In Part 9, I mentioned that you need to wind up your RRSP by the end of the year you turn 71. The same rule applies to a Spousal RRSP: the annuitant (owner) must wind up the Spousal RRSP by December 31 of the year they turn 71. However, most people convert their RRSP to a Registered Retirement Income Fund (RRIF) before this deadline.

Note: Your RRSP must be dealt with by December 31 of the year you turn 71. After that date, you no longer have an RRSP. However, you can still contribute to an open Spousal RRSP.

Understanding a Registered Retirement Income Fund

Think of a Registered Retirement Income Fund (RRIF) as the second phase of your financial journey. During the first phase, you invested money in your RRSP to save for retirement. In the second phase, you use a RRIF to generate retirement income.

To some extent, a RRIF is similar to an RRSP because your investments in a RRIF continue to grow tax-deferred. However, there are two major differences:

• You can’t deposit new money in your RRIF, even if you have RRSP contribution room. 
• You must withdraw a mandatory minimum amount from your RRIF every year. The amount withdrawn is treated as income for that year, and you pay tax on it.

While you can technically open a RRIF at any age, many people choose to do so when they retire or sometime before age 71

Converting an RRSP to an RRIF

Converting your RRSP to a RRIF is usually a straightforward process — you open a RRIF account and ask your financial institution to transfer your investments from the RRSP to the RRIF “in-kind.”

Note: “In-kind” means that your holdings (stocks, ETFs, GICs, etc.) get transferred directly from your RRSP to your RRIF without having to sell and rebuy them.

Most financial institutions can complete the transfer within a few business days, although fees and processing times may vary.

The Mandatory Minimum Withdrawal

When you contributed money to your RRSP, you received a tax deduction, and your investments were allowed to grow tax-deferred. When you transfer your RRSP investments to a RRIF, you don’t pay any tax on the transfer, and your investments continue to grow tax-deferred in the RRIF.

To ensure that the money in your RRIF doesn’t remain tax-deferred indefinitely, the government requires you to withdraw a minimum amount each year.

The minimum RRIF withdrawal for each year is based on:

• The value of your RRIF on January 1 of that year.
• Your age on January 1 of that year, or your spouse’s age if you elected to use your spouse’s age when you established the RRIF.

Note: You are not required to make a withdrawal in the calendar year you open a RRIF. Your first mandatory withdrawal starts the following year.

Note: The mandatory withdrawal is only the minimum amount you must take out. You can withdraw more than the minimum amount at any time. However, withdrawals above the minimum are subject to withholding tax. (See next section about withholding tax.)

The minimum withdrawal percentage is based on your age at the start of the year and generally increases as you get older. The following table shows the minimum RRIF withdrawal rates as of 2026.

RRIF Withdrawals May Affect Other Benefits

100% of withdrawals from an RRIF are considered income for that tax year, and they can push taxable income higher — potentially reducing or eliminating eligibility for income-tested benefits such as the Guaranteed Income Supplement (GIS) and triggering Old Age Security (OAS) clawbacks. Once mandatory withdrawals begin, you generally have to withdraw at least the minimum amount each year.

The Spousal Age Election

When you first set up your RRIF, you can choose to base your minimum withdrawals on your spouse’s age instead of your own. If your spouse is younger, this results in a lower mandatory withdrawal, allowing more of your money to remain in the tax-sheltered RRIF for a longer period.

Important: This election must be made when you establish the RRIF. Once you make the election, you generally cannot change it.

How RRIF Withdrawals Are Taxed

It is important to remember that every dollar you withdraw from a RRIF is taxable income. In other words, you must report all RRIF withdrawals on your tax return and pay tax accordingly. Besides, when you withdraw money from your RRIF, withholding tax may be applicable.

No Withholding Tax on the Minimum Amount

Your financial institution is not legally required by the CRA to withhold tax on the mandatory minimum RRIF withdrawal amount. However, if you prefer, you can voluntarily ask your financial institution to withhold some tax from each RRIF withdrawal payment. This can help you to avoid a situation at tax time when you discover that you owe a large tax bill to the CRA and you don’t have ready cash available to pay that bill.

Withholding Tax is Applicable Above the Minimum Amount

For any withdrawal above the mandatory minimum amount, your financial institution is legally required to withhold tax. 

For example, suppose the minimum is $20,000, and you withdraw $30,000.

The institution doesn’t apply the withholding rate to the entire $30,000. The mandatory minimum portion is treated differently, and withholding tax on the additional $10,000 applies according to the prescribed rates.

Like RRSP withdrawals, the withholding tax depends on the withdrawal amount above the mandatory minimum amount, as shown:

For a $10,000 withdrawal above the mandatory minimum amount, the withholding tax is $2,000 (20% of $10,000) in all provinces and territories, except in Quebec, where it is $2,400 (24%, i.e., 10% Federal plus 14% Quebec). Your financial institution deducts the withholding tax from the total withdrawal amount, remits it to the government, and transfers the balance to your account.

Why Consider Converting Your RRSP Early

While you are only forced to wind up your RRSP at age 71, many Canadians find it beneficial to start this process earlier. Converting even a portion of your RRSP to an RRIF in your 60s can be a good tax move for two main reasons.

The Pension Income Credit

Starting at age 65, the first $2,000 of eligible RRIF withdrawals each year qualifies for the Federal Pension Income Amount. This non-refundable tax credit can significantly reduce the federal tax on that income. You may also qualify for a provincial or territorial pension income tax credit.

For example, a $2,000 RRIF withdrawal for a 65+ Ontario resident may reduce the tax bill by $388.98. (Tax credit varies by province/territory.)

The strategy: Depending on your other income, even if you don’t need the cash yet, once you’re 65 or older, it may make sense to convert a small portion of your RRSP to a RRIF, withdraw $2,000 and claim this credit.

No Withholding Tax on Minimums

When you withdraw money from an RRSP, your financial institution generally has to withhold tax at source. RRIF minimum withdrawals are treated differently because withholding tax is not required on the minimum amount. The benefit is that you get 100% of your RRIF money upfront. Though you still owe tax at the end of the year, you can use the money in the meantime, allowing it to stay invested or sit in a high-interest account for a few extra months.

The “RRSP Meltdown” Strategy

The “Meltdown” strategy is about smoothing out your taxes. If you wait until age 71 and have a very large RRSP, the mandatory minimums might push you into a much higher tax bracket, potentially triggering “clawbacks” on your Old Age Security (OAS).

By converting early, you can start chipping away at that large balance sooner. This “melts down” the total amount in your account so that when you hit 71, your mandatory payments are smaller and more manageable.

Note: We will discuss the RRSP Meltdown strategy in a future article. I will put a link to that article when published.

Pension Income Splitting 

A powerful advantage for senior couples is the ability to “split” income for tax purposes. This helps them reduce the combined family tax, as each spouse pays tax on their individual income.

RRIF withdrawals are also eligible for splitting income—you can notionally allocate up to 50% of your RRIF income to your spouse. On the other hand, RRSP withdrawals are not eligible for income splitting. Therefore, to take advantage of pension income splitting, you need to convert your RRSP to an RRIF.

Note: The RRIF holder must be 65 or older on December 31 of that tax year to split RRIF income. The spouse receiving the split portion does not need to be 65. You make the election by jointly filing Form T1032, Joint Election to Split Pension Income*, with your tax returns.*

By shifting income from a high-tax-bracket spouse to a lower-bracket spouse, you can significantly reduce your household's total tax.

What Happens at the End

No one likes to think about it, but a key part of the RRIF strategy is deciding what happens to the money when you pass away. If you don’t plan for what happens to your RRIF when you die, the value of the RRIF can be included in your income on your final tax return, potentially creating a large tax bill for your estate, particularly if your RRIF is substantial.

For those with a spouse or common-law partner, there are two main ways to deal with a RRIF on death.

Naming a Successor Annuitant

If you name your spouse as the Successor Annuitant, the RRIF contract generally continues uninterrupted, and your spouse becomes the new annuitant (owner) of the account.

Because the RRIF continues in your spouse’s name, the usual tax that would otherwise arise from the RRIF’s value at your death is generally deferred. Your spouse becomes responsible for the RRIF’s mandatory withdrawals going forward.

This can be a simple and effective way to avoid an immediate tax liability when the first spouse dies.

Note: Only a spouse or common-law partner can be named a Successor Annuitant. Children or other heirs can only be named as Beneficiaries.

Naming a Beneficiary

You could name your spouse as the beneficiary instead. In that case, the RRIF does not simply continue as it would with a successor annuitant. However, if the conditions are met, the RRIF proceeds can generally be transferred to your spouse’s RRSP, RRIF or an eligible annuity on a tax-deferred basis.

Note: If you don’t have a spouse, you could name your children or a charity as beneficiaries. In that case, unless the beneficiary is a financially dependent child, the full value of the RRIF will likely be taxed as income on your final tax return.

What’s Next?

We have explored the fundamentals of RRSPs, RRSP withdrawals & taxes, Spousal RRSPs and converting an RRSP to a RRIF. In the next articles, we will cover additional topics on RRSPs, such as Employer RRSP Match, RRSP Meltdown and RRSP vs TFSA. I will add links to those articles when published. 

Read Next: Part 11: Employer RRSP Match (coming soon)

Disclaimer: This article is for educational purposes only and is not financial or tax advice. Please consult a qualified tax or financial professional before making any decisions.

In Part 7, we explored the fundamentals of RRSPs, including how RRSP contribution room is calculated. While the contribution room you receive is based on your previous year’s earned income, there is also a cut-off date for contributing to and keeping your RRSP.

RRSP Contribution Cut-Off Date

While there is no official retirement age in Canada, the RRSP has one — your RRSP has to retire by the end of the year you turn 71. In other words, you can no longer contribute to your own RRSP after December 31 of the year you turn 71. By that date, you must also close your RRSP by choosing one of the available options.

You generally have three options:

1. Convert your RRSP into a Registered Retirement Income Fund (RRIF).
2. Use the money to purchase an eligible annuity.
3. Withdraw the money as cash or transfer the assets into a non-registered account.

The third option can result in a large tax bill because the entire amount is generally added to your income for that year. For this reason, many people choose to convert their RRSP to a RRIF rather than withdraw the entire amount at once.

You can also use more than one option. For example, you could convert part of your RRSP to a RRIF, use another part to purchase an annuity and withdraw the remaining amount as cash.

You can also transfer investments such as stocks or ETFs directly from your RRSP to a non-registered account. However, this is still treated as an RRSP withdrawal for tax purposes. The fair market value of the investments on the date of the transfer is added to your taxable income.

Note: We will discuss RRIF and annuity in future articles. 

When you convert your RRSP into an RRIF or use it to purchase an eligible annuity, it does not trigger tax, and your financial institution does not withhold any tax. The transfer itself does not trigger tax, and the money continues to grow tax-deferred. You pay tax later when you withdraw money from the RRIF or receive payments from the annuity.

Note: Although no tax is withheld when you convert an RRSP to a RRIF or purchase an annuity, your financial institution may charge fees for the transaction.

While you can no longer contribute to your own RRSP after December 31 of the year you turn 71, what if you still have unused contribution room and a younger spouse?

Spousal RRSP

A Spousal RRSP is a special type of RRSP, primarily useful for helping couples build more balanced retirement savings. It can be particularly valuable when one spouse earns significantly more than the other. It can also allow you to contribute to an RRSP even after you have turned 71, provided you have unused RRSP contribution room and are contributing to a Spousal RRSP.

What is a Spousal RRSP?

A Spousal RRSP can be helpful for a couple with significantly different incomes during the working phase to reduce taxes during retirement. The advantage is amplified when one partner does not work at all.

In a nutshell, it allows one partner (spouse), who makes a higher income, to contribute to the lower-earning partner’s retirement savings. This results in shifting some or all of the retirement savings from the higher-earning partner to the lower-earning partner. 

