3 common misconceptions about investing and how to overcome them

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For many Canadians, investing can seem intimidating or out of reach. Misconceptions, often fueled by jargon, fear or misunderstanding can lead them to either avoid investing entirely, make risky decisions or worse, fall victim to investment scams.

While investing is a continuous financial journey, understanding the basics and starting with strong fundamentals can set you up for success. Here is a look at some common misconceptions about investing and how you can reframe your thinking:

 

Misconception #1: Investing is like gambling

Pop culture often portrays investing as a fast-paced, high-risk thrill ride. This narrative fuels the long-held belief that successful investing solely involves day trading and playing the market odds for quick profits. For some, this portrayal may seem similar to gambling and can scare them away from investing or lead them to invest in high-risk and unsuitable opportunities.

Though all investments carry some degree of risk, planning an investment strategy with long-term goals vastly differs from gambling for three main reasons:

  • Time horizon vs right now: Gambling focuses on immediate results while investing takes a long-term view of growing money over extended periods of time through compounding interest. Emotions and adrenaline shouldn’t dictate investment decisions. With a financial plan in place, investors can approach investing in a mindful and strategic way.
  • Informed choice vs chance: Long-term investing considers crucial financial information about the stock, company or fund. You can study a company’s earnings reports, products and services, and leadership before committing to investing your money. In contrast, gambling is simply betting your money on the odds and a healthy dose of luck.
  • Ownership vs all-or-nothing: When you invest money into buying a stock, mutual fund, or ETF, your purchase gives you partial ownership of a company. The return on your investment is never an all-or-nothing scenario like in gambling. Investments can deliver returns in the form of interest, dividends, or capital gains. Diversifying your assets to include low-risk options like GICs, bonds, or a basket of investments through a mutual fund or ETF can further help manage risk

 

Misconception #2: Investing is only for the rich

This is by far the most common barrier to investing. According to CIRO’s 2024 Investor Survey,  six-in-10 non-investors identified not having enough money to invest as one of the things holding them back from investing. For many Albertans, finding room in your budget for investing may seem like a privilege. But modern-day investing has come a long way and is much more affordable.

Gone are the days of expensive stockbrokers and minimum investment requirements. Thanks to advancements like robo-advisors, low cost brokerages, fractional shares and ETFs, you could start investing with as little as $1. Today, the ability to start investing has minimal financial barriers.

An interesting statistic from Ramsey’s 2024 National Study of Millionaires showed that most U.S. millionaires did not inherit any money from their parents or family members. According to the survey, eight out of 10 millionaires came from middle-income or lower-income families. In the same study, three out of four millionaires stated regular consistent contributions lead to success.

Even small investments are worthwhile! Investing can start with small amounts based on your budget and increase as you earn more or are able to allocate more towards your long-term goals.

 

Misconception #3: It’s too late to invest

The goal of any investor is to maximize profits and earn the best return on their investment, while staying within their risk tolerance and time horizon. A longer time horizon allows your money to compound and grow over time faster. But, this thinking can lead some to believe they’re too late to invest or need to take on excessive risk to catch up.

This isn’t the case. Three key lessons that are critical to your success as an investor involves understanding:

  • A financial plan: Regardless of age, having a financial plan in place can help you consider realistic goals and accurate timelines for when you can achieve them. Certified financial planners can help you create an action plan taking into consideration your age, current financial obligations, and risk tolerance.
  • Time in the market: Time spent invested and in the market is generally better than time spent staying on the sidelines. Remember, the power of compound interest works regardless of when you start investing.
  • Risk and return: Taking on more risk doesn’t guarantee a higher return. Know your personal risk tolerance. This will help ensure you choose suitable investments aligned to the risk you are comfortable taking.

 

Like the ancient Chinese proverb, the best time to plant a tree was 20 years ago. The second best time is now.

Common misconceptions can skew how you view and approach investing. With a measured approach and a strong foundation backed by investing principals like diversification, risk vs. reward and compound interest, you can start your investing journey on the right path today.

From saving to drawdown in retirement: Understanding RRIFs

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Imagine this: you have diligently saved towards retirement for decades, consistently contributing to your Registered Retirement Savings Plan (RRSP) or Group RRSP plan through your employer during your working years. Now, with retirement on the horizon, a new question arises: how do you withdraw from your hard-earned savings and create a steady income stream through your golden years? One way is through a Registered Retirement Income Fund (RRIF), the bridge between your accumulated savings and retirement.

