My kids live in Ontario and want to begin personal investing with some money that I sent them. I’m going to help them with their investing decisions, but am first trying to understand the options. One mentioned a “TFSA”. Googling tells me that it’s sort of like a Roth IRA in the US, which allows for tax-free growth by investing already-taxed income. I assume that any withdrawal before retirement would include a penalty, but that doesn’t seem to be the case. The other mentioned “Wealth Simple”, which just seems to be a trading website.
There’s no penalty for withdrawing from the Tax Free Savings Account. It’s pretty much what it says on the tin, it acts like a savings account in pretty much every way, but the interest and capital gains aren’t taxed. There’s annual contribution limits, of course. One way it’s different from a regular savings account, though, is that it can include stock and mutual fund investments, not just a cash balance.
We also have Registered Retirement Savings Plans (RRSP), which do act more like what you mention: they defer the tax burden to when you withdraw funds. The contributions to an RRSP are directly deducted from your taxable income, which is the big benefit. Again, there are annual contribution limits.
The best plan would be to start an RRSP first, and contribute as much as allowed. If there’s anything left over, then use the TFSA, again for as much as allowed, if possible.
If there’s anything left over after that, you could start just a regular investment fund. Every year, you could move investments from that fund to the RRSP or TFSA, to gain the maximum tax benefits.
Then you just do this every year. Any extra cash you have goes into RRSPs first, TFSA second, and taxable investments third.
ETA: and just about every bank in Canada will have options to set up all these things. It might cost a bit more, but it’s very convenient. Canadian banks are large enough that if they collapse enough for you to lose your money, we’re losing the whole country, so money won’t matter.
Thanks! They are college kids so have no real source of income. I think it’s too low to report. That’s (hopefully, please please!!!) a couple of years away. Also, at this point, I haven’t given them enough to breech the TFSA max. With this in mind, TFSA sounds like the better option. I think once they start earning taxable income, I like the RRSP route.
Yeah, that sounds reasonable. Also, if something comes up and they need the money for an emergency, withdrawing from the TFSA is a lot easier. But it likely will take a few days, so take note of that.
If they have no income, there is no benefit in an RRSP. You are not paying Canadian taxes. If your kids had enough income to pay income tax, you could give them the money and they could put money into an RRSP and deduct the contribution from their income. You cannot contribute directly into someone else’s RRSP (except for your spouse). TFSA is the way to go. I have already maximized my contribution for 2025. Meantime I am collecting money from my RRIF (what an RRSP turns into at age 71). And paying tax on that income.
To add to this, there is also a First Home Savings Account (FHSA) which is new this year and a Registered Education Savings Plan (RESP) which in addition to tax free compounding receives a grant of 20% up to $500/year/kid (more for low income families).