RRSP (Registered Retirement Savings Plan) allows retirement investments to grow tax free. Contributions to RRSP are tax deductible while RRSP withdrawals are taxable income. Possible RRSP investments include individual stocks, bonds, ETFs, mutual funds, GICs, and RRSP Savings account.
Generally, stocks and ETFs (Exchange Traded Funds) have higher potential returns but are more risky compared to other investments. On the other hand, RRSP Savings account is mostly a safe investment but returns are lower.
1. Stocks and ETFs
Stocks are ownership of a company. Suppose a company has 1 billion stocks trading at $100 each. As a whole, the value of this company would be $100 billion. Owning 1 stock out of 1 billion shares would be owning roughly 0.000000001% of a company.
Owning all of 1 billion shares would mean 100% ownership of a company. Stock owners can make money when the stock price increase in value. Stock price usually increase when the revenue or profit of a company is growing.
Investing in individual stocks can be risky since a stock price will be $0 when a company go bankrupt. S&P 500 is the most common stock market index which tracks the stocks of 500 largest companies in America. The price of S&P 500 is influenced by the 500 stocks.
S&P 500 is the most common measure to know how the stock markets are performing.
ETFs (Exchange Traded Funds) is typically used to diversify investments. For example, S&P 500 ETFs such as SPY and VOO tracks the returns of the S&P 500 with exposure to all 500 stocks.
Questrade RRSP
Questrade offers a self-directed RRSP account where you can buy and sell stocks, ETFs, and mutual funds. Questrade was founded on 1999. Questrade charges around $5-10 for buy or sell stock trades. The main advantage of Questrade is free ETF buys. Selling ETFs on Questrade have a commission fee of about $5-10.
Questwealth, on the other hand, is offered by Questrade to automatically invest funds for a management fee of around 0.37% per year (0.25% charged by Questrade, 0.12% by ETFs). When opening a Questwealth account, a survey needs to be filled to know your risk tolerance and to suit your financial goals to your Questwealth portfolio.
Questrade Video Tutorial: How to Buy and Sell Stocks
Wealthsimple Trade RRSP
Launched on 2019, Wealthsimple stands out as the simplest to use stock and ETF trading platform in Canada. However, they charge an exchange rate fee of 1.50% for every buy or sell US stock and ETF trades. For this reason, people prefer Wealthsimple Trade for Canadian stocks and ETFs since there is no commission for Canadian dollar trades.
Since Wealthsimple is a relatively new platform in Canada, opening an RRSP may be better with the traditional big banks or Questrade. A Personal (taxable) account with Wealthsimple Trade may be best to start trading stocks with small money in Canada.
Video Tutorial: How to Buy and Sell Stocks on Wealthsimple Trade
2. Mutual Funds
Mutual funds are managed by fund managers to invest on different kinds of assets such as stocks and bonds. Mutual funds charge around 1-2% management fees per year.
To buy or sell mutual funds, most Investment Dealers charge around $10 per trade in addition to the 1-2% fee per year that the mutual fund charges.
3. RRSP Savings Accounts and GICs
RRSP Savings accounts earns constant interest income based on the amount of investment. Interest income on an RRSP Savings account are tax free. RRSP withdrawals are taxable while deposits to RRSP are tax deductible up to a certain contribution limit amount which is stated on your CRA account.
On the other hand, GICs (Guaranteed Investment Certificates) earn a constant interest income for a period of time. GIC term length typically varies from 3 months to 10 years. Rates are usually higher on a GIC since the investment is locked in until the term length expires.
GICs can also be held inside an RRSP Savings account. GIC term lengths typically varies from 3 months to 10 years with rates ranging from 0.10% to 2.50% yearly rates. Most Financial Institutions have a minimum of $500 for a GIC term length.
Similarly, interest rates are fixed for the term length you chose.
After the term length expires, you can withdraw the capital or buy another GIC. Multiple GICs of different term lengths can be purchased at any one time. Most Financial Institutions in Canada have a minimum of around $500 for every GIC.
| RRSP Savings Account | RRSP GICs |
| Withdraw anytime | Deposits can only be withdrawn after term length (non-redeemable GICs) |
| Rates can change anytime | Rates are fixed until maturity |
| Receive Monthly Interest | Interest paid out either every year or on the maturity date (Client’s choice) |
Bonds are debt of a company or a government. Bonds pay interest to bondholders. When a corporation go bankrupt, its bonds may be worthless or only a portion of original investment may be paid back.
Government bonds are often thought as the risk free asset since governments can simply print money to avoid bankruptcy. Government bonds, like any bonds and other assets, still have inflation risk, that is, the risk of the value of currency being devalued.
Although government bonds are commonly known as the risk free asset, rates nowadays have been historically low.
Here is a full list of Interest Rates on US Government Bonds (US Treasuries) with maturities ranging 1 month to 30 years.
For example, a government bond may pay 0.5%. Assuming a 3% inflation, the real returns would be around a 2.5% loss in terms of purchasing power.
Inflation simply means higher prices. A 3% inflation means that prices, on average, became 3% more expensive.
At maturity, the government or corporation have to pay back debt to bondholders. Longer maturity dates are more sensitive to change on interest rate.
How RRSP Works
Investments can grow tax free on an RRSP. However, RRSP withdrawals are taxable income. Also, there is a limit to how much you can deposit to an RRSP account.
RRSP Contribution Limit
The contribution limit on an RRSP is the 18% of your previous year’s income up to a certain limit ($27,830 for 2021). Also, unused RRSP limits from past years will automatically be added to your current contribution limit.
For example, a person earned $100,000 on tax year 2020. The RRSP contribution limit for tax year 2021 will be $18,000 (18% of $100,000) which means up to $18,000 can be contributed to an RRSP and deducted when filing 2021 income taxes.
Moreover, employers may contribution to your pension plan. These pension plan contribution by your employer may deduct your RRSP contribution limit.
To skip calculations, the RRSP Contribution Limit amount is specified on your Notice of Assessment (received after filing taxes) from the CRA (Canada Revenue Agency – Tax Authority in Canada). Also, the RRSP contribution limit is stated on your CRA account.
RRSP Withdrawal
To withdraw from an RRSP, selling some investments such as stocks or mutual funds may be necessary to convert to cash. Investments such as stocks and ETFs can be converted to cash in less than a week. When some investments are sold and converted to cash, funds can be withdrawn anytime from an RRSP account.
- No Limit
- Withdraw funds anytime
Withdrawing before retirement is possible, but may be subject to higher tax rates. For example, withdrawing $20,000 from an RRSP while having an employment income of $100,000 will result to a taxable income of $120,000. For most provinces in Canada, this may result to a marginal tax rate of around 35%.
In comparison, withdrawing $20,000 from an RRSP during retirement with little additional income may result to a lower marginal tax rate. Assuming $10,000 income from other pension plans, a total of $30,000 taxable income may result to a tax rate of only 20%.
Is RRSP a good investment?
In summary, RRSP is a good investment for long term retirement income. RRSP withdrawals are taxable. RRSP withdrawals are best during retirement when income is low to potentially pay a lower tax rate. RRSP contributions are tax deductible. So, deposits to RRSP are best when you have employment income and a high tax rate.