Tax-sheltered accounts, explained in plain words

Two people can invest in exactly the same fund and end up with very different amounts. Often the difference is the account they used.

Two main types

Tax now, never again. You put in money you've already paid tax on. It grows tax-free, and withdrawals are tax-free. In Canada this is the TFSA. In the U.S., the Roth IRA and Roth 401(k) work in a similar way.

Tax later. You get a tax deduction when you put money in. It grows tax-deferred, and you pay tax when you take it out. In Canada this is the RRSP. In the U.S., the traditional IRA and 401(k).

Which is better?

It depends mostly on your tax rate now compared with what you expect in retirement.

• If you expect a lower tax rate later, "tax later" accounts often come out ahead.
• If you expect a similar or higher rate later, "tax now" accounts often win.
• Many people use both.

Rules to know

Each account has contribution limits, deadlines and withdrawal rules, and they change. Over-contributing can bring penalties. Check the current limits each year on your government's tax website.

Don't forget workplace matches

If your employer matches contributions to a workplace plan, that's often the best first step. A match is extra money on top of your pay.

Before you choose an investment, choose the right home for it.

Tax rules are personal. An accountant or financial planner can help you decide which accounts fit your situation.