Back by popular demand!–here.s Part Four and accounts are the next item on the table. But since I can.t remember the topics in parts one to three, it might be a good idea for a refresher before starting! Here.s the road we took: Part One covered why investing is handy and what to expect. Part Two focussed on costs, costs, and costs. Part Three introduced the idea of risk and how an easy to construct portfolio with a bond and an equity component could be tailor fit to suit an investor.s risk profile. Next up are the different types of accounts.

Accounts: TFSA, RRSP (or RSP), and Non-Registered

There.s three different types of accounts. Think of accounts as empty baskets or shopping carts into which you can put your investments. Just as baskets or carts have different qualities (they can be made of metal or wood; some you carry and others have wheels, etc.,) the three different types of accounts have different attributes from a tax perspective:

TFSAs (Tax Free Savings Accounts) are accounts where you can put your after-tax income. Your investments grow tax free inside the account, hence it.s name. When money is taken out of the account, it is not declared as income and you are not taxed.

RRSPs or RSPs (Registered Retirement Savings Plans) are accounts where you can put your pre-tax income (pre-tax since when you file taxes in March the CRA sends you back whatever taxes you paid on the amount that was contributed to the RSP). Your investments grow tax free inside the account. When the money is taken out, it is declared as income and you are taxed.

Think of TFSAs and RSPs are mirror images of one another. If the tax bracket in your working and retirement years doesn.t change, they are the same in terms of the savings because in the TFSA you are taxed on the money before you put it in (therefore you put in less) but you are not taxed when you take it out. In the RSP, you aren.t taxed on the money before you put it in (therefore you have more to put in) but you are taxed when you take it out.

Non-Registered accounts are simply investment accounts held outside tax shelters such as TFSAs and RRSPs. You put your after-tax income into these accounts. Growth in investments in non-registered accounts are classified as dividends or capital gains and are taxed, but at preferential rates. Some basic record keeping is necessary to work out gains and losses when doing taxes. Although there are more tax considerations and record keeping with non-registered accounts, they are incredibly flexible.

If you.re starting out, the best option is either a TFSA or a RSP. They.re tax shelters and there.s less record keeping involved. If you expect to be making the same or more income during retirement (it happens, believe it or not), go with a TFSA. If you.re not sure, start out with a TFSA. TFSAs are simpler in terms of taking money in and out. If you.re certain you.re going to be making quite a bit less during retirement, consider starting off with a RSP: this way when you put your money into the RSP, you get a lot of your taxes back (because you.re in a high tax bracket) but when you.re withdrawing from your RSP, you.ll be taxed minimally (because you.re in a low tax bracket).

Yes, I know, investing is a workout because it forces you to think about the future! As Yogi Berra once said, ‘Predictions are hard, especially when they concern the future’!

If you.re not sure what to do, start out with a TFSA and you.ll do just fine.

How to Open an Account

So you.ve decided to open up a TFSA. Very good! How do you do this? Well, there.s a couple of options. What you want is a ‘Self-directed TFSA’ account. Self-directed means that you.re in control: you.re not going through a financial advisor (who will offer value added services by directing you to their high cost products). Self-directed is the way to go

The big 5 banks all have brokerage divisions:

1. TD.s brokerage is called TDDI (TD Direct Investing)

2. RBC.s is called RBC Direct Investing

3. Scotia has Scotia iTRADE

4. BMO has BMO Investorline

5. CIBC calls theirs CIBC Investor.s Edge

It might make sense to have the self-directed TFSA with the same institution where you do your banking. You can link it with your chequing account and make deposits or withdrawals quickly and easily. The other option which give you lower cost trades is to go with an independent brokerage such as Questrade. They have lower commissions. To fund the account, you use the bill pay feature at your bank and select Questrade as a payee. You pay them as you would a hydro or a phone bill. When you set up the account, you send Questrade a void cheque so that when you do withdrawals, Questrade will do an electronic funds transfer directly into your bank chequings account. Easy. I have investment accounts at TDDI (because I bank there) and Questrade (to take advantage of low commissions).

Most of the banks allow you to do the application online. Questrade has a handy online application as well: for the ID and void cheque portions, you simply upload photos. It.ll take a few hours to get things set up.

If you.re wondering whether to go with one of the big 5 banks or an independent brokerage, I.d suggest Questrade because of their low fees. It.s easy to set up the account online and it.s easy to use bill pay on your regular bank account to fund it. Withdrawals with electronic funds transfers are also a piece of cake.

So there you have it! Accounts demystified! I think we.ll do two more instalments of the ‘Passive Income’ series before returning to regularly scheduled programming. A primer on how to buy and sell once the account is opened is coming your way. And for the final instalment, maybe a brief FAQ with some words on how my investment philosophy came to be what it is today.

Until next time I.m Edwin Wong and it.s through the passive income stream that I.m able to be Doing Melpomene’s Work. And assiduous readers who have been reading are well on their way as well!