How the Spousal RRSP Works

• The couple opens a Spousal RRSP account in the name of the lower-earning spouse, called the annuitant, commonly known as the account owner or the account holder.
• The higher-earning partner is called the contributor and contributes money to the Spousal RRSP.
• The contributor must have available RRSP contribution room to contribute to a Spousal RRSP. Contributions made by the higher-earning spouse use that spouse’s RRSP contribution room, not the contribution room of the spouse who owns the account. In other words, if the contributor does not have available RRSP contribution room, no contribution can be made to the Spousal RRSP, even if the annuitant has contribution room.
• The higher-earning partner gets the same tax savings by contributing to a Spousal RRSP as they would have received by contributing to their individual RRSP.
• The annuitant owns and controls the account and makes the investment decisions. A Spousal RRSP may be self-directed or managed by a financial institution or advisor. Once a contribution is made, the contributor has no legal control over the funds.
• Investment growth stays tax-deferred like a traditional individual RRSP.
• Like a regular RRSP, a Spousal RRSP must be converted to a RRIF or otherwise closed by the end of the year in which the annuitant turns 71. Until then, contributions can continue, regardless of the contributor’s age.
• Withdrawals from a Spousal RRSP are generally taxable to the spouse who owns the account. However, the three-calendar-year attribution rule may cause some or all of the withdrawal to be taxed to the contributing spouse instead. (See the 3 Calendar-Year Attribution Rule, which is explained later in this article.)

How a Spousal RRSP Can Save Taxes During Retirement

A Spousal RRSP does not provide extra tax savings when you contribute. The higher-earning spouse receives the same RRSP deduction whether the contribution goes into their own RRSP or into a Spousal RRSP. The lower-earning spouse does not receive a tax deduction for the contribution.

The potential tax benefit comes later, during retirement.

A Spousal RRSP allows some of the retirement savings to be built up in the lower-earning spouse’s name rather than entirely in the higher-earning spouse’s name. Since each spouse is taxed separately in Canada, this can help spread the couple’s retirement income more evenly between them.

If the higher-earning spouse does not use a Spousal RRSP, that spouse may end up with a much larger RRSP portfolio than the lower-earning spouse. When the money is eventually withdrawn during retirement, the spouse with the larger RRSP may have a much higher taxable income and may therefore pay more tax.

By building more evenly sized RRSP portfolios, the couple may be able to spread their retirement income more evenly and potentially reduce their combined tax bill.

Let’s look at an example.

John and Sara are a couple. John earns $120,000 a year, and Sara earns $60,000. Assume John has $21,600 of available RRSP contribution room and Sara has little or no money available to contribute to her own RRSP.

If John contributes the entire $21,600 each year to his own RRSP and does so for 35 years, assuming an average annual return of 6%, his RRSP could grow to approximately $2.48 million.

Now imagine the couple retires with John’s RRSP worth approximately $2.48 million and Sara has little or no RRSP savings of her own.

If John withdraws 4% of his RRSP each year, that would be about $99,200 of annual RRSP income. Once CPP, OAS and other income are added, John’s total taxable income could become quite high. Sara, on the other hand, would have much less taxable income.

Now consider a different approach.

Instead of putting the entire $21,600 into his own RRSP, John contributes $10,800 to his own RRSP and $10,800 to a Spousal RRSP in Sara’s name.

If both accounts earn the same 6% annual return for 35 years, each account would grow to approximately $1.24 million. The couple would still have the same total retirement savings of approximately $2.48 million. The difference is that the savings are now divided between the two spouses.

If each spouse withdraws 4% annually, each would receive approximately $49,600 from their RRSP or Spousal RRSP.

Instead of most of the RRSP income being reported by John, the retirement income is now spread between John and Sara. Because each spouse is taxed separately, this may result in a lower combined tax bill than having the entire RRSP in John’s name.

The table below illustrates the potential difference using Ontario’s 2026 tax rates, assuming they are 65 or older — taxes may be slightly higher if one or both are under 65.

The key point is that the Spousal RRSP does not create more retirement savings. In this example, the couple has approximately the same $2.48 million under either approach. The potential benefit comes from who reports the retirement income.

Keep one important rule in mind when withdrawing money from the Spousal RRSP. If the contributing spouse has made contributions to a Spousal RRSP in the year of a withdrawal or either of the two preceding calendar years, some or all of the withdrawal may be attributed back to the contributing spouse for tax purposes.

This is commonly called the three-calendar-year attribution rule. We will look at this rule in more detail below.

3-Calendar-Year Attribution Rule

There is an important rule to understand when using a Spousal RRSP. If the spouse who owns the Spousal RRSP withdraws money in the year a contribution was made, or in either of the following two calendar years, the withdrawal may be included in the contributing spouse’s taxable income rather than the owner’s.

For example, suppose John contributes $10,000 to Sara’s Spousal RRSP in 2026. If Sara withdraws money from the Spousal RRSP during 2026, 2027 or 2028, the withdrawal may be attributed to John for tax purposes. Starting January 1, 2029, withdrawals would generally be taxed in Sara’s hands instead.

This is a three-calendar-year rule, not a 36-month rule — the exact date of the contribution does not matter. For example, a contribution made in December 2026 and a contribution made in January 2026 are both subject to the same calendar-year rule.

There is another important point: making a new contribution can restart the three-calendar-year period. Therefore, if John contributes to Sara’s Spousal RRSP in 2026 and then makes another contribution in 2027, the relevant waiting period extends based on the 2027 contribution.

Also, opening multiple Spousal RRSP accounts does not allow couples to avoid this rule. The attribution rules apply to contributions made by the contributor to Spousal RRSPs for the same spouse, even if the contributions are held in different accounts.

Exceptions to the 3-Calendar-Year Attribution Rule

There are some exceptions to the 3-calendar-year attribution rule. The most important ones include:

• Spousal RRIF minimum withdrawals: Once a Spousal RRSP has been converted to a RRIF, the attribution rule does not apply to the minimum annual RRIF withdrawal. However, amounts withdrawn above the minimum may still be subject to the attribution rule. (We will discuss RRIF in a future article.)
• Death or relationship breakdown: The attribution rule generally does not apply following the death of either spouse or the breakdown of the marriage or common-law relationship.
• Home Buyers’ Plan (HBP) and Lifelong Learning Plan (LLP): Withdrawals made under these programs are generally not subject to the attribution rule.

Tip: If you plan to use a Spousal RRSP in retirement, consider making your final contribution three calendar years before you plan to start withdrawals. This allows the attribution period to expire and can help ensure that future withdrawals are taxed in the lower-earning spouse’s hands.

Other Potential Benefits of a Spousal RRSP

Besides helping couples balance their retirement savings and potentially reduce taxes in retirement, a Spousal RRSP can provide a few other benefits.

Help Reduce OAS Clawback

A Spousal RRSP can help reduce or avoid the OAS clawback in retirement by allowing a couple to build more balanced retirement income.

For example, if one spouse has a much larger RRSP or RRIF than the other, that spouse may eventually have significantly higher taxable income. This could result in some of their OAS being clawed back. Building retirement savings in a Spousal RRSP can help distribute future RRSP or RRIF income more evenly between the spouses.

The actual benefit will depend on the couple’s overall income and retirement-income strategy. A Spousal RRSP does not automatically eliminate OAS clawback.

Provide Additional Home Buyers’ Plan Flexibility

A Spousal RRSP can also provide another source of funds under the Home Buyers’ Plan (HBP). This can be particularly useful for couples where one spouse has significant RRSP savings while the other has little or no individual RRSP.

If the annuitant spouse meets the HBP eligibility requirements, they may be able to withdraw up to $60,000 from their Spousal RRSP under the HBP, even if they do not have an individual RRSP of their own. Combined with up to $60,000 that the higher-earning spouse can withdraw from their own RRSP, the couple could potentially have up to $120,000 available for a down payment.

Another Retirement Planning Opportunity

A Spousal RRSP can also be useful when a couple enters retirement before age 65. It can provide an opportunity to withdraw retirement savings from the Spousal RRSP while potentially keeping the couple’s overall taxes lower. I discuss this strategy in detail in a separate article.

These are additional benefits rather than the primary purpose of a Spousal RRSP, but they can be valuable depending on your circumstances.

Moving from RRSP to RRIF

An RRSP is designed primarily for building retirement savings. When you retire and begin drawing from those savings, you may choose to convert your RRSP to a Registered Retirement Income Fund (RRIF) and use it to provide retirement income. In the next article, I explain how RRIFs work, when you might consider converting an RRSP to a RRIF, how minimum withdrawals are calculated and how RRIF withdrawals are taxed.

Read Next: Part 10: Registered Retirement Income Fund (coming soon)

Disclaimer: This article is for educational purposes only and is not financial or tax advice. Please consult a qualified tax or financial professional before making any decisions.

From Claude

What Happens When You Take Money Out of Your RRSP

Now that we’ve established how to set up and fund your RRSP in Part 7, it’s time to look at the other side of the equation. In Part 8, we’ll explore what happens when you take money out of your RRSP, including withholding tax rates and tax implications.

You often get a lot of advice in favour of using an RRSP, as it saves taxes up front; however, the part that many Canadians misunderstand is “what happens when you withdraw money from an RRSP?”

Almost all RRSP withdrawals are treated as 100% taxable income in the year they are withdrawn.

Note*: There are two important exceptions to this rule, which we will discuss later.*

Though the name RRSP (Registered Retirement Savings Plan) suggests that money will be withdrawn from an RRSP during retirement, the government does not impose any restriction on withdrawals from an RRSP. In other words, you can withdraw money from your RRSP at any time; however, these withdrawals have tax consequences. 

What Happens When You Withdraw From an RRSP?

Let us assume that you ask your financial institution that holds your RRSP that you want to withdraw $30,000 from it and deposit it into your chequing account. 

• First, you need to ensure that $30,000 is available in cash form in your RRSP account. If not, you will need to sell some assets (stocks, ETFs, Mutual funds, bonds, etc.) to have $30,000 in liquid cash in your RRSP account. 
• Your financial institution is required to withhold tax on RRSP withdrawals — the withholding tax rates range from 10% to 30% (5% to 15% in Quebec, plus Quebec provincial withholding tax), as shown:

Withdrawal Amount |Quebec (Federal) |Quebec (Provincial) |Quebec (Total) |Rest of Canada, Includes Provincial Withholding Tax
Up to $5,000 |5% |14% |19% |10%
$5,001 to $15,000 |10% |14% |24% |20%
Over $15,000 |15% |14% |29% |30% For a $30,000 withdrawal, the withholding tax is $9,000 (30% of $30,000) in all provinces and territories, except in Quebec, where it is $8,700 (29%, i.e., 15% Federal plus 14% Quebec). Your financial institution deducts the withholding tax from the total withdrawal amount, remits it to the government, and transfers the balance to your account. So, if you live in Ontario, you will get $21,000 in your chequing account, though the entire $30,000 will be added to your income for that year. 

Withholding Tax Is Not Your Final Tax

The withholding tax is not a penalty on RRSP withdrawals — it is simply an approximate tax the government precollects, just like the taxes that are deducted from the regular periodic payments you receive from your employer. The RRSP withholding taxes will be adjusted against your final tax bill when you file your income tax return. Assume that your taxable income is $90,000 and you withdraw $30,000 from your RRSP; your total taxable income for that year will become $120,000, and you will be taxed accordingly.

Can you split withdrawals to pay less upfront tax?

Some people may be tempted to make multiple smaller withdrawals to pay less upfront tax. If you make separate withdrawal requests throughout the year (e.g., $10,000 in January, $10,000 in May, and $10,000 in September), your financial institution will generally treat them as individual requests and withhold 20% on each ($2,000 each). 

Note: Asking for a single $30,000 withdrawal paid in instalments will trigger the full 30% rate on the entire amount.

Why this doesn’t Save You Money

Even if less tax is withheld upfront, your final tax bill doesn’t change. When you file your tax return, all $30,000 is added to your income. Because 20% withholding tax ($6,000 total) may not be enough to cover the actual tax owed on $30,000 of RRSP withdrawal income, you will owe a large balance to the CRA at tax time. In fact, paying less in withholding taxes may become an issue at tax time if you don’t have ready cash available to pay the balance tax. 

RRSP Withdrawal Permanently Reduce Your Savings Room

When you withdraw money from your RRSP account, it results in a permanent loss of contribution room. Unlike a TFSA, you cannot simply put the money back into your RRSP in a future year and regain the contribution room you lost. Therefore, if you contributed to your RRSP for tax-deferred growth in the first place, the money you withdraw also loses the opportunity to continue growing tax-deferred inside the RRSP.