 

What is a RRIF and how does it work?

Much like other registered accounts, the Registered Retirement Income Fund (RRIF) is a tax-deferred retirement account available to Canadians. However, the RRIF is not an account to which you can contribute. Rather, it is an extension of your RRSP.

RRSPs are designed to help you save for retirement by allowing tax-deferred growth on your savings and investments until you’re ready to withdraw them. Your accumulated savings and investments from your RRSP can be transferred to a RRIF, which automatically creates a routine annual drawdown process of your assets to provide an income stream.

Similar to the RRSP, the RRIF also offers you the option to allocate your underlying funds to a number of investments such as stocks, bonds, mutual funds, Exchange Traded Funds (ETFs), and Guaranteed Investment Certificates (GICs). You can also transfer funds into a RRIF from a Pooled Registered Pension Plan (PRPP), a Registered Pension Plan (RPP), a Specified Pension Plan (SPP), another RRIF, or from a First Home Savings Account (FHSA).

 

When to convert and what to consider when converting a RRSP to a RRIF

An RRSP can be converted into a RRIF before standard pensionable age. Once converted, no additional funds may be added to it. However, a crucial deadline exists. By the end of the year you turn 71, your RRSP must be — transferred into a RRIF, converted into an annuity, or paid out as a lump sum. Failure to convert your RRSP to a RRIF will result in your account being deregistered, leading to serious tax issues.

If you realize you have opened a RRIF too early and change your mind, it can be converted back to an RRSP as long as the account owner is 71 or younger. It is best to consult a financial advisor who can provide personalized advice based on your situation.

 

Understanding RRIF withdrawals

A hallmark feature of a RRIF is its mandatory minimum withdrawal. Unlike an RRSP, where you can grow your money untouched, the Registered Retirement Income Fund requires you to take out the minimum required amount each year.

There are some factors to consider when withdrawing from your RRIF:

  • The minimum percentage: The minimum withdrawal amount is calculated based on percentage of your RRIF’s total market value at the end of the previous year. This percentage increases as you age, reflecting the idea that you will need more income as you get older. If your spouse is younger than you, the minimum withdrawal can be based on your spouse’s age, allowing for lower minimum payments and longer tax-deferred growth.
  • Finding the right amount: Since a RRIF offers tax-sheltered growth only on the money that remains within the plan, all withdrawals, including the minimum amount, are considered income and taxed at your marginal tax rate. While the plan offers the freedom to withdraw more than the minimum if needed, it’s recommended to consider the following before doing so:
    • You could deplete your savings faster than anticipated.
    • The amount of taxable income increases as you withdraw more.
    • This can impact eligibility for certain government benefits like the Old Age Security (OAS).

 

Should you convert your RRSP early?

The decision to convert your RRSP to a RRIF is a significant milestone when planning for retirement. While some people might wait until their income is lower to convert, there’s no one-size-fits-all answer.

There can be some advantages to converting early, like accessing your savings sooner. However, there are also drawbacks. To make the best choice, consider your retirement timeline, goals, health, and spouse’s age and income. These factors will influence your future needs and tax implications.

The best choice for you will depend on your individual circumstances. Talking to a certified financial advisor can help you weigh the pros and cons and decide what’s right for your retirement goals.

 

What happens to a RRIF when the annuitant dies?

By default, upon death, the value of your RRIF becomes taxable income of your estate. To prevent this, you can name a beneficiary or a successor annuitant.

  • Beneficiary: You can choose anyone as a beneficiary. However, only a beneficiary who is 71 or younger can transfer the funds into their RRSP without affecting their contribution limit. The RRIF account is then closed, and your estate avoids income tax on the amount.
  • Successor annuitant: Only your spouse or common-law partner can be named a successor annuitant. In this case, they will take ownership of the RRIF and have the choice to continue receiving payments, transfer the assets to their own RRIF, or delay the annual withdrawal by transferring it to their RRSP if they are 71 or younger.
  • Financially dependent infirm child or grandchild: Proceeds of a deceased annuitant’s RRIF can also be rolled over to the Registered Disability Savings Plan (RDSP) of a financially dependent infirm child or grandchild.
  • Financially dependent child or grandchild: The funds can only be transferred to a term annuity if the child or grandchild is financially dependent, but not because of a mental or physical impairment.

