Understanding essential investing terms

RRSPs: A Registered Retirement Savings Plan is a special type of account that shelters your retirement savings from tax. You need to build up contribution room by earning income in Canada for a year or two before you can contribute. You don’t pay income tax on the money you contribute to your RRSP each year, and your money can compound tax-free. But you pay tax on withdrawals when you take the money out. This is a great savings tool for people making $40,000 or more. TFSAs: Tax-Free Savings Accounts are popular with newcomers, as you don’t have to build up contribution room before you can use them. You can contribute $5,000 during your first year in Canada as long as you’re over 18 years old, have a valid social insurance number and are a resident of Canada. Your contribution room will then grow at the rate of $5,000 each year. You have to pay income tax on the money you put in, but you won’t have to pay tax on any interest, dividends or capital gains earned on investments in the account, even when you take out the money. RESPs: Registered Education Savings Plans are a great saving tool to help put a child through university or college in Canada. Each year you contribute, the government will put up to $500 a year in grant money into the RESP, with a lifetime limit per child of $7,200. The money grows tax-free while inside the RESP. When the money is taken out, the student pays the tax, if any. Mutual funds: These popular investments pool money from different investors, which is then put in a single portfolio of stocks and bonds which is overseen by an investment manager. You can benefit from instant diversification and professional money management, but be warned: in Canada, mutual fund fees—money taken out of the fund to pay managers and other expenses—are among the highest in the world. Look for a bond fund with a management expense ratio (MER) of 1% or less, and an equity (stock) fund that charges 1.5% or less. Avoid funds that levy a deferred sales charge (DSC) if you sell the fund too early.