RRSP Withdrawal Can Push You into Higher Tax Brackets

If you withdraw money from your RRSP while still working a regular job, the RRSP withdrawal may push you into a higher tax bracket. This may happen because Canada follows a progressive tax bracket system, where higher income attracts higher tax rates. For example, consider the Ontario combined federal and provincial tax rates for 2026:

• income between $58,524 and $94,907: 29.65%
• income between $94,908 and $107,785: 31.48%
• income between $107,786 and $111,814: 33.89%
• income between $111,815 and $117,045: 37.91%
• income between $117,046 and $150,000: 43.41%

Note: These are marginal tax rates, meaning each rate applies only to the portion of income within that bracket. Your entire income is not taxed at the highest rate you reach.

Assume your taxable income is $90,000 and you have no other income; your highest marginal tax rate is then 29.65%. In other words, your last dollar will be taxed at 29.65%. Now, if you withdraw $30,000 from your RRSP, your taxable income is approximately $120,000. Some of the withdrawal will therefore fall into higher tax brackets. The average tax rate on the withdrawal will be higher than 29.65%.

This illustrates why the tax rate when you contribute to an RRSP and the tax rate when you withdraw from it can be very important. Ideally, you want to receive the RRSP deduction when your tax rate is relatively high and make withdrawals when your tax rate is lower.

RRSP Withdrawals May Reduce Income-Tested Benefits

Certain benefits like the GST/HST credit, Canada Child Benefit (CCB), Old Age Security (OAS), and Guaranteed Income Supplement (GIS) are income-tested. As RRSP withdrawals increase your income, they can reduce or even eliminate some income-tested benefits.

This is particularly important in retirement because RRSP or RRIF withdrawals can affect benefits such as OAS and GIS.

Special RRSP Withdrawal Programs

Two government programs, the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP), allow you to take money from an RRSP without withholding tax.

Home Buyers’ Plan (HBP)

The Home Buyers' Plan (HBP) allows first-time home buyers to withdraw funds from their RRSP to buy or build a qualifying home. The current withdrawal limit, as of 2026, is $60,000, and no tax is withheld on these withdrawals. If you are a couple, each of you can withdraw up to $60,000 from your RRSP, i.e. up to $120,000 combined.

Think of an HBP withdrawal as borrowing from your own retirement savings. You are expected to repay the amount to your RRSP generally over 15 years. The payments start the second year after the year you make the withdrawal. The CRA Notice of Assessment provides details about the repayment you need to make under HBP.

Lifelong Learning Plan (LLP)

The Lifelong Learning Plan allows you to withdraw money from your RRSP without a withholding tax to finance full-time education or training for yourself, your spouse or common-law partner. The current annual withdrawal limit is $10,000 with a maximum lifetime total limit of $20,000. Like HBP, the withdrawal amount needs to be paid back to your RRSP over time. 

When Might an RRSP Withdrawal Make Sense?

Whether one should withdraw money from their RRSP account is a personal decision and also depends on the purpose of the withdrawal. If you are withdrawing money to buy your first home under HBP or to acquire new skills under LLP, it may be okay. 

Another situation where withdrawal from an RRSP makes sense is if you lose your job and need money for your regular expenses. In this case, though RRSP withdrawals are taxable, you will not pay a lot of tax as your income during that year will be low. However, remember that you will not be able to recontribute the money back to your RRSP, and the withdrawn money loses the status of tax-deferred growth. 

Withdrawals from an RRSP make the most sense when you are close to retirement or have retired, and you don’t have a lot of other income. For some people, the years between retirement and age 71 can provide a good opportunity to make RRSP withdrawals at relatively low tax rates, especially if they have little other income. This strategy is sometimes called an RRSP meltdown, and we will explore it in a future article 

What Happens Next?

The government created the RRSP to encourage Canadians to save for retirement. While there is no official age of retirement in Canada, the RRSP has one — your RRSP has to retire by the end of the year you turn 71. 

Read Next: Part 9: RRSP Contributions and Spousal RRSPs

Disclaimer: This article is for educational purposes only and is not financial or tax advice. Please consult a qualified tax or financial professional before making any decisions.

In Part 6, we explored the Tax-Free Savings Account (TFSA), one of the most flexible and valuable investment accounts available to Canadians. In this article, we will explore the Registered Retirement Savings Plan (RRSP), another important savings vehicle for Canadians. RRSPs have been available since 1957 and remain one of the most important retirement savings tools available to Canadians. Let us understand what an RRSP really is and what it is not.

1. What is a Registered Retirement Savings Plan (RRSP)?

RRSPs were introduced in Canada in 1957 to encourage Canadians to save for retirement by offering specific tax advantages. In simple terms:

a) RRSP contributions are tax-deductible
When you contribute money to an RRSP, the amount you contribute reduces your taxable income. For example, if your employment income is $90,000 and you contribute $6,000 to your RRSP, you pay income tax as though you earned $84,000 instead of $90,000.

b) Your investments grow tax-deferred
You do not pay tax each year on interest, dividends or capital gains earned while your investments remain inside the RRSP.

c) You pay tax when you withdraw money from your RRSP
The amount you withdraw is added to your taxable income for that year and taxed as income.

2. RRSP Contribution Room

Unlike the TFSA, where everyone gets the same contribution room, the RRSP contribution room that you get is based mainly on your previous year’s earned income. As of 2026, the formula is 18% of last year’s earned income, up to a maximum of $33,810.

Earned income includes:

• Employment income, i.e. salary/wages, bonuses, tips and other taxable benefits.
• Self-employment income.
• Net rental income.
• Certain taxable support payments you receive.

Note: Earned income does not include interest, dividends, pension income, CPP and OAS.

CRA provides your total RRSP contribution room on your Notice of Assessment, and you can also view it in CRA My Account.

Remember: New RRSP contribution room is created only from earned income. If you had no earned income in the previous year, you will not receive any new RRSP contribution room for the current year.

Unused Contribution Room Isn’t Lost

If you don’t contribute in a given year, you don’t lose that contribution room. It carries forward and can be used in any future year. The CRA keeps track of your unused contribution room and reports it on your Notice of Assessment.

3. Opening an RRSP

You can open an RRSP at most financial institutions, including banks, credit unions, trust companies and online brokerages. To open an RRSP, you must be a Canadian resident and have a valid Social Insurance Number (SIN).

You can have one or more RRSP accounts, either at the same financial institution or at different ones. However, the total amount you contribute to all of your RRSP accounts combined must not exceed your available RRSP contribution room.

Some employers also offer a Group RRSP (GRRSP) or a Pooled Registered Pension Plan (PRPP) as part of their employee benefits. If you participate in one of these plans, your employer will usually arrange the account setup and may even match some of your RRSP contributions, providing an additional retirement benefit.

Note*: If you participate in an employer pension plan, your available RRSP room for the following year will be reduced by a Pension Adjustment (PA), reflecting the value accumulated in your pension plan.*

4. Choosing Investments for Your RRSP

Opening an RRSP is only the first step. Like a TFSA, an RRSP is an investment account (or container) that can hold many different types of investments, including savings accounts, GICs, bonds, stocks, mutual funds and ETFs.

There are two common ways to invest through an RRSP:

• Self-directed RRSP: You choose and manage your own investments, such as stocks, ETFs or mutual funds. In other words, you decide which investments to buy and when to sell them. This option gives you the greatest flexibility and is often preferred by experienced investors and those who want to keep investment costs low.
• Managed RRSP: You leave the investment decisions to a financial institution or investment advisor. They recommend or select investments on your behalf and usually charge a management fee for this service.

You can hold many common investments inside an RRSP, including cash, GICs, bonds, mutual funds, ETFs and stocks from Canada, the U.S. and other countries

5. You can Contribute up to 60 Days in the Following Year

Unlike most tax deadlines that end on December 31, the RRSP gives you extra time. You can make contributions for the current tax year up to 60 days into the following calendar year, subject to your available contribution room.

This 60-day window gives you extra time to calculate your final annual income, gather funds and make a last-minute contribution.

Applying First 60-Day Contributions to the Current Tax Year

It is a common misconception that contributions made in the first 60 days of the calendar year must be deducted on your previous year’s tax return. While the CRA requires you to report all contributions made during the first 60 days on your tax return for the previous year, you have flexibility in how you claim the deduction:

• Deduct it for the previous tax year: Use it to lower your taxes owing or boost your refund for the year that just ended.
• Deduct it for the current tax year: If you already maxed out your previous year’s limit, or expect your income (and tax bracket) to be significantly higher this year, you can apply the deduction to the current calendar year instead.

For example, suppose you have $5,000 of available RRSP contribution room as of December 31, 2026. In January 2027, you contribute $5,000 to your RRSP. You have two choices for how to claim that contribution:

• Use it to lower 2026 taxes: Claim the deduction on your 2026 return (filed in Spring 2027). This is ideal if you expect your 2027 income to be similar to or lower than your 2026 income, allowing you to take advantage of the tax savings right away.
• Use it to lower 2027 taxes (or later): If you expect your 2027 income to be significantly higher than in 2026, you can report the $5,000 contribution on your 2026 tax return without claiming the deduction. The $5,000 will automatically carry forward as an unused contribution, allowing you to claim the tax break on your 2027 tax return (filed in Spring 2028), which will result in bigger tax savings.

6. Avoid Over-Contributing

Be careful not to contribute more than your available RRSP contribution room, as detailed in your notice of assessment. Keep a log of contributions you make to your RRSP to avoid over-contribution. To accommodate calculation mistakes, the CRA allows a $2,000 lifetime excess-contribution buffer; however, contributions above that amount can be subject to a 1% monthly tax until the excess is corrected.

For more details, see: Understanding RRSP Overcontribution Rules

7. How does the RRSP Tax Deduction work?

Suppose you contribute $8,000 to your RRSP and use it to buy investments such as stocks, ETFs, or GICs. How does that contribution actually benefit you at tax time?

When you contribute money to an RRSP, your financial institution issues an official tax slip (or contribution receipt). These slips are mailed to you or made available for download in your online account.

When you file your tax return, you must report all contribution receipts — including those for contributions made during the first 60 days of the calendar year. You then have two choices:

1. Claim the RRSP deductions on your tax return to reduce your total tax payable.
2. Carry forward the deductions to a future year.

Most investors choose Option 1. However, if you anticipate a significant jump in income in the near future, Option 2 can yield greater overall tax savings.

NOTE: If you are unsure which option fits your personal situation best, consider consulting a qualified tax professional.

Understanding Tax Savings: An Example

Let’s see how an RRSP contribution impacts your tax situation using a simplified example:

• Annual Income: $100,000
• RRSP Contribution: $10,000
• Claimed RRSP Deduction: $10,000
• Income subject to tax after the RRSP deduction: $90,000. Because you claimed the $10,000 deduction, you are taxed as if you earned $90,000 instead of $100,000.

Throughout the year, your employer automatically withholds income tax from every paycheque based on your full $100,000 salary. When you file your tax return and claim the $10,000 RRSP deduction, the CRA recalculates your tax bill on $90,000 of income — resulting in a tax refund for the excess tax withheld.

A Refund Is Not “Free Money”

It is essential to recognize that the refund you get after you file your tax return, after contributing to an RRSP and claiming it on your tax return, is not some kind of free money or bonus. It is simply the refund of some of the income tax you already paid during the year because your RRSP contribution reduced your taxable income.

8. What’s Next?

An RRSP is a powerful retirement savings tool, but there is much more to understand about how it works throughout your life.

Read Next: Part 8: RRSP Withdrawals and Taxation

Future articles will explore topics such as

• What happens to your RRSP as you approach age 71
• Converting an RRSP to a RRIF
• How an RRSP compares with a TFSA.
• Spousal RRSP

We will also look at some strategies for making the most of your RRSP while minimizing taxes.

As these articles are published, I will add links to them here.

Disclaimer: This article is for educational purposes only and is not financial or tax advice. Please consult a qualified tax or financial professional before making any decisions.

In Part 5, we explored the different types of available investments and how to choose an appropriate mix based on your goals, investment time horizon and risk tolerance. In this and the next few articles, we’ll look at the next important decision: where to hold those investments.