 

Investing as you age

Having a sound financial plan can play a significant role in helping you work towards your retirement goals. While building up your savings and investments for your retirement is a worthwhile endeavour, finding the optimal path to drawing them down is just as important. Take the time to learn more about RRIFs and how they can fit into your overall retirement strategy.

Planning ahead: Preparing for retirement

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Most Canadians aspire to having a happy and comfortable retirement. Achieving this goal requires proper financial planning and wise investment decisions. One of the commonly used investment vehicles to achieve this goal is a registered retirement savings plan. However, the question remains if this traditional investment method still holds merit for you.

What is an RRSP and how do they work?

An RRSP is a government-registered retirement savings plan in Canada designed for individuals to contribute funds with the specific aim of saving for their retirement.  Advantages of investing in an RRSP include:

  • tax-deductible contributions,
  • the option to make early withdrawals for a first home purchase,
  • compounded growth, and
  • the flexibility to convert an RRSP to a Registered Retirement Income Fund (RRIF) for structured periodic payments as early as age 55.

An RRSP must be opened before the age of 71, as stipulated by the Canada Revenue Agency. The annual contribution limit for RRSPs is set at 18% of the previous year’s earned income or a maximum dollar limit, whichever is lower. For 2024, the maximum contribution limit is $31,560. Exceeding this limit by more than $2000 will result in a 1% per month tax penalty on the excess contributions.

Withdrawals from your RRSP before turning 71 years of age will incur a withholding tax. The exact rate of tax depends on your province of residence. It is important to note that early withdrawals must be declared as income on your tax return and they will be taxed at your marginal tax rate. Additionally, withdrawals from an RRSP can result in permanent loss of the contribution room.

Starting RRSP contributions early in life can help you leverage the power of time and compound interest. This means that your investments have more time to grow, potentially resulting in a more substantial retirement fund. Additionally, early contributions allow you to take advantage of tax-deferred growth, which means that you can reduce your taxable income now and enjoy the benefits of tax-sheltered growth until retirement. Ultimately, starting an RRSP early can help you lay the foundation for a more secure retirement. Use the ASC’s RRSP calculator to see how contributing often and early can benefit your retirement plan.

What types of RRSP options exist for investors?

If you are considering opening an RRSP account, it’s important to know the available options to make an informed decision. Essentially, you need to decide whether you want to invest individually or in collaboration with others.

  1. Individual RRSP: An individual RRSP is registered in your name, providing exclusive ownership of the investments and associated tax benefits. This option is ideal for those seeking full control and ownership over their RRSP portfolio. Consider choosing a self-directed RRSP if you prefer to make investment decisions on your own. With a self directed RRSP, you have the flexibility to purchase and sell various qualified investments such as GICs, bonds, mutual funds, and more. However, keep in mind that commissions on transactions apply, similar to a non-registered brokerage account. Additionally, an annual administration fee may be applicable. Learn more about the different types of investments available to you.
  2. Group RRSP: A Group RRSP is a retirement savings plan that your employer offers. It may come with some enticing benefits, such as matching contributions. Matching is when your employer contributes to your RRSP as well, providing essentially free money for your retirement savings. Additionally, you may also enjoy lower management fees on the investments held within the Group RRSP, and the convenience of automatic contributions directly from your paycheque.
  3. Spousal RRSP: A spousal RRSP is an account designed to benefit couples by allowing income splitting during retirement. Contributions made by the higher-earning spouse generates tax deductions, while withdrawals are attributed to the lower-earning spouse, potentially reducing overall tax liabilities.

Each option caters to specific needs and preferences, providing flexibility in aligning your RRSP with your unique financial goals. Consulting with a financial advisor can further guide you in making an informed choice tailored to your circumstances.

Additionally, it’s worth exploring other tax-advantaged accounts like Tax-Free Savings Accounts (TFSA). TFSAs prove advantageous, particularly for those with income taxed at lower rates or those who are anticipating increased income in the future.

Four steps to building financial resiliency into your investing journey

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For many new and experienced investors, it can be challenging to invest and work to achieve financial goals while managing the rising costs of daily life. However, developing certain behaviours and processes in relation to your money can help you stay on track as well as build your financial resiliency. These steps hopefully mitigate stress and help you weather the storm of rising costs.

