Saving for retirement inside an RRSP account is a great way to grow investments tax free. RRSP is designed for retirement.
Registered Retirement Savings Plan (RRSP) is a registered account in Canada where people can hold investments such as stocks, bonds, ETFs, etc. Deposits to RRSP are tax deductible up to a certain limit (18% of last year’s income or $27,830 for 2021).
Dividends and investment income inside RRSP will compound and grow tax free until withdrawn. RRSP withdrawals are taxable and considered as taxable income, similar to employment income which are both declared as taxable income when filing taxes.
How does RRSP work on Wealthsimple?
There is no minimum balance to open an RRSP account on Wealthsimple. Deposits to a Wealthsimple RRSP on a year is tax deductible when filing taxes. RRSP withdrawals are taxable. Stocks and ETFs can be invested on Wealthsimple Trade RRSP while funds are automatically managed on Wealthsimple Invest RRSP.
RRSP Key Advantages
- Investment income (dividends, capital gains, interest income) inside an RRSP can grow tax free.
- Contributions (deposits) to an RRSP are tax deductible towards your employment income or other taxable income.
- Most RRSP Investments can be withdrawn anytime.
How to Maximize RRSP to Lower Taxes
It is best to contribute or deposit to an RRSP during your high income year and withdraw when you have little to no income. Tax rates are typically higher as your income rises in Canada. Thus, contributing to an RRSP when you are earning decent income allows you to get more tax deductible.
Withdrawals are best done during retirement when a person have little to no income. Thus, the tax rates you pay can be lower.
For instance, the first $42,184 in taxable income on BC on 2021 is subject to 20.06% tax bracket (combined federal and provincial income taxes). On the other hand, income above $49,020 (up to $84,639) have a combined tax bracket of 28.20% in BC for tax year 2021.
Assuming a person earned $65,000 on a year and deposit a total of $10,000 to an RRSP, this will result to a tax deduction of $2,820 (28.20% of $10,000).
Decades later when the person retires and have no longer employment income, assume $10,000 is withdrawn from an RRSP. Suppose the total income is below $40,000, it is likely that it will only be subject to 20.05% tax bracket. Any gains from investments may also be taxable at this lower rate.
More tax deduction are eligible when you earn higher income. Assuming a person is subject to 40% income on a tax year, RRSP deposits will be result to a tax deduction of 40%. When withdrawn on a low income tax year (usually happens on retirement), the person would likely only pay around 20% in taxes eventually.
Although you can withdraw RRSP investments anytime, it is best to withdraw funds during a low income tax year. Withdrawing RRSP funds when you already have $60,000 in income will be subject to 30%- 40% in taxes whereas it would only be around 20% taxable on retirement or on your low income tax year. There is no minimum age to withdraw from an RRSP.
How to Invest on an RRSP with Wealthsimple
- Wealthsimple Trade RRSP – Select individual stocks or ETFs and buy or sell anytime. (Stocks and ETFs can be held for years and can be sold in 2-3 days)
- Wealthsimple Invest RRSP – Wealthsimple will manage your investments based on how much risk you are willing to take (based on a survey after you open an account) in exchange for 0.50% per year in management fees.
How to Buy and Sell stocks on Wealthsimple Trade
| Wealthsimple Trade | Wealthsimple Invest |
| Buy or sell individual stocks anytime | Deposits will automatically be invested to diversified stocks and bonds. |
| $0 fees when for every buy/sell of Canadian stocks | Fees applies on a per year basis (0.50% per year) |
| 1.5% exchange rate fee for every buy/sell US stocks | Withdraw anytime |
| Withdraw anytime | Close an account anytime |
| Close an account anytime | No minimum to start investing |
| No minimum to start trading | Managed for you by Wealthsimple for 0.50% fee per year |
| Manually managed |
For more details between Wealthsimple Trade and Wealthsimple Invest, here is a full comparison between Wealthsimple Trade vs Invest.
For Wealthsimple Trade, it may be best to consider a diversified ETF (Exchange Traded Funds) such as S&P 500 ETFs in Canadian dollars like VSP and VFV. Also, there are ETFs which are made up of 80% stocks/ 20% bonds and ETFs with a mix of different assets. S&P 500 is made up of the 500 largest stocks (corporations) in the US.
Also, starting with individual stocks such as Apple, Air Canada, or Mcdonald’s stock may be an option. However, individual stocks tend to have a higher downside or upside compared to S&P 500 ETF.
Wealthsimple Invest asks new users to fill up a 5-10 minute survey to determine your investment goals and how much risk you are willing to take. Wealthsimple Invest will then invest Wealthsimple Invest RRSP deposits to a diversified group of assets automatically. In exchange, Wealthsimple Invest charges around 0.50% yearly management fee. ($0.50 management fee per $100 investment)
Alternative RRSP accounts
Wealthsimple Trade allows you to invest on individual stocks and ETFs in Canada and US on your Wealthsimple RRSP account. On the other hand, Wealthsimple Invest automatically manage funds inside your Wealthsimple Invest RRSP account and invests to a diversified group of foreign and domestic stocks, bonds, and other assets.
One of the low risk RRSP accounts are RRSP Savings accounts. With little to no risk, returns on RRSP Savings accounts are typically lower. Similarly, deposits to an RRSP Savings accounts are tax deductible while withdrawals are taxable income.
Interest income can compound tax free and will only be subject to taxes during withdrawal. In comparison, interest income on a regular savings account are taxable on the year it is received.
Multiple RRSP accounts can be opened as long as the total deposits (contributions) on a year is below your maximum contribution amount (typically 18% of previous year’s income).
Can I open an RRSP with Wealthsimple?
Anyone with a valid SIN number and have filed for taxes at least once can open a Wealthsimple RRSP account. Wealthsimple RRSP is a great way to open your first RRSP account since it has no minimum balance to start. It is possible to start with only $200 or less stock investment on a Wealthsimple RRSP.
Stocks and ETFs inside a Wealthsimple RRSP can eventually be transferred to other RRSP account if you choose to do so.