each one services our needs differently. You may require a truck for work, a car for family purposes, and a van for travelling with young hockey players and their equipment.  You may prefer one versus another specifically because of fuel mileage, comfort,  or  safety.  Whatever your reason, you match your choice to your need.  Therefore, if you can relate investment vehicles to the vehicles you drive, you will be one step closer to differentiating Registered Retirements Plans, Tax Free Savings Accounts, and Non-Registered Savings.

Another element which adds to the confusion is the types of investments held under the respective investment vehicles. The diagram above shows that the types of investments are the same.  Whether you strictly hold GICs (Guaranteed Investment Certificates), specific bonds, stocks, or mutual funds will depend on your time horizon and risk tolerance.  {Does this sound familiar? I covered this topic in my previous blog, Can Investing Actually Be Easy.}  Again, consider types of investments linked to automotive industry as a “make” of vehicle: Ford, General Motors Canada (GMC), Toyota and Honda.  You can purchase either a truck, car, or van in your preferred "make".  GICs, bonds, stocks and mutual funds, are all different investments, yet you can purchase them as a Registered Plans, TFSA, and Non-Registered Accounts.  Once you grasp this analogy, your choice of appropriate investments will be made easy.

In order to choose the right investment vehicle, you need answers to these questions:

What is your purpose for saving?  This crucial question is important for your plan to succeed. Money set aside for retirement is invested differently than money set aside for emergencies.

What is your annual income today and what will be your annual income in retirement?  This important information determines whether utilizing a Registered Retirement Savings Plan is preferred over the Tax Free Savings Account. 

Understanding the investment vehicles’ distinct features helps you identify the benefit you can derive from its use.  Just as your vehicle has special “must-have” features like cruise control, 8-way power adjustment driver’s seat, and push button start, your investment choice also has special “must-have” features. The chart below explains some of the features to help you determine whether you can benefit from each specific investment vehicle.

Registered Investments	Tax Free Savings Account	Non-Registered Savings
Contribution room calculated as a percentage of earned income.  RRSP contribution limit reported on Notice of Assessment.	Contribution room became available in 2009 with an annual limit of $5,000.  In 2013, the annual limit increased by $500 to $5,500 indexed by the inflation rate.	Contribution limits do not apply. The sky’s the limit.
Contributions when applied reduce taxable income.	Contributions do not reduce taxable income.
Eligible to contribute the maximum amount with the option to apply the deduction to your taxable income in any given year.	Once the maximum contribution is made, the amount is reported to ensure contributions remain within the limits.
Contribution room varies according to earned income.	Contribution room is set the same for all Canadians. The exception may occur as a result of income earned on the principal.  When TFSA proceeds are withdrawn in its entirety, the new contribution limit is then equal to the principal and earnings.
If contributions are not made in current year, then the contribution room is carried forward to future years.	If contributions are not made in current year, then the contribution room is carried forward to future years.
When a withdrawal is processed, contribution room is lost and cannot be restored.	When a withdrawal is made in the current year, contribution room is restored in the following year for the same amount.
Contributions end at the end of the year of 71st birthday.	Contributions permitted from age 18 to any age.	Contributions can be made at any age.
Earnings are tax-sheltered.	Earnings are tax-sheltered.	Earnings are not tax-sheltered.
Withdrawals will be included in your income and taxed accordingly.	Withdrawals will not be included in your income and are taxed.	Withdrawals will not be taxed.  Earnings are taxed annually.
Income will affect federal income-tested benefits and credits such as Guaranteed Income Supplement (GIS) and Child Tax Benefit.	Income will not affect federal income-tested benefits and credits such as Guaranteed Income Supplement (GIS) and Child Tax Benefit.	Income will affect federal income-tested benefits and credits such as Guaranteed Income Supplement (GIS) and Child Tax Benefit.
Purpose for savings: retirement, financing your first home under the Home Buyers Plan, training or post-secondary education under the Life Long Learning Plan, or as a tool for tax deferral.	Purpose for saving: vacations, vehicle, furniture, emergency, renovations, and even a home.  May be used for children’s education if your RESP (Registered Education Savings) have been maximized.	Purpose for saving: vacations, vehicle, furniture, emergency, renovations, and even a home.  May be used for children’s education if your RESP (Registered Education Savings) have been maximized.

Understanding your investment vehicle helps you fulfill your purpose for investing and gain the greatest advantage from your investment selection. The most satisfying reward is to discover an easy way to achieve your goal by implementing smart investment strategies.  Just as all vehicles come with many options, so, too, do investment vehicles.  Using appropriate investment vehicles will allow you to drive your future dreams.