The financial-service industry has so many different terms for the same thing, making it sound more confusing than it really is. But it’s not that complicated when you break the types of accounts into two broad types — registered and non-registered.
For example, a non-registered account can also be referred to as a taxable account, cash account or margin account. Some investors call it a taxable account because you are taxed on all the income it generates.
Some call it a cash account as it is essentially “after tax” money and you can generally access funds within this type of account with little or no tax consequences. Some investors have attached another signed “margin agreement” to enable them to borrow off the equity in the non-registered account. A margin account is still a non-registered account.
Deposits and withdrawals within non-registered accounts do not need to be reported. With non-registered accounts, investors can essentially deposit as much as they want into this type of account. All income earned and dispositions within a non-registered account must be reported by financial firms to the Canada Revenue Agency by either the end of February or end of March, depending on the type of income.
The term registered account essentially means that it is registered with the Canada Revenue Agency. Financial firms must report all deposit and withdrawal activity within these types of accounts every year because there are limits as to how much you can contribute to a registered account. Financial firms do not have to report interest, dividends, dispositions or purchases within registered accounts to CRA. Once funds are within the registered account, all income is tax sheltered. Firms must report all withdrawals from registered accounts. Withdrawals from a Registered Retirement Savings Plan and Registered Retirement Income Fund are considered taxable and a T4RSP or T4RIF slip is issued for the gross amount taken out of the plan as regular income. Withdrawals from a Tax Free Savings Account are not taxable.
In preparing for retirement, investors should have a balance between registered and non-registered accounts. The registered accounts provide deferral of income until pulled out. The non-registered provide liquidity for cash flow. When investors have a balance of both types, an adviser can map out the desired cash flow while smoothing out long- term taxable income at the optimal marginal tax bracket.
We refer to the non-registered account as a funnel account. Items that go into the funnel are external deposits from inheritances, selling real estate and registered account withdrawals. Items that come out of the funnel account are annual contributions to the TFSA, and periodic cash flow needs to live off that are transferred automatically from the investment account to the bank account.
Canadians who have RRSPs must convert their accounts to a RRIF at age 71, and then take a minimum payment, that is taxable, starting in the year they turn 72. In many cases, we recommend clients map out registered account withdrawals earlier than age 72 and at an amount greater than the minimum. Individuals that have periodic work, income which fluctuates, or considering selling an asset that would create a taxable event, are advised to hold off on any extra registered-account withdrawals until later in the year when they have a good projection of their taxable income. In some cases, if a client sells an asset that triggers higher than normal taxable income, we will definitely not pull extra funds out of registered funds. In fact, we may even explore the ability to make an RRSP contribution right up until the age of 71. Contributions later in life are not so much about deferral of tax as it is about smoothing out income with the end goal of paying as little income tax as possible during your lifetime.
Our next three columns will focus on the most common types of registered accounts for adults: Registered Retirement Savings Plans, Registered Retirement Income Funds and the Tax Free Savings Account.
Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with The Greenard Group at Scotia Wealth Management in Victoria. Call 250-389-2138.