Trying to open a new account and I don’t understand what I can open.
There’s the regular stuff, like day-to-day banking or whatnot, but then there’s also a TFSA and RSP, and then there are debit and credit accounts and then there are chequing and savings accounts and I’m just trying to understand the difference in all of it. Isn’t a RSP also a savings account? Do some of these overlap? Which ones? I’m trying to be more independent.
In: 6
Your basic accounts:
Savings account – you deposit money with the bank. The bank pays you a small amount of interest on it, because they loan that money out for profit. There is usually a penalty for withdrawing too much too often.
Checking account – you can deposit and withdraw money without limit. You are also issued a bank card and/or check book linked to the account so that you can pay for goods and services with it. It does not earn interest.
Canada specific accounts:
TFSA – Tax Free Savings Account. This is a savings account in Canada with certain tax benefits. It can hold a variety of assets – not just cash. It can hold stock shares, bonds, etc.
RRSP – Registered Retirement Savings Plan. This is an account that you put assets into (cash savings, foreign currency, investments, etc.) for retirement. It has tax benefits like a TFSA, but it is angled more towards retirement savings (like a 401k or IRA in the US). You can contribute and withdraw at any age. But at 71, you either have to withdraw everything (and get taxed on all of it) or convert to an RRIF. An RRIF continues tax free but you can no longer contribute to it, and there is a minimum monthly withdrawal you have to take out.
At the bare minimum, you should get a checking account. This allows you to get paid for work via direct deposit, and to spend your money directly. This is called liquidity – a checking account is about as liquid as you get, and you should have one in order to better spend and manage your money.
A savings account is also a good idea for short term savings. You should try to, over time, save 3-6 months of income into a savings account as an emergency fund. You won’t be earning much interest on it, but if an unexpected expense comes up or you lose your job, having that money there and accessible is a huge boost.
TFSAs and RRSPs are great options for saving for long term purposes. The idea with these is you put your money/assets in, preferably invested in something that pays good interest, and then you don’t touch it for years or decades. Over time, through market ups and downs, you will increase the value of this money significantly thanks to compound interest. If you want to retire at some point, these are a must. You should get an emergency fund saved and then talk to a financial advisor to see which account and savings plan is best for you.
I’m unfamiliar with debit/credit accounts. Those may be regional/not terms used where I live (US). But generally, debit and credit are accounting terms. A debit is the use of funds that directly decreases an account, like a checking account. A credit is the issue of money that is expected to be paid back with interest, like with a loan or credit card.
Source: work in a bank
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