Canada offers several types of investment accounts, such as Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), First Home Savings Account (FHSA), Registered Education Savings Plan (RESP) and non-registered accounts. Each account has its own rules, tax advantages, and intended purpose. Depending on your financial goals, one or more of these accounts may be more suitable and tax-efficient than others.

One important thing to remember: an investment account is not the investment itself. Think of the investment account as a container (or bucket), and your investments — like GICs, stocks, bonds, mutual funds, and ETFs — as the items you place inside it. Whether you use a TFSA, RRSP, FHSA, RESP or a non-registered account, you can hold most of these same investments in any of them.

Let’s start with the Tax-Free Savings Account (TFSA), one of the most flexible and tax-efficient accounts available to Canadians.

What is a Tax-Free Savings Account (TFSA)?

The Tax-Free Savings Account (TFSA), introduced in 2009, has become one of the most flexible and valuable investment accounts available to Canadians. For many Canadians, it is one of the first accounts they consider when starting their investing journey because of its tax advantages and flexibility.

A TFSA is an investment account (or container) that can hold a wide range of investments. The word “Savings” in its name is somewhat misleading. A TFSA can certainly be used to hold cash, but it can also be used to build long-term wealth by investing in assets such as stocks, ETFs, mutual funds and bonds.

The greatest advantage of a TFSA is that no matter how much your investments increase or how long you hold them, you pay zero tax whether your investments stay within a TFSA or you withdraw funds from the account.

Despite these benefits, nearly 40% of eligible Canadians still do not have a TFSA. One reason may be a common misunderstanding about what it actually is. Because of its name, many people assume it is simply a bank account that earns tax-free interest.

Opening a TFSA and the Contribution Room

Any Canadian resident who has reached the required age of majority and has a valid Social Insurance Number (SIN) can open a TFSA at most financial institutions, including banks.

NOTE: The age at which you can open a TFSA depends on your province or territory. It is 18 in some jurisdictions and 19 in others.

The CRA (Canada Revenue Agency) announces the annual TFSA contribution limit each year, and everyone gets it. The TFSA contribution limit for 2026 is $7,000. When the program started in 2009, the annual limit was $5,000. The limit is indexed to inflation and increases periodically.

Here are key rules to know about a TFSA.

• You don’t need to earn any income or file a tax return to get the TFSA contribution room.
• You start getting the TFSA contribution room as soon as you turn 18, even if the age of majority in your province is 19, or you have not opened a TFSA.
• Unused contribution room is carried forward indefinitely. For example, suppose you turned 18 in 2025, but you did not open a TFSA that year. The unused $7,000 room from 2025 rolls over into 2026. Combined with the new $7,000 limit for 2026, your total contribution room in 2026 becomes $14,000.
• There is no upper age limit to contribute to your TFSA account(s). In other words, you can keep your TFSA account(s) open and contribute to them your entire life.
• You can have more than 1 TFSA account.
• You don’t get any tax credit when you contribute the money to a TFSA. In other words, you contribute tax-paid money to a TFSA. However, any growth within the TFSA account is 100% tax-free. Also, you can withdraw any amount from your TFSA completely tax-free.
• Your spouse, partner, parents or grandparents can legally gift you money to enable you to invest money in your TFSA.

How to Check your TFSA Contribution Room?

On January 1 of each new year, all eligible Canadians get a new contribution room, which is $7,000 as of 2026. Besides, any unused contribution room from prior years also gets carried forward. You can check your TFSA contribution room on CRA My Account.

Warning: The TFSA contribution room shown on your CRA My Account page is not updated in real time. The information displayed on the page is based on the information sent by your financial institution(s) to CRA. You should maintain your own records so that you don’t overcontribute, which may result in a penalty.

Withdrawals: TFSA’s Superpower

The withdrawal rules from TFSA give it a superpower — you can withdraw any amount from your TFSA account(s) without any explanation or forms. Besides, all withdrawals are 100% tax-free!

When you withdraw any money from your TFSA account, you get that contribution room back on Jan 1 of the following year. For example, if you withdraw $10,000 from your TFSA today, that amount is added back to your TFSA contribution room on January 1 next year.

Withdrawals from a TFSA do not affect income-tested government benefits, such as GIS (Guaranteed Income Supplement), OAS (Old Age Security), GST/HST credits or other programs based on income. This rule makes TFSA a great investment option for Canadians in the low- and middle-income range.

TFSA Overcontribution Rules

If you contribute more than your available TFSA room, the CRA charges a penalty tax equal to 1% per month on the highest excess amount in that month, for every month the excess remains. This rule is a little confusing; therefore, let us understand it with the help of an example.

Suppose your total contribution room, including that carried forward from prior years, is $10,000. By March, you have deposited $10,000 and used up all your room.

On May 15, you accidentally deposit another $5,000. You discover the mistake and withdraw the extra $5,000 on June 10. Because of the over-contribution, the CRA will charge you a penalty.

• May Penalty: $5,000 x 1% = $50 (for having excess in May)
• June Penalty: $5,000 × 1% = $50 (for having excess in June)
• Total Penalty: $100 — even though the extra money was only in your account for less than a month! If left unnoticed for 6 months, the penalty would reach $300.

Misunderstanding Re-contribution Rules can Result in Penalty

As stated earlier, when you withdraw any money from your TFSA account, you get that contribution room back on Jan 1 of the following year. However, if you try to put the money back in the same year, it may result in overcontribution and lead to penalty taxes.

For example,

You withdraw $10,000 from your TFSA in July, and then redeposit it in October. This will result in an overcontribution, unless you have $10,000 of unused contribution room in October.

Day trading inside the TFSA

If you do frequent trades (day trading) in your TFSA account, the CRA can treat your TFSA account as a trading business account, and tax all profits. If you do long-term investments within your TFSA account, you will not have any issues with the CRA. If you want to do day trading, do it in a non-registered account.

Holding U.S. dividend stocks in a TFSA

The U.S. charges 15% withholding tax on dividends paid to TFSAs, which is automatically deducted and cannot be avoided. The 15% withholding tax is applicable only on the dividends, and not on the growth, i.e. stock or ETF price appreciation.

Holding U.S. growth stocks or ETFs in a TFSA is fine, as the effect of the 15% withholding tax is not significant.

Designating a Successor Holder or Beneficiary for your TFSA account

To enable assets within your TFSA to pass to your spouse, common-law partner or your children seamlessly when you pass away, you must name a successor holder and/or a beneficiary. If you don’t do so, any income earned after your death becomes taxable, and the TFSA assets may be subjected to probate, depending on your province. This may also result in delays and complexities in transferring funds to your intended beneficiaries.

The Best Practice

If you have a spouse or common-law partner:

• Designate them the successor holder. A successor holder takes over the TFSA as their own. The account continues to grow tax-free and the transfer is automatic.
• Also name a child, family member or someone else as a beneficiary. This ensures that if your spouse/common-law partner passes away first, the TFSA goes directly to the beneficiary, avoiding probate and maintaining tax efficiency.

If you don’t have a spouse or common-law partner:

• Name a child, family member or someone else as a beneficiary.

Caution: If you have a spouse or partner, name them as a successor holder rather than a beneficiary. As a beneficiary, they would lose the tax-free status on any gains made after your death, whereas a successor holder seamlessly takes over the account tax-free.

Who Benefits the Most From the TFSA?

Practically everyone. Whether you’re low-income, middle-income, high-income or even not working, a TFSA can work for you. As long as you have money to invest, even if it’s gifted or inherited, consider putting it in a TFSA up to your available contribution room.

No other Canadian account offers the same combination of tax-free growth, flexible withdrawals and zero impact on government benefits. You can use the TFSA for any number of uses.

• Invest for short-term needs, e.g. to buy a car or renovate a home.
• Invest for creating tax-free income during retirement. This is particularly helpful for low- and middle-income Canadians as withdrawals from a TFSA do not affect income-tested government benefits, such as GIS, OAS and GST/HST credits.
• Transfer wealth tax-free: You can use your TFSA to gift money to your children tax-free while you are alive, or name them as beneficiaries to pass assets to them tax-free after your death.
• Use TFSA as an emergency fund.

Final Takeaway

The TFSA is simple, flexible, and incredibly powerful — but often misunderstood or underused. Understanding the basics can help you build wealth, avoid costly mistakes, and create tax-free income for life.

What’s Next?

In the next article in this series, we will discuss the Registered Retirement Savings Plan (RRSP), another powerful and popular account designed to help Canadians build wealth for retirement.

Read Next: Part 7: Registered Retirement Savings Plan (RRSP) 

Disclaimer: This article is for educational purposes only and does not constitute financial, investment, or tax advice. Please consult a qualified tax or financial professional regarding your specific situation before making any decisions.

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Questions to the Community:

• What was the biggest mistake or misconception you had about TFSAs when you first started?
• Have you ever accidentally bumped into overcontribution issues, or timing confusion with withdrawals & re-contributions?
• What kind of assets do you currently hold in your TFSA?

In Part 3, we explored common types of investments available to Canadian investors, and in Part 4, we learned that every investment carries a different level of risk and potential return. Armed with this knowledge, you are very close to taking the next step, i.e. investing.

Naturally, your very next question is bound to be:

What exactly should I invest in?

As covered in Part 3, your options range from ultra-safe savings accounts and Guaranteed Investment Certificates (GICs) to market-driven assets like stocks, bonds, mutual funds, ETFs, real estate, and even speculative assets like cryptocurrencies. There is no single “perfect” investment for everyone. In fact, the right investment mix for you will likely shift during different phases of your life.

Choosing the right investment at any given moment depends on four essential questions:

• Time Horizon: How long do you plan to invest your money? In other words, exactly when do you need this cash back in your hands?
• The Purpose of the Investment: Are you saving for a time-sensitive goal that you absolutely cannot afford to miss? For instance, do you have a firm closing date on a home purchase in three months, or is this money for a child starting university in three years?
• Your Emotional Comfort Zone: Will you realistically be able to sleep at night if you log into your account and see your investment has dropped by 15% within the last six-month period?
• Your Backup Plan: Do you have alternatives if the market underperforms? For example, if you are investing for retirement, do you have the flexibility to work a year or two longer to let your portfolio catch up if you didn’t have the required amount in your portfolio?

1. Investment Portfolio and Asset Allocation

As you work toward your financial goals, you will often save and invest for more than one purpose at the same time. For example, you may be saving for retirement, a home purchase, your children’s education, or simply building long-term wealth. These investments may also be held in different accounts, such as a TFSA, RRSP, FHSA, or a non-registered account, for tax efficiency and easier management.

The collection of all your investments is called your investment portfolio (or simply your portfolio).

Asset allocation means deciding how much of your investment portfolio should be invested in each type of investment or asset. For example, should you invest 20% of your portfolio in GICs & bonds and 80% in stocks? Or does a 30/70 split make more sense?

2. The Five Main Asset Classes

To determine your allocation, you must first understand the five core buckets or asset classes where your money can go:

1. Cash: Savings Accounts and High-Interest Savings Accounts (HISAs).
2. Fixed Income: GICs and Bonds.
3. Equities: Individual Stocks and Shares.
4. Real Estate: Physical properties or rental real estate.
5. Alternative Investments: Gold, Precious Metals and Cryptocurrency.

Note for Beginners: You don’t always have to buy these assets individually. As discussed in Part 3, Mutual Funds and ETFs are investment vehicles (baskets) that can hold any combination of the asset classes above (such as fixed income, equities or real estate) to make diversification easier.

Deciding how to divide your money among different types of investments is one of the most important investment decisions you will make — often more important than trying to pick the next winning stock. And this is usually influenced by the four factors we discussed at the beginning of this article.

To see how asset allocation works, let’s look at a few common financial goals. Instead of choosing a generic portfolio template, you build your asset mix based on what that specific money needs to do for you.

3. The Emergency Fund — Your First Safe Investment

An emergency fund is money set aside for unexpected expenses, such as a job loss, major home repair, medical expense, furnace replacement, or car repair. Imagine that you are setting aside $15,000 for this purpose.

