Discover the value of investing early by considering RESPs, RRSPs, and TFSAs, all of which can add long-term value for investors
One of our key pieces of investment advice on the value of investing early is that you should take advantage, as early as is practical, of all registered savings plans—RRSPs, TFSAs, etc. RESPs are particularly attractive, if they apply to you, due to the government grants that come with them.
However, early in their investing careers, beginner investors have only a vague idea of the value of building an investment portfolio. These investment lessons provide some perspective on making better investment decisions.
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Look to investments like RRSPS, RESPs, and TSFAs and you can enjoy the value of investing early throughout your life
The value of investing early with RRSPs: RRSPs are the best-known and most widely used tax shelter in Canada. The tax treatment of RRSPs is what sets them apart from other investment accounts. Ottawa created RRSP tax shelters to let Canadians invest money on a tax-deferred basis, presumably for retirement.
You can put money in RRSP tax shelters each year (up to a limit based on your income) and deduct it from your taxable income. You only pay income tax on your investment, and the income it earns, when you make withdrawals from your RRSP.
In a way, investment gains in RRSP tax shelters give you a double profit. Instead of paying up to 50% of your investment gains in taxes, you keep 100% of them working for you until you take money out.
The value of investing early with TFSAs: These accounts let you earn investment income—including interest, dividends and capital gains—tax free. But unlike registered retirement savings plans (RRSPs), contributions to TFSAs are not tax deductible. However, withdrawals from a TFSA are not taxed.
You can now contribute a maximum of $6,000 to your TFSA each year. However, if you have not contributed in the past, or did not meet maximum contributions in any given year, you can catch up on unused contributions. (Maximums are $5,000 per year from 2009 to 2012, $5,500 per year from 2013 to 2014, $10,000 in 2015, $5,500 in 2016, 2017 and 2018, and $6,000 in 2019, 2020 and 2021.)
The value of investing early with RESPs: Registered education savings plans (RESPs) are one of the best ways to save for a child’s post-secondary education.
There are no annual limits for contributions to RESPs. However, RESPs have a lifetime limit (from birth to age 17) per child of $50,000. Only the first $2,500 of contributions per year to RESPs will receive a Canada Education Savings Grant (CESG) from the federal government. That’s up to a lifetime maximum of $7,200.
Contributions to RESPs aren’t tax-deductible like RRSP contributions, but the money does grow on a tax-sheltered basis. When the student withdraws the plan’s earnings, they are taxable to the student, not the contributors. However, students usually have little income and pay little or no tax.
All income earned in RESPs – whether it is in the form of dividends, interest or capital gains – grows on a tax-sheltered basis with no attribution back to the contributor. Contributions and Canada Education Savings Grants (CESGs) from the federal government are not taxable when withdrawn for the student’s education.
Create a diversified portfolio so you can get the full benefits and value of investing early
A diversified portfolio consists of investments spread across the five main economic sectors as well as a range of individual stocks.
Most investors should have investments in most, if not all, of the five sectors. The proper proportions for you depend on your temperament and circumstances.
Conservative or income-seeking investors may want to emphasize utilities and Canadian banks for their high and generally secure dividends.
More aggressive investors might want to increase their portfolio weightings in Resources or Manufacturing stocks. However, you’ll want to spread your Resource holdings out among oil and gas, metals and other Resources stocks for diversification within the sector, and for exposure to a number of areas.
Use our three-part Successful Investor approach to get the most value from all your investments
Invest mainly in well-established, mostly dividend-paying companies;
Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
Downplay or avoid stocks in the broker/media limelight.
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How early did you start investing, and how has it benefited you?
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Legal Notices and Disclaimers
The contents of this web site and our publications are based upon sources of information believed to be reliable, but no warranty or representation, expressed or implied, is given as to their accuracy or completeness. Any opinion reflects the Successful Investor’s judgment at the date of publication and neither the Successful Investor, nor any of its affiliated companies, nor any of their officers, directors or employees, accepts any responsibility in respect of the information or recommendations contained in the publications or on this web site. Moreover, the information or recommendations are subject to change without notice.
Information presented on this web site or contained in our publications is not an offer, nor a solicitation, to buy or sell any securities referred to on the web site or in the publications. The material is general information intended for recipients who understand the risks associated with an investment in any securities referred to in the publications or on this web site. The Successful Investor has made no determination regarding whether an investment, course of action, or associated risks are suitable for the recipient.
