- How to choose the right account type
- Set investing goals you can hit
- How to get started
Remember the first time you drove a car? Odds are before getting behind the wheel, you’ve been in cars thousands of times. Likely, it was the same old car you’ve been driven around in for years. But something about being in control and being the one responsible can be nerve-wracking.
Investing for the first time can feel the same way as driving a car. Most likely, you’ve had someone handling your investments for you. They were controlling the car and you were just along for the ride.
Whether you’re looking to take control of your investments or you’re starting from scratch, the thing to remember is millions of people invest, just like millions of people drive a car. And everyone started at the same point as you. Learning the basics and getting comfortable starts with opening an investment account.
No matter where you’re starting from, you want to make the right decision when it comes to your investments and it begins with choosing the right account for your investments.
What accounts can I use to invest?
Accounts fall into two categories: registered accounts and non-registered accounts. Accounts are like baskets, they can all hold investments like stocks, options, ETFs (exchange-traded funds), mutual funds, and more.
While there are many types of accounts, we’ll cover the three most popular accounts people open at Questrade: RRSPs, TFSAs and margin accounts.
Registered Accounts (RRSP, TFSA, etc.)
A registered account is a specialized account that comes with government benefits which can include tax sheltering, income tax deductions, or tax-free capital gains.
A Registered Retirement Savings Plan is primarily for retirement saving. Other than a few exceptions (like the Home Buyers’ Plan and Lifelong Learning Plan), you can’t withdraw from your RRSP until retirement or you’ll be faced with early withdrawal penalties. You can open an RRSP up until you’re 71 as long as you have earned income and filed your tax return.
There are two major advantages of RRSPs:
- Tax-deductible contributions:commonly thought of as a way to get tax-refunds. These are a mainstay with RRSPs and part of the reason why they’re so popular. When you make a deposit into your RRSP, the amount comes off your taxable income for the year, and you could receive money back from the government at tax time.
- Tax-sheltered earnings: the investments in your RRSP grow tax-free. So you benefit from years of compound growth without having the tax-man reaching in while it’s in the account. However, when you retire you will have to pay taxes on the money you withdraw.
Because of these advantages, the government limits the amount you can put into your RRSP. You can deposit 18% of your earned income in the previous year (up to a maximum $26,230 for 2018). Also, any leftover room from previous years will carry over. And if you’re a member of a pension plan, your pension adjustment will reduce the amount you can contribute to your RRSP.
Did you know?
Some people hesitate before opening an RRSP because they already have one elsewhere. Many people don’t know you can open a second RRSP. However, you will not receive any new contribution room, so you should make sure you have room to make an RRSP contribution. It’s a popular way people try Questrade before moving their entire nest egg.
The Tax Free Savings Account is a new account in Canada but has quickly become a favourite with investors at Questrade. Like an RRSP, it comes with awesome tax advantages.
While money you deposit won’t get you a cheque at tax time from the government, you also won’t have to pay tax when you withdraw.
The money in the account is also tax-sheltered, a.k.a. free to grow without taxes. However, some investments (like dividends paid by U.S. stocks) do not qualify and taxes will be withheld from you.
In this account, you don’t have to use it for retirement, you can withdraw the money tax-free at any time. That’s why this account is used for many different financial goals, like buying a house, paying for a wedding, or a going on a big vacation.
Again there is a limit to the amount you can contribute. Contribution room begins at age 18. If you were already 18 when it was introduced in 2009 and have never made a deposit, you would currently have $69,500 of room. If you turn 18 in 2020, you only have $6,000 in room.
Here are the contribution limits for each year since 2009:
Like an RRSP, you can have multiple TFSAs, as long as your total deposits across all these accounts do not exceed your contribution limit.
Unlike a registered account, non-registered accounts don’t offer you any tax sheltering or tax-free gains, but also don’t have limits for deposits.
A margin account is a type of investing account that allows you to borrow funds from the brokerage to invest. Known as “borrowing on margin” this kind of investing comes with benefits and risk.
Benefits of a margin account:
- No contribution limits: a key feature for anyone who has maxed out their registered accounts.
- Short selling: a way to make money when the price of a stock drops. Going short on a stock is an advanced trading strategy and is not allowed in registered accounts.
- Leverage: you can buy securities (like stocks) with much less initial money required by borrowing the rest. Much like the way we buy real estate through a mortgage.
Risks of a margin account:
- Unlike registered accounts, you will pay capital gains tax when you make a profit.
- You will be charged interest on the amount you borrow.
- o If your position falls below the minimum margin requirement, it will trigger a “margin call” where you will need to add more cash to your account or sell the security to cover a certain amount owed.
Margin accounts are typically reserved for more active traders. At Questrade, we do not automatically convert currencies when entering a position. If you’re buying a U.S. security in your margin account, and you don’t have enough U.S. dollars available, you will borrow the funds (and be charged interest) unless you request to exchange the funds in your account.
Set investment goals you can hit
The account you open can depend on your financial goals.
When it comes to figuring out your goals, first consider these four factors:
- What you own (your assets)
- What you owe (your debts)
- What you earn (your income)
- What you spend (your expenses)
Once you determine your current financial situation, you can set more specific goals like saving $3,000 for a dream vacation or saving $40,000 for your daughter’s education.
The S.M.A.R.T. goal setting method is a great tool to help define investment goals. SMART stands for:
- Specific: What exactly do you want to do with this money and how much do you need to make it happen?
- Measurable: What can you do to track progress and make sure you’re getting closer to your goal? (Like saving a specific dollar amount by a certain day.)
- Agreed-upon: Who else needs to know about your goals and be aligned with them? (Like agreeing with your fiancée about a wedding budget.)
- Realistic: Can you actually reach your target?
- Time-bound: How long are you going to give yourself to achieve this goal?
Use this method to figure out your goal and you’ll be even more confident when opening your account.
What You Need to Open an Account
Now that you know the most popular investment accounts and how to determine what you’re investment goals are, you’re all ready to open your account.
Opening an account at Questrade is fast, easy and can be done entirely online.
You’ll need your SIN card and a photo ID (like a driver’s licence). For registered accounts, more documents may be required.
When you open an account at Questrade, you’re never on your own. Whether you’re a brand new investor or have been investing since 1999, our award winning customer service specialists are here whenever you need us. Give us a shout at 1.888.783.7866, shoot us an email or reach out through chat. We’re happy to help you finish opening your account or answer any questions about investing.
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