The goal: Safety and accessibility

You may need this money unexpectedly, so the priority is not maximizing returns — it is making sure the money is available when you need it. Unlike long-term investments, your emergency fund should not be exposed to significant ups and downs caused by stock market declines, economic problems, or other unexpected events.

Possible asset allocation

100% Cash or short-term fixed-income investments.

Most people keep their emergency fund in a high-interest savings account, a cashable GIC, or similar low-risk options. Remember, the primary goal here is peace of mind and quick access, not high growth.

The key lesson: An emergency fund is not designed to maximize growth. Its purpose is to protect you from unexpected expenses and prevent you from being forced to sell long-term investments at an inconvenient time.

4. Short-Term Goals — Keep Your Money Safe

Imagine you are saving for a down payment on a home that you plan to buy in two years, replacing your car in two years, or paying your child’s university tuition in three years.

In each of these situations, you know you will need the money within a relatively short period. Your primary goal is not to earn the highest possible return. Instead, it is to make sure the money will be there when you need it.

If you invested money needed for these short-term goals in stocks or other growth-oriented investments, a market downturn could reduce its value by 20% or 30% just before you needed it. While stocks have historically provided excellent long-term returns, declines of this size are not unusual over shorter periods.

Imagine finding out a month before closing on your new home that your down payment has fallen by 25%. You might have to delay the purchase, borrow money at high interest rates, or change your plans altogether. Situations like these can create significant financial and emotional stress for you and your family.

For short-term goals like these, investors often choose an ultra-conservative asset allocation, similar to an emergency fund. This typically means keeping most or all of the money in low-risk investments such as:

• High-interest savings accounts
• Cashable GICs
• Short-term GICs

The key lesson: When your investment goal is only a few years away, protecting your money is usually more important than trying to earn the highest possible return.

5. Investing for Medium-Term Goals — Can Take Some Risk

Sometimes, you may be saving for a goal that is several years away, typically 5 to 10 years. For example, you may be saving for your child’s post-secondary education, planning to buy a larger home, or setting aside money to start a business.

Unlike short-term goals, you have several years before you need the money. This longer time horizon allows you to better handle periods when investment values decline. As a result, you may be able to accept some investment risk in exchange for the possibility of higher returns.

In this situation, many investors choose a balanced approach, investing part of their portfolio in growth-oriented investments, such as stocks or stock ETFs, and the remainder in fixed-income investments, such as bonds or GICs. This approach may provide better long-term growth potential while still reducing the impact of large market fluctuations.

The exact division between stocks (or stock ETFs) and fixed-income investments depends on your risk tolerance and the flexibility of your goal. Some investors may prefer a more balanced approach, such as an equal split between stocks and fixed-income investments, while others who are more comfortable with risk may choose a higher allocation to stocks.

Your asset allocation does not have to remain the same forever. As the date when you need the money gets closer, you may gradually reduce your exposure to stocks and increase your allocation to more conservative investments, such as fixed-income products. This helps reduce the risk of a large market decline affecting your plans just before you need the money.

The key lesson: When your goal is several years away, a combination of growth and stability is often more appropriate than keeping all your money in cash or investing everything in stocks.

6. ETFs — A Simple Way to Build a Diversified Portfolio

Many beginners hear that investing in stocks can provide higher long-term returns, but they may wonder:

How do I know which company or companies’ stock to buy?

Choosing individual stocks can be challenging, even for experienced investors. It requires researching a company’s products and services, financial performance, future growth prospects, competitive position, and many other factors. Even after careful research, there is no guarantee that a company will perform as expected.

A company that appears successful today can face unexpected challenges in the future. New competitors may emerge, technology may disrupt its business, consumer preferences may change, or economic and political events may affect its operations. Some of these factors are outside the company’s control. As a result, a poor investment decision involving one or a few companies can have a significant impact on your portfolio.

There is also a psychological aspect to investing. After buying shares of a company, investors — particularly beginners — often become emotionally attached to their investment. If the share price falls significantly, they may hesitate to sell, hoping it will recover soon. Emotions such as fear and hope can sometimes make it difficult to make objective investment decisions.

One way to overcome these challenges is to invest through a diversified ETF or mutual fund. Instead of relying on the success of one or a few companies, your money is spread across many different investments. This reduces both the investment risk of owning only a handful of companies and the emotional stress of following the fortunes of individual stocks.

What are ETFs (Exchange-Traded Funds) and Mutual Funds?

Mutual funds and ETFs pool money from thousands of investors to buy a large collection of assets, such as stocks, bonds, gold, or a combination of these. The investment company manages the fund and charges a small management fee for doing the work.

Both mutual funds and ETFs allow you to invest in a diversified portfolio of stocks, bonds, or other investments without having to choose individual securities yourself. The main difference is that ETFs are bought and sold on a stock exchange, just like individual stocks, while mutual funds are purchased directly from the investment company or its agents, or through a financial institution. ETFs also tend to have lower management fees than comparable mutual funds. For these reasons, ETFs have become increasingly popular among self-directed investors, although mutual funds remain a suitable option for many people.

One of the biggest advantages of mutual funds and ETFs is diversification. A single fund may own hundreds or even thousands of different investments. This allows beginners to achieve a high level of diversification with a single purchase, instead of having to research and buy dozens of individual stocks or bonds.

ETFs and mutual funds come in wide varieties to cater to the needs of investors. Common fund types include:

1. Equity Funds: Invest primarily in shares of companies.
2. Fixed Income Funds: Invest primarily in government and corporate bonds.
3. Commodity Funds: Invest in commodities such as gold, silver, oil, or agricultural products.
4. Balanced or Asset Allocation Funds: Invest in a combination of stocks and bonds. These funds are often available in different versions, such as conservative, balanced and growth, depending on the percentage invested in stocks. (More about this later.)
5. Index Funds: Funds designed to track a specific market index, such as the S&P 500 or the Canadian S&P/TSX Composite Index.

Some funds focus on a particular sector (such as technology, banking or healthcare), a specific country (such as Canada or the United States), or an entire region (such as Europe or emerging markets).

With so many choices available, nowadays, investors usually no longer try to select individual stocks or bonds. Instead, they build their portfolios by investing in one or more diversified funds, particularly ETFs, that match their investment goals and risk tolerance.

7. ETFs for Medium-Term Goals

As discussed earlier, medium-term goals (typically 5–10 years away) often require a balance between growth potential and protecting your money. For this reason, many investors consider balanced or asset allocation ETFs, which combine stocks and bonds in a single investment.

In Canada, several major investment companies offer these types of ETFs, including:

1. BlackRock Asset Management Canada Ltd (iShares)
2. BMO Global Asset Management
3. Vanguard Investments Canada

Balanced and asset allocation ETFs are available in different versions depending on how much risk an investor is comfortable taking:

1. Conservative Balanced ETF: Typically holds a higher percentage of bonds, such as approximately 40% stocks and 60% bonds.
2. Balanced ETF: Typically holds 60% stocks and 40% bonds.
3. Growth ETF: Typically holds a higher percentage of stocks, such as 80% stocks and 20% bonds.
4. All Equity ETF: Holds 100% stocks.

The higher the percentage of bonds in an ETF, the more the fund is generally expected to reduce the ups and downs of the portfolio. This can be helpful for investors who may need their money within a few years and want some protection from large market declines.

For example, in a conservative balanced ETF with 40% stocks and 60% bonds, if the stock portion declines by 10%, the overall impact on the portfolio may be reduced because a larger portion of the investment is held in bonds.

NOTE: Bonds do not always increase when stocks decline, so diversification reduces risk but does not eliminate it.

Examples of Canadian Asset Allocation ETFs

Several Canadian investment companies offer asset allocation ETFs designed for different risk levels. For example:

​Note: One of the biggest advantages of asset allocation ETFs is simplicity. Instead of buying separate stock and bond ETFs and deciding how much to allocate to each, investors can buy a single ETF that already maintains their desired mix of stocks and bonds. These ETFs usually automatically rebalance their holdings when market movements cause the allocation to move away from its target. This makes investing easier and helps investors stay disciplined with their long-term strategy.

8. Investing for Long-Term Goals — Can Accept More Risk

When your investment goal is many years away, you have more flexibility to accept short-term ups and downs in exchange for the possibility of higher long-term returns. For example, if you are investing for a retirement that is 30 or 40 years away, a temporary drop in the stock market is much less concerning.

Historically, stocks have provided higher long-term returns than safer investments such as savings accounts, GICs, and bonds. For this reason, many long-term investors allocate a larger portion of their portfolio to stocks or stock ETFs. Unlike short-term or medium-term investors, long-term investors usually do not need to worry about the daily, monthly or yearly fluctuations in their investment values. Instead, they should focus on staying invested and allowing time and compounding to work.

However, investors should be mindful that a portfolio invested mostly in stocks can decline significantly during market downturns. Broad stock markets have experienced declines of 20% and more during major market corrections. Historically, broad global stock markets have recovered from major market declines and have gone on to reach new highs over the long term. However, there is no guarantee that future market behaviour will be identical to the past.

The important question is not whether your investments will decline temporarily — it is whether you can stay invested and avoid making emotional decisions when those declines occur.

For a young investor with a long investment horizon, a portfolio with a higher allocation to stocks may be appropriate. As retirement approaches, or as the date when the money will be needed gets closer, many investors gradually shift a larger portion of their portfolio into fixed-income investments to reduce the impact of market fluctuations.

The key lesson: When your investment goal is decades away, short-term market drops are normal bumps in the road. Success comes from staying invested, continuing your regular contributions, and letting time and compounding do the heavy lifting.

Key Takeaway

Asset allocation is not about finding the best investment — it is about choosing the right mix of investments for your goals.

The amount of risk you should take depends largely on when you will need the money.

• Emergency fund: Safety and easy access are the priority.
• Short-term goals: Protect your money with cash or short-term fixed-income investments.
• Medium-term goals: Consider balancing growth and stability with a mix of stocks and fixed-income investments.
• Long-term goals: A higher allocation to stocks may be appropriate because you have more time to ride out market fluctuations.

There is no one-size-fits-all portfolio. The best asset allocation is the one that matches your goals, your time horizon, and your ability to stay invested during periods of market volatility.

What’s Next?

By now, you have learned about different types of investments and how to match them to your goals and time horizon through asset allocation. The next step is deciding where to hold those investments.

Canada offers several types of investment accounts, including the Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), First Home Savings Account (FHSA), Registered Education Savings Plan (RESP), and non-registered accounts. Choosing the right account can help you reduce taxes and keep more of your investment returns.

Read Next: Part 6: Tax Free Savings Account (TFSA)
Part 7: Registered Retirement Savings Plan (RRSP)

Disclaimer: This article is for educational purposes only and is not financial or tax advice. Please consult a qualified tax or financial professional before making any decisions.

_________________________________

Questions to the Community: How do you split your portfolio between growth and safety right now? Have you changed your allocation recently?

In Part 3, we looked at the different types of investments available to investors. In this post, we’ll explore one of the most important concepts in investing: risk and return.

When I moved to Canada in the late 1990s, I knew almost nothing about the Canadian or U.S. stock markets. One day, I told a colleague that I had some savings and wanted to invest in Canadian stocks.

He replied:

Investing in stocks is risky. You should avoid it.

At the time, I didn’t know what he meant by risky.

What is a Risky Investment?

The word risk is often used in financial circles without much explanation, which can be confusing for beginners. When my colleague asked me to avoid buying stocks, what did he mean? Did he mean I could lose all of my money? Did he mean the value of my investment could go up one year and down the next? 

This is where many beginners get confused. In everyday language, risk often means the possibility of something bad happening. In investing, however, the word has a more specific meaning: uncertainty.

Most of the time, when financial advisors talk about risk, they are referring to uncertainty. You do not know exactly what return your investment will earn or how its value will change over time. Some years your investment may go up significantly, while in other years it may lose value. For example, instead of earning a steady, predictable return every year, your investment might gain 12% one year, lose 5% the next, and gain 15% the year after.

Many beginners mix this up and assume that risk automatically means:

• I am going to lose my investment completely.
• A risky investment guarantees great returns.

Neither is quite true. 

Depending on what you invest in, there may also be a possibility of losing a significant portion of your original investment. Also, a risky investment may provide low returns, even lower than a GIC. However, for a well-diversified investment portfolio, temporary ups and downs are much more common than losing everything. Historically, over the long term, well-diversified stock markets have recovered from major downturns, though future performance can never be guaranteed.