November is Financial Literacy Month, a time when Canadians are reminded to strengthen their financial knowledge and resilience. The following four steps can help you become more financially resilient.

  1. Practice financial self-awareness
    When times are tough, ignoring your financial situation and maintaining your current spending habits can be comforting. However, this feeling of comfort may be short-lived though, as uncertainty can become a source of anxiety. Instead, practice financial self-awareness by staying mindful and fully engaged with your finances. By assessing your income, expenses, savings, investments and debts, you can better understand where you can cost-cut, which debts to pay off sooner, and how to rebalance your spending towards necessities and long-term goals.
  2. Recognize what you can and can’t control
    It is critical that you recognize that certain factors – such as interest rates or a possible economic recession – are beyond your control. However, building a plan that factors in worst-case scenarios can help make you feel empowered when times are unpredictable. For instance, if you’re worried about the market heading for a recession, consider the time horizon of your investment goals and if you are well-diversified to reduce the risk you are taking on. If you need more assistance with your financial planning or reviewing your investment portfolio, a certified financial planner or registered investment advisor can help you better plan for the future.
  3. Create and maintain an emergency fund
    An emergency fund is a savings account dedicated to helping you cover life’s unforeseen costs without having to draw from high-interest debt options such as credit cards or selling your investments early. One of the best ways to establish an emergency fund is to start small, setting aside a small portion of every paycheck into a savings or high-interest savings account. Over time you can automate them through your bank or credit union, or even increase your contributions as your budget allows. Creating an emergency fund equivalent to three to six months of your typical expenses can provide you with peace of mind that you can sufficiently cover most emergency costs.
  4. Prioritize paying down consumer debt
    Consumer debt, such as credit cards and the negative compound interest they generate, can limit the money you have available for day-to-day life as well as your ability to save and invest. Only paying the required minimum on your credit card will help you avoid additional late fees, but will only pay off a fraction of the principal loan. Worse, ignoring your debt can compound the interest. For example, if you did not make any payments on a credit card with an interest rate of 24.99 per cent (the annual percentage calculated daily and charged on any balances carried from month to month), the amount you owed would double after just four years. Paying down your debt frees up your future earnings so you can use them elsewhere.

Building financial resilience takes time and conscious effort, but developing healthy habits now can pay off for years to come. This November, take small steps – track your spending, start an emergency fund and/or make a plan to pay down debt.

Three tips to becoming a better investor this fall

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October marks Investor Education Month, a time when Canadians are reminded to strengthen their investment literacy. Whether you are a new or experienced investor, refreshing yourself with our top tips and the fundamentals of wise investing can help you avoid poor performance, common mistakes and fraud.

  1. Consider where you are getting your investing advice
    Investors today are inundated with news, speculation and excitement across traditional, social and digital channels on what to invest in or how to invest. Before putting your money into any recommended investment or changing your current investing approach, consider the qualifications and knowledge of those providing the recommendations. One of the greatest things you can do as an investor is to stay focused on your investing plan. Use diligent research into the fundamentals of the company you are planning to invest in, including its profitability, debt obligations and return on equity. Understanding the fundamentals and relying on information from qualified experts using publicly available data can help you make a more informed decision and avoid fraud.
  2. Pay yourself first
    Investing consistently over time, regardless of whether the share price of an investment is up or down, is one of the best ways to reduce your average cost per share over time. Avoid the costly mistake of trying to time the market or not investing at all. Automating your contributions to your investment accounts is an easy way to remove the decision of when to invest and turn investing into an ongoing and sustainable habit. Some trading platforms may even allow you to set rules for automatically purchasing investments once your contributions reach your accounts.
  3. Reinvest your dividends
    Some single stocks and investment funds offer dividends to their shareholders. Dividends are a share of a company’s profits paid to shareholders either monthly, quarterly or annually based on the number of shares they hold. Investors wanting to maximize the compounding effect of their investments can apply for a dividend reinvestment plan (DRIP) with the financial institution, firm or trading platform they use, for any dividend-producing investments in their portfolio. With a DRIP in place, any dividends received from an investment equal to or greater than the investment’s share price will automatically purchase more shares for you at no extra cost. This reduces the cost of placing trades and further compounds your investment earnings over time.

Improving your investment knowledge on an ongoing basis can play a significant part in helping you reach your financial goals and avoid fraudulent investment scams. Check our Fraudster’s playbook to learn more about avoiding fraudulent investment scams.

