The Three Investments Every Canadian Needs

   There are 3 essential investing accounts for anyone looking to become financially independent.

   Each of these accounts have their own advantages and disadvantages, but put together, they form an important foundation for your financial dreams and plans.

   The 3 accounts you need are, a Tax-Free Savings Account (TFSA), a Registered Retirement Savings Account (RRSP), and an unregistered investment account.

Why These Three Accounts?

   While there are several important factors at play for successful investing, there are two that you can directly control. The amount that you invest, and the length of time in the markets. These three accounts provide several key benefits, helping hit those key levers.

Tax-Free Savings Account (TFSA)

   The TFSA is one of the most important accounts for Canadians. Being tax-advantaged, it helps you minimize taxes paid on growth. As a result, your invested dollars stretch further than they would in an unregistered account.

   This works by contributing after-tax dollars, similar as you would in an unregistered account. But the perk here is that because those funds are already taxed, you won’t pay tax again on withdrawals, including any associated investment growth.

   Of course, with such an incredible tax saving, the government limits the amount that you can put in, to a cumulative lifetime limit based on your length of residency in Canada. If you’ve been eligible since the account creation in 2009, you can contribute up to $75,500.

   This account should be used early and often to minimize taxes paid on investment growth – the sooner you can max out this account, the more you can let time play its role, capitalizing on the compound growth over time, all tax-free.

   With more money in your pocket after taxes, the TFSA is an investment account that every Canadian needs to have.

Registered Retirement Savings Account (RRSP)

   Your RRSP is the second account you need in your quest for financial independence.

   The RRSP is again tax advantaged, this time as a tax deferral. Instead of contributing after-tax dollars, any contributions made to your RRSP help reduce your taxable income for the current year. This means you pay less tax now, and have more funds to contribute to your investments.

   Of course, the government always gets paid. Instead of paying taxes now, you pay your income taxes on withdrawal in the future. Unlike the TFSA mentioned above, taxes paid on the RRSP also include paying taxes on investment growth.

   Increasing the amount you can contribute, through the powerful tax deferral mechanism, helps you put more money into the markets to take advantage of additional compounding over time.

   Once again, this investment account has a limit, this one based on your total income. You can contribute up to 18% annually, with unused contributions saved for contributions in the future.

   This account also has the advantage of being tax-advantaged in the United States as well, which means that any investments made in US markets are subject to less foreign withholding taxes. Given the relative size of the US markets over Canadian markets, this opens up substantially more investment opportunities without those pesky taxes.

Unregistered Investment Accounts

   To round out the trio of investment accounts, you’ll need just a simple investment account.

   This account doesn’t have any perks of course, no tax deferrals, no special treatments. But, it also has no limits.

   Unfortunately, the two accounts mentioned above, the TFSA and RRSP, both have investment contribution limits. Those limits mean that those accounts alone likely won’t be sufficient to reach financial independence, and require to be supplemented by additional investments.

   By maxing out your TFSA and RRSP contributions, you capitalize on the tax savings that are available to you. The rest of the journey comes down to consistent, hard work, and your third necessary account for financial independence, the unregistered investment account.