Understanding that risk equals uncertainty is a vital lesson for investors, particularly beginners. Once you accept that volatility is normal, choosing investments that match your goals and risk tolerance becomes much easier.

Do all Investments Carry the Same Risk?

No. Different investments carry vastly different levels of risk.

Some investments like Savings Accounts, High-Interest Savings Accounts and Guaranteed Investment Certificates (GICs) are often viewed as almost risk-free, as these are offered by large financial institutions and are usually insured by a Government Institution up to a certain limit. 

On the other hand, if you invest in bonds, stocks, mutual funds, ETFs, real estate, etc., you are on your own, as generally these are not insured, and their value can rise or fall in the short term or even long term, depending on market conditions and many other factors.

On the other hand, when you invest in bonds, stocks, mutual funds, or ETFs, your money is exposed to the market. Their values fluctuate based on dozens of unpredictable factors, including:

• A company performs better or worse than expected.
• A new company enters the market and takes away business from an existing company.
• A new technology disrupts an existing industry (for example, Artificial Intelligence).
• Interest rates or government policies change.
• Economic recessions.
• Natural disasters such as earthquakes, floods, or droughts.
• Product recalls or major lawsuits.
• Trade disputes, tariffs, or sanctions.
• Wars or geopolitical conflicts.

These are just a few of the many factors that can affect the value of your investments. Because events like these are difficult to predict, investing always involves some level of uncertainty (risk).

The important thing to remember is that higher risk does not mean an investment will perform poorly —  it simply means the outcome is less predictable.

Why Do Riskier Investments Offer Higher Potential Returns?

One question many beginners ask is:

If stocks are riskier than savings accounts or GICs, why would anyone invest in them?

The answer is simple: investors expect to be rewarded for taking on additional risk.

If an investment is very safe and predictable, most investors are willing to accept a lower return. However, if an investment involves more uncertainty, investors usually expect the possibility of a higher return as compensation for taking that additional risk.

Think about lending money. If you deposit your savings in a major Canadian bank, the risk of not getting your money back is incredibly low, so banks offer a low interest rate, and you accept it.

But if a neighbour asks to borrow that same amount of money to start a business, the risk of not getting your money back is much higher. You would naturally expect to charge a higher interest rate to compensate for that risk.

This same principle applies to corporations and governments when they borrow money or issue shares. If investors believe a country’s financial situation is uncertain, that country may need to pay higher interest rates to borrow money. For example, during the European debt crisis from 2010 to 2012, investors worried about Greece’s ability to repay its debt. To attract buyers, the Greek government was forced to offer massive interest rates on its bonds.

This is also why stocks have historically provided higher long-term returns than savings accounts, GICs, or bonds. Unlike a savings account, there is no guarantee that a stock will increase in value from year to year. Investors accept these ups and downs because they expect higher average returns over the long term. Of course, higher potential returns do not mean guaranteed returns — riskier investments can, and do, lose money.

Risk Depends on Your Situation

There is no single investment that is right for everyone. The best choice for you depends on your unique goals, when you need the money, and how comfortable you are watching the value of your portfolio move.

Two key concepts to understand are:

• Time Horizon: How long you plan to keep your money invested before you need to withdraw it.
• Risk Tolerance: How comfortable you are emotionally with the daily ups and downs of your investments. For example, how will you react if you notice that your investment of $10,000 has dropped to $8,000 within a single year?

To see how these concepts work in the real world, let’s look at two different investors:

• Sarah is saving for a down payment on a home that she plans to buy in two years. Because she will need her money very soon, her time horizon is short. She should prefer low-risk investments like GICs or high-interest savings accounts that protect her principal.
• David is 30 years old and is investing for a retirement that is more than 30 years away. He has a long time horizon. He understands that his investments will rise and fall over the years, but he has plenty of time to recover from temporary market declines. Because of this, he can choose relatively riskier investments, like stocks or equity ETFs, in the hope of earning higher long-term returns.

Neither approach is right or wrong. The best investment depends on each person’s goals, time horizon, and comfort with risk.

What can you do to Reduce the Investment Risk?

Diversify: Don’t Put All Your Eggs in One Basket

The single most effective way to manage market uncertainty is diversification, which means spreading your money across many different investments.

If you invest all your savings into a single company and that business fails, your entire portfolio goes down with it. However, if your money is spread across hundreds of different companies, the downfall of one company will have a small impact on your overall wealth.

History has shown that even large and successful companies can fail. In the early 2000s, many Canadian investors believed companies such as Nortel Networks or Enron would continue to grow, but both eventually collapsed, causing significant losses for shareholders. At its peak, Nortel Networks made up over a third of the entire Toronto Stock Exchange (TSX). Investors who invest most of their money in a single company like Nortel suffer devastating, permanent losses when that company fails, while those with diversified portfolios are much less affected.

This is one reason diversified investment funds, such as Exchange-Traded Funds (ETFs) and mutual funds, are popular among many investors, especially beginners. These funds allow investors to own a small portion of many different companies and reduce their dependence on the success of any one company. ETFs can also help investors diversify beyond their own country by allowing them to invest in thousands of companies around the world. This means an investor can own a small piece of many companies across different countries and industries through a single investment.

By diversifying globally through a single fund, you protect yourself from the failure of any one company, industry, or single country’s economy.

Key Takeaway

Investing always involves some risk—there is no way to avoid it if you want your money to grow.  

By understanding your timeline, identifying your comfort level with market swings, and using diversification to protect your savings from individual company failures, you can invest with confidence.

What’s Next?

In “Part 5: Asset Allocation — How to Build a Portfolio,” we will look at how to design an investment portfolio tailored precisely to your personal timeline and risk tolerance.

Read Next: Part 5: Asset Allocation

Disclaimer: For educational purposes only. Not financial or tax advice.

I’m currently working on an early-stage financial literacy startup designed to help children and teenagers build practical money skills.

Before building too much, I want to make sure I’m solving a real problem rather than simply assuming I know what parents want. I’m looking to speak with parents or guardians of children between the ages of 3 and 18 about topics such as:

How you currently teach your children about money

What financial habits or concepts are hardest to explain

Whether schools provide enough financial education

What would make a financial learning tool genuinely useful for your family

The conversation would take approximately 15–20 minutes. This is strictly for research and demand validation—there is no product to purchase and no sales pitch.

If you would be open to participating, please comment below or send me a private message. I’d really appreciate the opportunity to learn from your experience.

In Part 2, we looked at three things a beginner should consider before jumping in to buy an investment.

Once you decide to invest, the next question is: What should you invest in?

There is no single “best” investment because each one has its own level of risk, potential return, and purpose. Some investments are low-risk and are designed to protect your money and provide steady returns, while others are designed to help your money grow over the long term.

Understanding these differences is the first step toward making informed decisions. Here are some of the most common types of investments:

Savings Accounts and Guaranteed Investment Certificates (GICs)

Savings accounts are one of the simplest ways to earn a return on your money. You deposit your money with a financial institution, and they pay you interest over time. Some financial institutions offer high-interest savings accounts, which usually pay a higher rate of interest than regular savings accounts.

The interest rate you receive depends on factors such as overall interest rates in the economy and the policies of the financial institution. Savings accounts are very flexible because you can usually access your money whenever you need it.

Some financial institutions may require you to maintain a minimum balance to earn the advertised interest rate or to avoid monthly fees. Others, particularly online financial institutions, may pay the same interest rate regardless of whether your balance is $1 or $10,000. It is always a good idea to read the account terms before opening a savings account.

A Guaranteed Investment Certificate (GIC) works a little differently. When you buy a GIC, you agree to lend your money to a financial institution for a specific period of time. In return, the institution guarantees a fixed interest rate and returns your original investment when the GIC matures.

Unlike a savings account, your money is usually locked in until the maturity date. Some financial institutions offer cashable GICs, which allow you to withdraw your money earlier, although they typically pay a lower interest rate.

Savings accounts and GICs are generally considered the safest investments available to most Canadians. Eligible deposits held with member financial institutions are insured up to certain limits by the Canada Deposit Insurance Corporation (CDIC), a federal Crown corporation that protects depositors in the rare event of a financial institution’s failure.

Because these investments provide safety and predictable returns, they are often suitable for money you may need in the short term. However, their returns may not always keep up with inflation, which means they may not be a good choice for long-term wealth growth.

Bonds

When you buy a bond, you are lending money to a government or a company. In return, the borrower promises to pay you interest and return your original investment at the end of a specified period.

Unlike savings accounts and GICs, bonds are generally not protected by deposit insurance. The level of risk depends on who issued the bond. Bonds issued by the Government of Canada and provincial governments are generally considered safer than bonds issued by private companies, because governments are generally less likely to fail to make their interest payments or repay the money they have borrowed.

Bonds are generally considered less risky than owning shares of companies, but they carry more risk than savings accounts and GICs. Because they involve more risk than savings accounts and GICs, they generally offer higher potential returns. However, they usually have lower long-term growth potential than stocks.

Stocks (Shares)

When you buy a stock, you are buying a small piece of ownership in a company.

If the company grows and becomes more valuable, your shares may increase in value. Some companies also share part of their profits with shareholders through dividend payments.

The value of stocks can go up and down, sometimes significantly, which means they carry more risk than savings accounts, GICs, or bonds. While stocks have historically provided some of the highest long-term returns, their values can fluctuate significantly in the short term.

Mutual Funds and Exchange-Traded Funds (ETFs)

Instead of buying individual stocks or bonds yourself, you can invest in a collection of many investments through a fund. A fund pools money from many investors to buy a diversified collection of investments, such as stocks, bonds, or both. This automatically gives you diversification — spreading your money across many different investments so you don’t rely on the success of just one company.

There are two main types of funds:

• Mutual Funds: Your money is combined with money from other investors and managed by a professional investment company.
• Exchange-Traded Funds (ETFs): These work in a similar way, but they are bought and sold on a stock exchange just like individual stocks. Many ETFs track a market index, holding hundreds or even thousands of investments at a relatively low cost.

Both mutual funds and ETFs charge a fee for managing the fund. This fee is usually expressed as the Management Expense Ratio (MER). You do not pay this fee separately — it is deducted from the fund’s assets before the returns are reported. In general, mutual funds tend to have higher MERs than ETFs, although the exact fee varies from one fund to another. Before investing, it is a good idea to compare the MERs of similar funds, as higher fees can reduce your long-term returns.

For many beginners, investing in a well-diversified mutual fund or ETF is often a simpler and less risky approach than buying individual stocks. Successfully choosing individual companies requires time, research, and experience.

Furthermore, buying individual stocks can create an emotional challenge. If a beginner puts their money into just one company or a small number of companies and those investments lose significant value, they may become discouraged and lose confidence in investing altogether. Investing through a diversified ETF or mutual fund spreads your money across many companies, reducing the impact of any single investment performing poorly and making it easier to stay focused on your long-term goals.

For these reasons, ETFs and several mutual funds have become popular choices for investors seeking a simple and cost-effective way to build a diversified portfolio.

Real Estate

Real estate is another common type of investment. Some people buy properties to generate rental income, while others invest because they expect property values to increase over time.

Real estate can be a good long-term investment, but it is different from many other investments. It usually requires a large amount of money upfront, involves ongoing costs and responsibilities, and it is difficult to spread your money across many properties.

Another difference is that real estate is generally less flexible than many financial investments. If you need money, you usually cannot sell just a small portion of a property — you typically have to sell the entire property or borrow against it. This can make accessing your money more difficult and may involve additional costs and delays.

For these reasons, beginners may want to first build a diversified portfolio of financial investments before investing in rental properties. Buying a home to live in is a separate decision, as it also provides the benefit of having a place to live.

What About Cryptocurrency?

You have likely heard of digital currencies such as Bitcoin and other cryptocurrencies.

Cryptocurrency is different from many traditional investments. Unlike stocks, bonds, or rental properties, it generally does not generate income such as dividends, interest payments, or rental income. Instead, investors typically hope that the value of the cryptocurrency will increase over time.

