Understanding the different savings plans

RRSP, RRIF, LIF, TFSA… How can you tell all the different savings plans apart? Should you invest in a savings plan or in an investment product? What’s the difference between a savings plan and an investment product? How do you use savings plans effectively? Can you include any investment product in any savings plan?

Savings plans and investment products

Savings plans, whether they are registered or not, are accounts created by government into which you can deposit investment products. Their use is governed by rules that reflect the different tax advantages they present. And, the annual allowable amounts of tax-deductible deposits vary from one savings plan to another.

Several types of investments can be included in these savings plans, but regulatory or administrative constraints may exclude others.

Choosing the right plan

First, as an investor you have to define the financial product that best suits your profile, risk tolerance and investment horizon. For short-term projects, that is projects you intend to carry out within a 3-year period, it’s preferable to invest in more secure savings products, such as redeemable term savings certificates, money market fund securities or savings accounts.

For longer term projects, you can opt for investments whose value may fluctuate but whose return potential is superior, such as market-linked guaranteed investments, mutual fund units and mutual fund portfolio holdings.

You can then include the investment you’ve decided on in a plan that provides the appropriate tax advantages. Ideally, because investment income (interest, dividends, etc.) is subject to a higher tax rate than capital gains, it’s wise to make sure that income generating investments (deposit certificates, bonds, income fund securities) are held in a plan, while securities that generate higher capital gains, such as stocks and equity fund units, are held outside a plan.

Your investment advisor or financial planner can provide advice that is perfectly adapted to your situation.

Project-based priority plans

Short-term projects

Short-term projects	Plan	Tax treatment	Investment tool
(3-year horizon)
- Travel - Buy a vehicle - Renovate the house	Tax-free savings account (TFSA) or outside a plan	Contributions are not tax-deductible, but returns are not taxable. There are no restrictions on the use of amounts withdrawn from a TFSA. Renovation projects can be financed with savings from a TFSA or non-registered account.	Investments must factor in the time required for the project to be carried out. For short-term projects, with a 3-year horizon, your selection should include investments whose value may fluctuate (fixed-term deposits, money market fund securities or short-term bond fund units).
- Change employment	Locked-in retirement account (LIRA)	If you change employment, the current value of your retirement plan can be transferred into a LIRA. The amount is locked-in and must later be transferred into a Life Income Fund (LIF).	The composition of your investment portfolio is based on the number of years to retirement.
Return to school	Registered Retirement Savings Plan (RRSP), TFSA	The terms and conditions for RRSP withdrawals and fee repayments for returning to school are set out by Canada Revenue Agency under the Lifelong Learning Plan (LLP). Amounts accrued in a TFSA can also be used. In that case, withdrawals are not taxable.	These projects generally require short-term planning. Investments whose value will not fluctuate, such as fixed-term deposits, money market fund securities or short-term bond fund units, are preferred.

Long-term projects

Long-term projects	Plan	Tax treatment	Investment tool
(more than 3-year horizon)
- Plan a child’s education	Registered Education Savings Plan (RESP)	Contributions are not tax-deductible, but returns are not taxable. Withdrawals must be used to pay for the beneficiary’s postsecondary studies.	Investments must be adapted to the length of the period leading up to withdrawal and should therefore be based on the age of the beneficiary.
- Buy a house, cottage or condo	RRSP, TFSA	Sums accrued in an RRSP can be used to buy a first home. The terms of the Home Buyers Plan (HBP) are established by Canada Revenue Agency.	The selection of investments to include in an RRSP must be adapted because this type of project is shorter term than retirement. Therefore, the investments in your RRSP must be more secure if you plan to take advantage of the HBP.
- Plan your retirement	Registered Retirement Savings Plan (RRSP)	Thus, the plan serves to defer taxes on certain types of income. The maximum annual amount of contributions is limited to a percentage of income and takes into account contributions to a pension fund.	The number of years to retirement is very important in determining the composition of your investment portfolio.
- Retire	Registered Retirement Income Fund (RRIF) and LIF	These plans receive the funds from converted RRSPs and LIFs. They are subject to an annual minimum taxable withdrawal.	At this stage of your life, it’s wise to choose more secure investment products. The portion of your portfolio invested in growth stock should be much smaller.

Other plans not covered in this capsule are the Deferred Profit-Sharing Plan (DPSP), the Individual Pension Plan (IPP) and the Simplified Pension Plan (SIPP). Your investment advisor or financial planner can provide you with information concerning them.