Artificial intelligence: What to consider before using it for investing

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Artificial intelligence (AI) has gained significant traction across various industries, including financial markets, promising increased efficiency and data analyzation. AI has also found a prominent role in our day-to-day lives, being used to enhance search engines capabilities and in AI-enhanced chat bots that deliver answers to questions or requests based on data sets that they are trained on.

With the growing interest in AI, some investors are looking to AI’s evolving technology for investing guidance. Before you use AI tools for investing, it’s important to understand its limitations.

Here are some things every investor should consider before investing with the help of AI:

AI is not a replacement for researching investments

While AI is a ground breaking technology, it does not replace the critical step of researching and qualifying an investment. AI chatbots like ChatGPT, OpenAI and Chatsonic are classified as large language models (LLM). This means they process vast amounts of select data sets from the internet and provide a response to your query based on probably word and phrase associations.

LLM AI relies heavily on historical data and may not provide real-time financial and investment analysis or guidance. Understanding past performance can be helpful information but it is never a guarantee of future performance.

Investors should take the time to thoroughly review the company they plan to invest in including the latest information and fundamentals like their business plan, operational information and milestones.

 

AI lacks human intelligence or the experience of registered investment professionals

Everyone has a unique investing journey. Constructing your investment portfolio comprises understanding your financial goals, time horizon and your risk tolerance. AI investing bots lack the emotional intelligence and human intuition to factor these important elements into their recommendations when asked.

Based on how the AI chatbot was coded and the types of data sets it was trained on to source answers, biases could also be present in its responses, favouring a particular approach or recommending only a limited number of investments to inquiring investors. Investors should look to registered financial advisors to receive a comprehensive and personalized assessment, and investment services when needed.

 

Be wary of AI chatbots that direct you to invest on a specific platform

With the growing excitement around the technology, fraudsters promote AI investing bots and apps they say can provide guaranteed or high returns with little to no risk to investors. Be mindful that these types of advertisements are a common red flag of fraud.

One of the best ways to avoid fraud is to confirm that the trading platform you plan to use is registered with the securities regulator in the province or territory you reside. Registration confirms that the individual or firm is properly qualified and comply with investor protection laws.

You can check the registration of any individual, firm or trading platform on our Check registration page.

Advancements in AI has undoubtedly transformed how we obtain, analyze and use information. While AI can provide helpful investment ideas, when it comes to making investment decisions, there is no replacement for the qualified services of registered investment professionals and your thorough research of investments to ensure they align to your goals and risk tolerance.

Treat using AI for investing as a helpful tool but not a substitute for due diligence.

Know your limit and invest within it: Understanding your risk tolerance when investing

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Understanding the level of risk you are willing and able to take with your investments is critical to your success as an investor. All investments come with some degree of risk; the higher the potential return of the investment, the higher the risk that you may lose some or all of your money. Understanding your personal risk tolerance and factoring it into your investment decisions can help you make suitable investments.

How can I determine my risk tolerance?

Risk tolerance is a measure of your ability and willingness to take risks with your money, with the understanding that the performance of your investments may not achieve the expected results. Whether you started investing in your 20s or nearing retirement, everyone has a different risk tolerance that gradually changes over time as they enter new life stages. Your personal preferences also change as you approach your financial goals.

When working with a registered financial advisor or a robo-advisor, a Know Your Client (KYC) form must be filled out before you begin investing. KYC forms play an important part in your investing journey by aiding financial advisors and robo-advisor services to better understand your risk appetite and the suitability of recommended investments. If you are planning to do self-directed investing, it is essential to personally assess your risk tolerance before starting. One tool that is available to help you is the Check Your Risk Tolerance quiz.

Tips to keep your investment portfolio in check with your risk tolerance

Whether you are a new or experienced investor, continually paying attention to and considering your risk tolerance is essential for long-term investing success.

1) Reassess your risk tolerance annually: Your life changes over time and so does the level of risk you want to be exposed to. Consider filling out a new KYC form with your advisor, retaking the CheckFirst quiz every year, or if you reach a new life stage, like getting married or nearing retirement.

2) Be honest with yourself: Investing is a personal journey and requires you to be open and honest with yourself and the investment professionals you work with on the level of risk you are willing to take. For instance, consider if you were to see a hypothetical 50% drop in your investment portfolio value. Reflect on your emotional and financial state if that were to happen and from this place, you will be able to more accurately answer KYC forms and thoughtfully consider high risk investments.