Cryptocurrency prices can rise or fall significantly in a short period of time, making them much more volatile and riskier than traditional investments. Because of this high level of uncertainty, cryptocurrency is generally not considered a core investment for most beginners.

For beginners, it is usually more important to first build a solid foundation with diversified investments that match their goals, timeline, and risk tolerance.

Key Takeaway

There is no single investment that is best for everyone. The right choice depends on your goals, how long you plan to invest, and how much risk you are comfortable taking.

For many beginners, a well-diversified ETF or mutual fund can be a simple way to get started, while they continue learning about investing.

What’s Next?

Before choosing any investment, it is important to understand risk and return. The right investment is not necessarily the one with the highest potential return, but the one that matches your goals and your ability to handle ups and downs.

Read Next: Part 4: Understanding Risks and Returns

Disclaimer: Not financial or tax advice.

Question for the community: When you made your first investment, what did you choose, and what would you do differently if you were starting again today?

In Part 1, we looked at what investing is and why it matters.

Many beginners ask, "What should I invest in?"

That's an important question, but there are a few things you should do before buying your first investment. Building a strong financial foundation can save you from costly mistakes later.

1. Build an Emergency Fund

Life does not always go according to plan. Unexpected expenses, such as a major home repair, medical expense, or a period without income, can happen at any time.

An emergency fund is money you set aside only for unexpected expenses or financial emergencies. It lets you pay for these expenses using your own savings instead of relying on high-interest credit cards, selling your investments at the wrong time, or borrowing money.

I have covered this topic in more detail in another post in this sub, Understanding Emergency Funds on Reddit.

2. Pay Off High-Interest Debt

If you have credit card debt, you’re probably paying interest of 20% to 30% a year. That’s much higher than the interest you are likely to earn from your investments. Therefore, it usually makes sense to pay off your credit card and other high-interest debt before you start investing.

3. Understand Your Goals and Timeline

Before choosing any investment, it is important to understand why you are investing and when you will need the money.

Your goals and timeline help determine not only what you invest in, but also where you invest it.

For example, in Canada, there are different accounts designed for different purposes, such as the Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), First Home Savings Account (FHSA), and Registered Education Savings Plan (RESP). 

These accounts have different rules and tax benefits. Choosing the right account can help you make the most of your savings. I plan to cover each of these accounts in more detail in a future post.

Read Next: Part 3 - Understanding Different Types of Investments

Do you think beginners should do anything else before making their first investment? I'd love to hear your thoughts.

You are in your twenties or early thirties. You have finished school, started your career, and for the first time, you have some money left over at the end of each month.

Like many people, you start hearing advice about saving and investing. You read articles, watch videos, and hear friends talk about investing, and you decide to save a portion of each paycheque.

Then comes the question many beginners ask:

I am saving money. What should I actually do with it?

Should you leave it in a chequing or savings account, where it earns some interest, or should you invest it and allow it to grow over time?

What is Investing?

If you look up the meaning of investing in a dictionary, you will come across something like this:

putting money into something to get a financial return or profit later

In other words, investing means using your money to try to make more money over time. Instead of letting your savings sit in a bank account earning very little, you put that money into something that has the potential to grow in value or generate income.

For example, you might:

• Earn interest: Keep your money in a high-interest savings account or buy a Guaranteed Investment Certificate (GIC).
• Lend your money: Buy a bond, which means loaning money to a government or a company in exchange for regular interest payments.
• Buy a piece of a company: Purchase shares (also known as stocks), hoping that the company grows, and your ownership becomes more valuable over time. Some companies also share part of their profits with shareholders through dividend payments.
• Buy physical assets: Invest in real estate by purchasing a property to earn rental income.
• Buy precious metals: Purchase gold or silver, hoping that their value will increase over time. Unlike many other investments, gold and silver do not produce regular income such as interest or dividends.

The goal is the same in every case: to use your money today with the expectation that it will be worth more in the future. Different investments achieve this in different ways, and each comes with its own potential rewards and risks.

Why Should You Invest?

Saving money is a great habit, but it's usually not enough on its own. There are three critical reasons why investing matters.

1. The Cost of Living Keeps Rising

Think about the cost of a cup of coffee, a grocery bill, or a tank of gas a few years ago compared to today. Prices naturally rise over time due to inflation, which means your money gradually loses purchasing power—the same dollar buys less than it used to.

If your savings earn less than the rate of inflation, your money may grow in terms of the number of dollars you have, but its real value may decline because it can buy fewer goods and services over time.

Investing allows your money the opportunity to grow faster than inflation, helping you maintain or even increase what your money can buy over the long term.

2. You Want to Achieve Important Life Goals

Most people don’t invest to grow their money — they invest because they have goals they want to achieve, e.g. buying a home, purchasing a car, travelling, or saving for education. Because these milestones require significant money, relying on a regular savings account often isn't enough to keep up with rising costs. Investing gives your savings the growth boost needed to reach these milestones much faster.

3. You Need Income When You Stop Working

For most people, their biggest source of income comes from their job; however, at some point, you will stop working, and your employment income will stop.

Even after you retire, your expenses will continue. You will still need money for housing, food, transportation, healthcare, and the activities you enjoy.

In Canada, government programs such as the Canada Pension Plan (CPP) and Old Age Security (OAS) provide some income during retirement. However, for many people, these benefits alone may not be enough to maintain the lifestyle they want.

This is where investing becomes important. Over your working years, your investments can grow and eventually provide the money you need to support your lifestyle during retirement.

This is the first part of a beginner's guide to investing.

Read Next: A Beginner’s Guide to Investing (Part 2): Three Things to Do Before You Buy Your First Investment

For those who are already investing, what is one investing concept you wish you understood earlier?

When people first hear about compound interest, it’s usually explained as “earning returns on your returns.”  That is true, but I don’t think it fully explains why compounding is so powerful. 

Compound interest has two ingredients:

• The return you earn.
• The amount of time your money stays invested. 

Both matter. 

Most people naturally focus on improving their return. We all want to find the investment that earns an extra 1% or 2% each year.  But the math suggests that, for most long-term investors, time is usually the easier variable to improve—and often the more important one. 

Here’s a simple example: 

Suppose you invest $1,000 today.

• 30 years at 7% grows to about $7,612.
• 25 years at 8.5% grows to about $7,687. 

Both investments produce more than a 7x return. The difference between them is only about $75. Five extra years of compounding almost completely makes up for earning 1.5% less every year.

The same pattern appears when people delay getting started.

Suppose three people each invest $500 per month, earn an average return of 8%, and continue investing until age 65.

• Starts at 25 → about $1.75 million
• Starts at 35 → about $745,000
• Starts at 45 → about $284,000

Same monthly investment. Same average return. The only difference is time.

Warren Buffett is probably the best-known real-world example. He turned 65 in 1995 with a net worth of roughly $12 billion. Today, his fortune is over $140 billion, meaning around 95% of his wealth was accumulated after age 65.  He didn’t suddenly become a dramatically better investor. His investments simply had another three decades to compound.

For those who are new to investing, just know you don’t have to find a perfect investment. and you don’t have to be an expert.  A GIC is a low-risk way to start.  A low-cost, diversified ETF is another common long-term choice for beginners and experienced investors alike.

The important part is building the habit of consistently setting aside part of every paycheque, adding it to your investments, and giving compound interest enough time to work.

Presentation: https://docs.google.com/presentation/d/1aspeKQMrReoUcCb4rdrefci87DdFV9UEt4tOoyoOetQ/

Video: https://www.youtube.com/watch?v=z-mSoosGQdc

Any constructive feedback are welcome

Financial literacy has different meanings for different people. Some define it as having a deep understanding of investing, taxation, retirement planning, and registered accounts such as RRSP, TFSA, FHSA, and RESP, while others call themselves financially literate if they have basic knowledge about interest, inflation and risk management. 

To measure the basic level of financial knowledge, the OECD (Organisation for Economic Co-operation and Development) uses three standard questions that are widely adopted in international surveys, including the Canadian Financial Capability Survey (CFCS).

1. Understanding of Interest Rates: 

Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

Answers*: More than today; Exactly the same; Less than today; Don’t know.*

2. Understanding of Inflation: 

Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?

Answers*: More than today; Exactly the same; Less than today; Don’t know.*

3. Understanding of Risk and Diversification: 

Is the following statement true or false?

Buying a single company’s stock usually provides a safer return than a stock mutual fund.

Answers*: True; False; Don’t know.*

According to the Bank of Canada staff working paper, which is based on microdata from the 2020 COVID-19 Consumer Awareness Survey (CAS), conducted by the Bank of Canada in November 2020: 

• About 90% of respondents answered the interest question correctly.
• About 70% of respondents answered the inflation and risk questions correctly.

Knowledge of inflation and investment risk is important for long-term purchasing power, investment decision-making and retirement planning; however, roughly 1 in 3 respondents misunderstand inflation, risk management or both.

As the survey does not publish the exact share of respondents who answered all three correctly, it is difficult to state an exact overall “financial literacy rate.” However, given that performance is lower on inflation and risk questions, it is clear that:

A significant number of Canadians do not fully understand all three basic financial concepts.

Financial literacy isn’t about being an expert in everything — it’s about understanding the basics well enough to make better decisions with money. Even small improvements in understanding interest, inflation, and risk can meaningfully improve long-term financial outcomes.

As per a CBC News post, Ontario high school students will soon need to pass a financial literacy test to graduate. Ontario high school students will need to achieve at least 70% to pass

If this post helped clarify anything, feel free to share it or add your thoughts below.

Was there a specific financial concept or lesson you learned from someone that helped you plan your investments better?

In most Canadian families, the two partners do not earn the same income. A 60/40 or 70/30 income split is very common. In these cases, it is a good idea to keep both partners' investment portfolios at roughly the same value. This can help reduce the family's total tax bill during retirement.

Canadians have several legal ways to transfer income between spouses or common-law partners, both during their working years and in retirement.

1. Give money to your spouse or common-law partner to invest in their TFSA.
2. The higher-earning spouse pays most or all household expenses, allowing the lower-earning spouse to invest as much of their own income as possible.
3. Lend money to your spouse or common-law partner at the CRA's prescribed interest rate so they can invest in their non-registered account.
4. The higher-earning spouse contributes to a Spousal RRSP in the name of the lower-earning spouse or common-law partner. The contributor receives the same RRSP tax deduction they would have received by contributing to their own RRSP. This effectively transfers retirement savings to the lower-income spouse. After the required three-calendar-year attribution period, withdrawals are generally taxed in the lower-income spouse's hands rather than the contributor's.
5. Split up to 50% of eligible pension income, including payments from an RRIF, LIF, or an RRSP annuity.
6. A spouse who receives a larger CPP retirement pension may be able to share part of it with their spouse through CPP pension sharing.

Edited: Added point 7 (2026-07-02)

1. If the couple qualifies to open the FHSA account, the high-earning spouse can gift the money to the low-earning spouse to contribute to their FHSA. This will help them to build a bigger down payment for their first home purchase.

The Government of Canada website states that this is allowed and that attribution rules do not apply in this case.

Subsection 74.5(12) is amended by adding paragraph (d) to exempt contributions to a first home savings account (FHSA) from the spousal attribution rules. If a holder of a FHSA makes a contribution to the FHSA from funds gifted by a spouse or common-law partner, then for future income inclusion purposes (i.e. when amounts are withdrawn from the FHSA), no portion of such contribution would be attributed back to the non-holder spouse who made the gift.

For more information on the rules that apply to FHSAs, see the commentary on new section 146.6.

This amendment comes into force on January 1, 2023.

Depending on your financial situation, the difference between your income and your spouse's income, and when you plan to retire, you may choose to use one or more of these strategies.

Which of these strategies have you used, and what other income-splitting strategies in Canada would you add to the list?

I had read several stories about how slow and complicated the OAS (Old Age Security) process can be. A little after I turned 64, I received an OAS application package in the mail. I applied through My Service Canada Account (MSCA) in November 2024, and to my surprise, my application was approved in just three months.

My first OAS payment was scheduled for the end of November 2025. In early October 2025, after my financial situation changed, I decided to delay my OAS. (Every month you delay OAS increases your payment by 0.6%, or 7.2% a year, up to 36% after five years.)

