How to choose the right RRSP for your goals
You’ll be faced with four options when you decide to open an account, but not all are created equal, and some are limited
I received an email the other day that reminded me yet again of how little some people know about RRSPs, even though they have been around for more than half a century.
The reader wanted to know where he could “buy” an RRSP that paid more than 2.4 per cent. That was the best offer he could find in his research.
The question revealed two basic gaps in his RRSP knowledge, which I suspect many people share. For starters, you don’t “buy” an RRSP. It’s simply a plan that can be used to invest in a wide range of eligible securities. Think of it as an empty box into which you can put any type of investment that’s approved by the Canada Revenue Agency — and that’s pretty well anything you can imagine except antiques and raw land.
Second, it appears my correspondent was under the impression that only guaranteed investment certificates (GICs) can be held in an RRSP, since the 2.4 per cent he referred to is the highest rate available on a five-year term right now. Here, again, that is not the case. GICs are just one of many possible options.
But not all RRSPs are created equal. The securities you can put into a plan are limited by its nature. There are basically four choices when you create an RRSP account, and it’s essential you choose the right one. Here they are:
Think of an RRSP as an empty box into which you can put any type of investment that’s approved by the Canada Revenue Agency
Asavings plan: This is really a tax-sheltered bank account. You’ll get a tax receipt for your contribution and your money will be safe, but you won’t earn much in the way of a return as long as interest rates remain low. The best option I could find for this type of plan is an RRSP eSavings Account with Alterna Bank, which currently pays 1.95 per cent. However, that rate can change at any time — it is not locked in. And in case you’re wondering, yes, Alterna is a member of the Canada Deposit Insurance Corporation (CDIC) so your money is protected up to $100,000. You’ll find more information at alternabank.ca.
AGIC plan: In this case, you lock in your money for a specific number of years (usually five) in exchange for a fixed rate of return and a guarantee that you will get your principal back at maturity. Again, low rates depress returns but your money is protected by deposit insurance if the financial institution is a CDIC member or covered by a provincial insurance plan.
The best rates are offered by smaller banks and credit unions. Hubert Financial offers the best five-year rate I could find right now, the 2.4 per cent referred to by our reader. Amutual fund plan: As the name suggests, these plans allow you to invest in the mutual funds offered by the financial institution that administers your RRSP.
It’s important to have a plan that provides the widest variety of funds.
Some plans are restricted to one brand of fund while others allow you to select from a range of thirdparty options. Also, ask your adviser about commissions. You want to buy no-load (no commission) mutual funds if possible. If the adviser also sells commission-based funds, you need to negotiate. Ask him to waive his fee on front-end load units (those where commissions are charged when you buy). Many advisers will do that to get your business.
If that’s not agreeable, shop elsewhere. Caution: Never buy deferred sales charge (DSC) fund units. You’ll be hit with a high redemption fee if you cash in within (usually) seven years. Self-directed plans: These offer the most flexibility, but also come with the highest risk.
They allow you to invest in all types of securities, including stocks, bonds, ETFs, mutual funds, GICs, etc. Your profit potential is greatly enhanced, especially when compared to savings and GIC plans. But you’ll need a lot of investing knowledge to administer this type of RRSP.
If you already have an RRSP account, check to see if it’s the best type for your goals and your risk tolerance
The potential for loss is very high, especially if you focus on the stock market, because there are no guarantees of principal and no deposit insurance coverage. If you’re uneasy building an investment portfolio and don’t want to hire a professional to do it for you, choose one of the other options. Self-directed plans can only be set up with a brokerage firm.
If you’re in the process of opening your first RRSP, decide which of these plans suits you best (personally, I’d choose a mutual fund plan).
If you already have an account, check to see if it’s the best type for your goals and your risk tolerance. If it’s not, make a switch. Don’t keep investing your retirement savings in a plan that is not suited to your needs. Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. His website is www.BuildingWealth.ca