Understanding the difference between a savings vehicle and a savings product
The best way to understand the difference between a savings vehicle and a savings product is to think of the former as a shopping cart and the latter as a grocery item you place inside it. Read on to learn more about them!
We all have our savings goals, whether it's putting money aside for retirement, financing a personal project, or buying property. To reach your goals, you can use different savings vehicles, such as a TFSA, RRSP, or RRIF. But a savings vehicle is nothing without savings products!
You can put different savings products in your chosen vehicle depending on your financial strategy, goal, and risk tolerance. Sound complicated? Don't worry! After reading the following article, you'll have a better understanding of how savings vehicles and savings products differ yet work together—knowledge that will make it easier for you to manage your personal finances.
What is a savings vehicle?
Pretend you're at the supermarket. When you arrive, you take a cart and fill it with grocery items. In this analogy, the cart is your savings vehicle, while the items you put inside it are your savings products. When you invest, you need to select a product and vehicle combination that suits your specific objectives.
For example, the RRSP, TFSA, and RRIF are carts that can be filled with different savings products. It's important to note that each cart has particular features and rules that provide certain tax advantages. Here are some examples.
- The TFSA (tax-free savings account): With this vehicle, you can grow your money and take advantage of tax-free investment income. In addition, any withdrawals you make are not added to your current year's income and are therefore non-taxable. It's a flexible savings vehicle, which means you can usually access your funds at any time. While a TFSA is well suited for short-term projects, it can also be a great choice if you're looking to build a financial cushion. It can even be integrated into a long-term investment strategy, such as saving for retirement.
- The RRSP (registered retirement savings plan): Designed to encourage you to save for retirement, RRSPs offer attractive tax benefits. Your contributions are tax deductible, making the RRSP a particularly appealing vehicle if you have a high income. Your contributions and the returns generated will not be taxable until the RRSP is disbursed. However, under certain conditions, the accumulated amounts can be used without tax implications to buy property (HBP) or to go back to school (LLP).
- The RRIF (When you retire, you can convert your RRSP to an RRIF to start enjoying your savings. With an RRIF, you have to withdraw a minimum amount each year. The money that remains in your RRIF will continue to grow tax-free as if it were in an RRSP. Note that the deadline to convert your RRSP into an RRIF is December 31 of the year you turn 71. Discover many other retirement savings vehicles and learn more about the different disbursement strategies.
- A non-registered savings plan: This vehicle may not offer any tax advantages, but unlike the RRSP and TFSA, it's not subject to annual contribution limits. Interest income, dividends, and capital gains are subject to different tax rules. A non-registered plan may be attractive if you've already maximized your RRSP and TFSA contributions.
- The RESP (registered education savings plan): This savings vehicle is very useful if you want to save for your child's post-secondary education. The accumulated amounts are non-taxable as long as they remain in the RESP. At the time of withdrawal, the beneficiary will have to add the educational assistance payments to their income. Registered with the Canada Revenue Agency, an RESP can generally remain open for up to 35 years.
Note: The terms "plan" and "savings vehicle" mean the same thing.
To ensure you make the best choices for your needs, start by taking stock of your financial situation. You should also define your goals, such as saving for retirement. This will help you determine which vehicle has the most to offer you.
What is a savings product?
A savings vehicle alone can't generate investment income. Rather, it's the products you include in it that can help you grow your capital. If you're interested in a savings vehicle's tax benefits, it's important to know what it contains.
For example, you can fill your cart with investments like guaranteed investment certificates, mutual funds, bonds, stocks, exchange-traded funds, and more. Each of these products has its own composition and specific features, including variable risks and returns.
To help you choose the best products for your shopping cart (or carts), start by establishing your investor profile. This depends on your financial situation, your level of investment knowledge, and your investment horizon, but also on your risk tolerance and savings goal. Once you've completed your profile, you'll have a clearer view of the strategy to adopt to maximize your potential investment gains without leaving your comfort zone.
To better understand the different options available, let's look at the Fonds's RRSP+1 and the TFSA with FlexiFonds2. If you save with the RRSP+, your savings vehicle is the RRSP and your savings product is the Fonds's shares. In the second case, the TFSA is your vehicle and your product is a mutual fund.
In short, it's possible to use the same savings product in two different vehicles. The important thing is to find what best suits your needs.
There are subtle but important differences between investing in a TFSA and investing in mutual funds within a TFSA. Once you fully grasp these nuances and are familiar with the different savings vehicles and products available, you'll have every chance of getting the most out of your money, whether in terms of tax benefits or reaching your savings goals. Be sure to ask a personal finance specialist to help you determine the best savings strategy for you.
Keep your savings local
The TFSA with FlexiFonds not only helps you save for important projects, but also allows you to support the Québec economy thanks to mutual funds that invest primarily here.DISCOVER THE TFSA WITH FLEXIFONDS