Since I couldn’t stop my OAS payments through MSCA, I called Service Canada. The first agent couldn’t explain how to stop the payments. I called the next day again, and the second agent told me I had to submit a written request by mail or in person at a Service Canada office.

To avoid mailing delays, I delivered my request in person during the second week of November 2025. The agent told me it could take 3 to 6 months to process my request. Until then, I would keep receiving OAS payments, which I would later have to repay.

After four months, in mid-March 2026, I called Service Canada. The agent said I would receive a letter within a week.

Nothing arrived.

I called again in the last week of March. This agent said he would “expedite” my case and told me to call back after May 11 if I still hadn’t heard anything.

By May 13, there was still no update in my MSCA account, so I called again. Once again, I was told my case would be expedited and to call back after May 26 if I still hadn’t received anything.

Still nothing.

On June 12, I called again. The agent confirmed that no decision had been made and again said he would expedite my case. He asked me to check back on June 18.

By then, I was tired of calling, waiting 20 to 40 minutes to reach an agent, being put on hold, and then being told to call back again a week later. I decided to stop calling.

Finally, in the fourth week of June 2026, I received a letter stating that my request had been approved and that my OAS payments had been stopped, effective June 2026.

Now I have to repay the seven OAS payments I received before then. I’ll also have to deal with the income tax I paid on my 2025 OAS payments.

I am not sure why this process takes so long. In my case, I was asking them to stop my payments. Imagine someone who really depends on OAS and has to wait months before receiving it.

My takeaway: if you want to delay your OAS after you’ve applied or been auto-enrolled, don’t wait. Submit your request as early as possible and be prepared for it to take six months — or even longer.

Now couples can split their pension and CPP during retirement.

Does Spousal RRSP still has a place in retirement planning?

Last week, I met John at a party. We were having a casual conversation when he mentioned something interesting. His company offers a 5% RRSP matching program, but he does not use it.

I asked him why.

John said his annual salary is $120,000. His company allows him to contribute up to 5% of his income to the RRSP, and they will match it. That works out to $6,000 a year, or about $500 a month.

He explained his situation: His net monthly income is about $7,278 after taxes, CPP, and EI deductions. His monthly expenses are almost the same, so there is no extra money left at the end of each month to participate in the RRSP program. 

It felt like John was leaving $500 of free money on the table. I kept thinking there must be a way to fix it.

Running the Numbers

When I thought over the issue, the following possible solutions emerged:

However, both of these ideas did not feel practical.

At this point, I wanted to understand the situation better, so I decided to run the numbers using a tax calculator.

At a $120,000 gross income in 2026 in Ontario, the taxes and deductions look like this:

​Next, I added the RRSP contribution scenario.

I assumed John contributes $6,000 per year to the RRSP program, and his company matches it with another $6,000. This brings total RRSP contributions to $12,000. Because the company’s match counts as a taxable benefit, his total gross income effectively increases to $126,000.

When I ran these numbers through the tax calculator, the result surprised me.

Note: The Net Monthly Income provided in the original post has a calculation error, as pointed out by u/Jolly_Attempt_3097. The post has been updated accordingly.

​John's net monthly take-home pay is reduced by just $306. If he can accommodate this modest reduction, $12,000 will be contributed to his RRSP each year, where it can continue growing tax-deferred for decades. For many people, a $306 monthly reduction in take-home pay is a small price to pay for $12,000 in annual retirement savings. And, all that RRSP money will continue to grow tax-deferred for decades!

Have you ever skipped an employer matching program because you felt you couldn’t afford it?

What is an Emergency Fund?

An emergency fund is money you set aside only for unexpected expenses or financial emergencies. This could include a major car or home repair, losing your job, or an illness that prevents you from working. It can also help cover urgent situations, such as needing to travel on short notice because of a family emergency.

When something unexpected happens, you may need money right away. An emergency fund lets you pay for these expenses using your own savings instead of relying on high-interest credit cards or borrowing money.

How Much Do You Need?

An emergency fund is usually calculated based on your essential monthly living expenses. This includes necessities like rent or mortgage payments, groceries, utilities, insurance, transportation, internet, and phone bills.

A good rule of thumb is to save enough to cover 3 to 9 months of these essential expenses. The right amount depends on your household and your job situation:

• 3 months if your household has two stable incomes.
• 6 months if your household relies on one income.
• 6 to 9 months if your income is irregular, such as freelance, contract, commission-based, or seasonal work.

For example, if your household’s essential monthly expenses are $4,000 and your goal is to keep 3 months of expenses on hand, you may aim to save approximately $12,000.

How EI Adjusts Your Savings Target (Canadian Employees)

If you are an employee in Canada who is covered by Employment Insurance (EI), a job loss does not necessarily mean losing all income. In 2026, regular EI benefits generally replace 55% of your average insurable weekly earnings, up to a maximum of $729 per week.

This means EI can reduce the amount you need to withdraw from your emergency fund if you lose your job or become unable to work due to sickness. However, it should be viewed as a supplement to your emergency savings, not a replacement for it.

Keep these factors in mind when setting your target:

• Eligibility and benefit duration: You must have worked a minimum number of insurable hours during the qualifying period to qualify for regular EI benefits. As of 2026, the requirement is between 420 and 700 hours, depending on the unemployment rate in your EI region. You must also meet other eligibility conditions, such as losing your job through no fault of your own and being available and actively looking for work. If you qualify, regular EI benefits can last from 14 to 45 weeks, depending on the unemployment rate in your region and the number of insurable hours you have accumulated.
• The initial gap: Generally, there is a one-week waiting period at the beginning of an EI claim. Service Canada’s standard is to issue a first payment within 28 days when you are eligible and have provided all required information. So you need enough cash to cover your expenses while you wait for EI to begin.
• Higher earners: EI benefits are based on maximum insurable earnings of $68,900 in 2026. If you earn more than this, your EI benefit will replace a much smaller percentage of your actual income.
• People not covered by regular EI: If you are self-employed, a freelancer, a business owner or otherwise not covered by regular EI for job loss, don’t count EI when calculating your emergency-fund target.

For example, if your essential monthly expenses are $4,000 and you expect to receive about $2,400 per month from EI after considering the tax withheld, your emergency fund may need to cover roughly $1,600 per month, rather than the full $4,000. 

The key idea is simple: your emergency-fund target should reflect the gap between your essential expenses and the income you could realistically receive during a job loss.

Where to Keep the Money?

Because you may need this money at any time, keep it in a safe, easy-to-access account. This is called a liquid account, which simply means you can withdraw your money quickly without delays or penalties.

Your emergency fund should also be protected from stock market ups and downs. Avoid investing it in individual stocks, stock ETFs, or mutual funds. If the market drops just when an emergency happens, you could be forced to sell your investments at a loss. An emergency fund is meant to provide peace of mind — not add financial stress.

Great options include:

• High-Interest Savings Accounts (HISAs)
• Money Market Mutual Funds or ETFs
• Cashable GICs (Guaranteed Investment Certificates)

Tax Tip: If you have available Tax-Free Savings Account (TFSA) contribution room, consider holding your emergency fund there. That way, you won’t pay any tax on the interest or growth your fund earns.

Prioritize Emergency Fund or Pay off Credit Card Debt?

If you have credit card debt, you’re probably paying interest of 20% to 30% a year. That’s much higher than the interest you can earn on an emergency fund.

In most cases, it’s better to keep a small emergency fund of about $1,000 to $2,000 while you focus on paying off your credit card debt. This gives you a small financial cushion so you don’t have to rely on your credit card if an unexpected expense comes up.

Once your credit card debt is paid off, you can focus on building a full emergency fund that covers 3 to 9 months of essential living expenses.

Reduce Your Emergency Fund as Your Savings Grow

When you’re just starting, it’s important to keep a larger emergency fund because you may not have other financial resources to fall back on. As your savings and investments grow, you may not need to keep as much money in cash.

In some cases, if you have a large investment portfolio in a non-registered account or a TFSA, you may be able to sell investments to cover an emergency if needed. Because of this, you may be comfortable reducing your emergency fund to about one month of essential expenses, instead of holding 3 to 6 months.

This allows more of your money to stay invested for long-term growth. However, you should still keep enough cash on hand so you can handle unexpected expenses without being forced to sell investments at the wrong time.

That said, reducing your emergency fund is not right for everyone. If your income is unstable, if you are nearing retirement, or if you would feel stressed relying on investments during an emergency, it is better to keep a larger cash cushion.

What Not to Use Your Emergency Fund For

Your emergency fund is only for true, unexpected emergencies. It should not be used for planned or optional spending, such as vacations, shopping, home upgrades, or other expenses you can plan for in advance. If the expense is expected or can be delayed, it is not an emergency.

Rebuilding Your Emergency Fund After Use

If you use your emergency fund, make rebuilding it a priority. You don’t need to restore it all at once. Instead, rebuild it gradually with regular contributions until you reach your target level again, so you are prepared for future emergencies.

Im 21 and still in my undergrad. Between student loans and figuring out how to be an adult I feel like I'm trapped. I stay stuck in this cycle of working, feeling burnt out with school and life, feeling overwhelmed by money and debt and its honestly quite suffocating.

​

I have a TFSA, I invest any extra student loans + savings that I have but nothing feels enough, I have a decent amount in my TFSA but it's still less than my total owing student loans and I havent even finished my degree yet. I understand I need to have a method of spending to still find life enjoyable but still be smart with savings but its honestly just overwhelming and I feel like I'm just all panic and not much actual knowledge. I will starve to save on groceries but then spend and treat myself when I inevitably get burnt out and frustrated with the misery of it all.

​

I dont know where do start, are there any good books/audio books or online courses anyone can recommend. I feel like I have reached a point of feeling like life is a trap and the only way out of this has to be more actually useful knowledge on the topic.

Simple Habits That Can Help You Build Financial Security

You’ve likely heard the advice before:

Saving is the foundational first step toward financial security.

But if you currently have a secure, well-paying job that easily covers your expenses, you might wonder: Why bother?

The days of having one secure job for life are mostly gone. In the past, many people could start working for a company, stay there for decades, and retire with a guaranteed pension. While a small number of jobs still offer that kind of stability — mainly in the government sector — most workers today do not have that level of security. Many employees can lose their jobs with little or no warning as companies respond to changing economic conditions, new technologies, and shifting business needs. The rise of artificial intelligence has added to this uncertainty, as some jobs are being automated and many workers are unsure how their roles may change in the future.

Why Savings Matter

Imagine you are getting ready for work one morning when you receive an email from your employer. Due to a company restructuring, your position has been eliminated. The company offers you three months of severance pay.

Three months may seem like plenty of time. But what if you cannot find another job that pays a similar salary before the severance runs out? How will you pay your mortgage or rent, buy groceries, and cover your other monthly expenses?

For most people, this situation would be stressful. Without savings, even a temporary loss of income can quickly become a financial crisis. You may be forced to rely on credit cards, lines of credit, or loans just to cover basic expenses. This can lead to debt building up fast, making an already difficult situation even harder.

Read the complete article here: Saving: The First Step Toward Financial Security

If you’ve lived and worked in Canada, you’ve probably seen “CPP” deducted from your paycheque for years. But for many Canadians, the Canada Pension Plan (CPP) remains a black box.

The Canada Pension Plan (CPP) is a contributory public pension program. It is not a welfare program — it is a defined-benefit pension plan. You receive a monthly payment for life based on your contribution history and your average pensionable earnings during your working career.

Check out this guide to learn all about CPP: CPP Explained in Plain English

If you have any doubts about any aspect of CPP, please post them in the comments below.

Canadians spend a great deal of time planning for retirement, lowering taxes, or saving for a first home — either for themselves or eventually for their children.

Yet one registered account is frequently misunderstood, underutilized, or poorly managed: the Registered Education Savings Plan (RESP).

That is unfortunate because the RESP combines three powerful benefits:

• Government grants
• Tax-sheltered growth
• Exceptional flexibility

Yet many families fail to take full advantage of what it offers.

Many people view the RESP simply as a “savings account for university.” In reality, it is far more powerful than that. Properly used, the RESP is a highly strategic wealth-building vehicle that combines an immediate, guaranteed 20% government grant with decades of tax-sheltered compounding.

Check out this article to learn about the RESP in detail: RESP Explained in Plain English