3) Think about your goals: The length of time you expect to hold your investments before withdrawing funds can be an important factor in determining the level of risk you take. Generally, the longer your time horizon, the more risk you can take, as you will have more time to recover if your investment underperforms for a period. The shorter the timeframe, the less risk you may want to take to preserve what you have invested.

4) Adjust your portfolio if it no longer falls within your risk tolerance: As your risk tolerance changes over time, your investments should re-align with it. If you are working with an advisor they can help adjust your portfolio to better represent your risk level. If you are investing on your own, consider how you can slowly adjust the level of risk within your portfolio by using appropriate risk-aligned investments.

Investing without considering your risk tolerance can lead to poor performance and ill-suited investments for your financial goals. By assessing your risk appetite throughout your investing journey, you can confidently build a portfolio to best meet your financial goals and comfort level.

Thinking ahead: Understanding the benefits of using a certified financial planner

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For new and experienced investors, your financial plan is one of the most important elements of your investing journey. A financial plan is a document that outlines your current financial circumstances, your short, medium and long-term goals and the steps you will take to accomplish them. A financial plan can also help you plan for and manage risks, including health or disability needs, job loss, and debt repayment.

Thoroughly evaluating your income, expenditures, savings, and debts and mapping out your expectations for the future is essential to constructing a comprehensive and realistic financial plan. While creating a financial plan can be done on your own, many seek out the expertise of a certified financial planner.

A certified financial planner has a thorough knowledge of personal finances and can help clients of all ages develop a plan to reach their goals and maximize the efficiency of their assets.

Let’s explore common scenarios where using the services of a certified financial planner might be right for you.

Not knowing where to start

Drafting your financial plan can feel daunting, and relying on a trusted fiduciary (someone obligated to work in your best interest), like a financial planner, can help you get started. Financial planners are trained to develop a diversified and suitable investment portfolio; provide retirement, estate and tax planning services, and insurance and debt management recommendations. Financial planners can get you started on the right foot by helping you better understand where you are currently and the optimal way to get to your financial goals while outlining additional factors in your planning you may not have considered.

Dealing with significant life events

Earning a promotion at work, getting married or divorced, and receiving an unexpected inheritance from a loved one are significant life events which can impact your finances and future goals. A financial planner can help you assess the changes in your life and begin charting out a plan of action that allows you to best meet your financial goals under your new personal and financial circumstances.

Preparing for retirement

Saving for retirement is an important goal for many Canadians. Knowing approximately how much you and your spouse will need in 10-20-30 years can be challenging to determine and even more so if you plan to retire early or with a desired retirement income. Financial planners can take a detailed account of your assets, including real estate, investments, debts, savings, work pensions and access to government benefits like the Canadian Pension Plan, Old Age Security, and the Guaranteed Income Supplement to formulate a comprehensive financial plan which includes recommended withdrawal limits during retirement to ensure your nest egg lasts through your golden years.

Having a sound financial plan can play a big part in helping you reach your goals. Whether you want to focus on a specific area of your life, like investment planning or simply want a new perspective from someone with the knowledge, skills, expertise and ethical obligations, a financial planner can be a valuable partner in your financial planning journey.

To learn more about certified financial planners and how to find a financial planner for your needs, visit FP Canada.

Saving and investing towards your first home with the new Tax-free first home savings account (FHSA)

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In a January 2023 poll conducted by The Harris Poll on behalf of NerdWallet, nearly two-thirds of Canadians (67%) listed owning a home as a priority. For those with the financial goal of buying their first home, the Canadian government introduced the Tax-free first home savings account (FHSA) on April 1, 2023, to help Canadians over 18 save and invest towards home ownership.

The FHSA is a registered plan that allows you to save and invest up to $40,000 tax-free toward your first home purchase. Learn what you should consider before opening an FHSA account.

1) The FHSA offers the best perks of the RRSP and TFSA

The FHSA takes the best benefits of a Registered retirement savings plan (RRSP) and a Tax-free savings account (TFSA). Your contributions to your FHSA within a particular calendar year will also reduce your taxable income when you file your tax return. Unlike RRSPs, where your withdrawals are taxed as income, withdrawals from your FHSA to purchase your first home are tax-free, including all the investment income you may have generated in the account, like a TFSA. This allows you to maximize your savings towards your first home purchase while minimizing income tax.

