One of the first decisions an investor must make is the type of investment account they want to open.
An investment account is necessary to purchase and sell securities. This account holds an investor’s cash and investments, including stocks, mutual funds, and ETFs, among others.
To get started, investors must open either a registered or an unregistered account through a financial institution or brokerage. Each type of account has its own benefits, making it imperative that investors fully understand the differences.
Registered accounts are granted tax-deferred status by the government. This means that income earned by the investments in the account are not taxed until funds are withdrawn from the account.
However, it’s important to note that this can vary slightly between the different types of registered accounts. For example, contributions to — as well as income earned in — a tax-free savings account (TFSA) are generally tax-free, even when an account holder makes withdrawals.
Conversely, nonregistered accounts are not given special tax treatment, as they are not registered with the Canadian federal government. Therefore, investors are required to pay taxes annually on income generated by investments held in a nonregistered account.
Investment gains include any interest, dividends, distributions, and capital gains from selling investments. At a high level, these are taxable at the investor’s marginal tax rate in the year they occur.
Unlike registered accounts, however, nonregistered accounts generally do not have any restrictions on how much an investor can contribute or withdraw from the account. Additionally, unregistered accounts offer more flexibility in terms of investments available. These accounts can hold products that are not allowed in registered accounts.
Importantly, nonregistered accounts can be used in conjunction with registered accounts to help investors meet their financial goals.
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