What is a cash account?
A cash account is a non-registered savings account that can be used to reach any financial goal. It’s a flexible account that allows for a wide range of investment options, including, mutual funds, stocks, bonds, cash and other securities.
Why use a cash account?
“A cash account is great for people who have already used the full benefit of their tax-advantaged accounts, like RRSPs and TFSAs, because it allows them to continue saving for those larger goals without being capped by a contribution limit,” says Shaun Dass, director, ATB Investor Services.
A cash account offers greater accessibility as it doesn’t have the additional costs or fees that are typically associated with registered plans. If you need to withdraw from the account, your money is conveniently available when you need it.
In contrast to RRSPs and TFSAs, which are tax deferred and tax exempt respectively, cash accounts are taxable. However, from an “asset location” perspective, cash accounts are helpful in maximizing the after-tax value of your overall portfolio because you can reap the benefits of certain tax-preferred investments or strategies.
What role can cash accounts have in your financial plan?
“From a financial-planning perspective, having a cash account can be beneficial because it allows you to take maximum advantage of investments that have tax-preferred treatment,” explains Dass. “For example, if you have a stock that has appreciated, you could take advantage of the capital gains tax exclusion available on the investment if was held in a cash account. If the investment was held in an RRSP, you wouldn’t be able to leverage this benefit.”
Before considering a cash account as part of your financial savings plan, you’ll need to know where you’re at with your investments. It’s recommended that you use a cash account only after you’ve maximized your RRSP and TFSA contributions for the year. Using a cash account is also a smart idea if you’re saving for something in the very short term, like a vacation or vehicle, and you need easy access to your money. If you’re saving for the long term, it makes more sense to put your investments into a registered account first and use the cash account as a vessel for extra savings.
To better understand how this type of account and these strategies will affect your personal tax situation, please consult an appropriate tax expert.
If you’re planning to use a cash account or have any questions, check out ATB Prosper.