2) The FHSA has annual contribution limits and qualifying withdrawals

For those wanting to use this newly registered account, the Government of Canada imposed limitations on how much you can save and invest in your FHSA before incurring penalties. Starting in 2023, Canadians can contribute up to $8000 in their FHSA yearly, with any unused contribution amounts carried forward to a max of $8000. Over-contributing to your FHSA will incur a 1% tax on the over-contributed amount each month unless brought below contribution limits.

To make a qualified tax-free withdrawal or series of withdrawals, you must be a first-time home buyer when you make the withdrawal(s). To qualify as a first-time home buyer, you must not have lived in a home you owned at any time during the part of the calendar year before the withdrawal is made or at any time in the preceding four calendar years. Any non-home related purchases may result in withdrawals being treated as taxable income.

3) You can combine your FHSA savings with the Home buyer’s plan

Before the FHSA was introduced, Canadians could use the Home buyers plan (HBP) to pay for a down payment. The HBP allows you to take up to $35,000 from your RRSP without taxation for your first home purchase. Any amount withdrawn through an HBP must be paid back to the RRSP within fifteen years or you lose the contribution amount from your RRSP and it is treated as taxable income. Combining the use of both accounts, potentially gives you access up to $75,000 in savings and investments towards your home purchase.

Saving and investing toward your first home purchase can be challenging, but leveraging the unique benefits offered by the newly introduced FHSA can help you reach your goal quicker and more efficiently than any other registered plan or account currently available.

Kicking off the new year with resolutions to strengthen your financial fitness

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For many, the new year is a time for personal reflection and goal setting. These goals or resolutions could be to hit the gym more frequently or even read a new book every month. While these are admirable activities, the new year is also a great time for considering your wealth-building journey and setting mid and long-term financial goals. Learn four actions you can take to become more financially fit in 2023:

1) Pay down your debt

Consumer debt is a challenging burden that limits not only the money you can put towards investing for future goals but also limits your ability to afford the day-to-day cost of living. One of the best steps you can take is to develop a repayment plan for your credit card or other kinds of debt. Credit cards have an average interest rate of 19.99% (the annual percentage calculated daily and charged on any balances carried from month to month) meaning debt can quickly grow out of control if you let it. Paying down your debt every month allows more of your future earnings to be used elsewhere.

2) Create a rainy day fund

If the pandemic has reminded us of anything, it’s that the unexpected can happen and the better prepared we are, the better we can weather the storm. From your vehicle needing an unforeseen fix to an emergency home repair, creating a savings account or high-interest savings account to cover the curveballs life throws at you can be a game changer for your wealth-building journey. Slowly building up an emergency fund, equivalent to 3-6 months of income, can allow you to dedicate a larger portion of your money to investing while giving you the confidence that you won’t have to sell your investments early to cover an unexpected cost. Starting with just $25 a paycheck can net you $600 in emergency savings in a year.

3)Take advantage of your employer’s group RRSP plan

Thinking about something far off – like retirement – can feel daunting, but the earlier you start saving and investing for your golden years, the bigger the nest egg you will create for yourself. If your employer offers a voluntary group registered retirement savings plan, you can start investing for your retirement every month, and also take advantage of group plan benefits like investments with lower-cost fees. You may even be able to benefit from a match savings program in which your employer will also contribute to your plan. Once you enroll in your company’s program, you can sign up for automatic payroll deduction and take the guesswork out of routinely saving for your retirement years.

4) Invest in yourself before you invest your money

Much like physical exercise, the more you train yourself to be financially fit, the better success you will have in developing positive habits with your money and investing toward your long-term goals. Look for opportunities to strengthen your knowledge of money management and investing with credible and unbiased resources. The Financial Consumer Agency of Canada has excellent information on debt and borrowing, managing your money and even mortgage calculators. Want to learn more about investing? Visit CheckFirst.ca, brought to you by the Alberta Securities Commission to access unbiased information, tools and resources to help you learn to invest and avoid scams. You can even attend one of the many free programs on investing held throughout the province all year long, both online and in person.

The new year always brings excitement and the push to learn and advance. As you build out your areas for growth in 2023, consider including a few financial resolutions to help you spend consciously, invest wisely, and reach your financial goals today and for many years to come.