Reader Question: RRSP Investing

Reader Karissa Dee asks:

ok, I have a question.
I’ve been putting $50.00 a month into a PC RRSP account for about five years. I haven’t been doing anything with it, I just assumed that the bank did it’s magic with it. How do I go about buying shares with it? Won’t I get hit at tax time?

FB’s Answer

Great question!

And here’s my short-ish answer.

Without knowing more, I’d assume it’s probably an RRSP Savings account. You have to check out this page PC Financial Mutual Funds to see what other RRSP investment vehicles you can buy.

RRSPs mean: Registered Retirement Savings Plan

It’s just a shell, or a plan that you can save money under, but how you choose to save or invest the money is up to you. You can use different investment vehicles (another fancy word for types of investing) to get your retirement nest egg to grow.

TYPES OF INVESTMENT ‘VEHICLES’

Saving the money and letting interest grow on it

Most likely what you’re doing right now, at a 3% interest rate or whatever PC is offering at the moment. This is quite safe, just as safe as buying bonds in my opinion because you’re just letting compounding interest do its magic.

The only caveat is that you won’t get a higher return than 3% (or whatever), which JUST covers the cost of inflation.

Buying shares in mutual funds a.k.a. index funds

Read my Investment Primers on the right side bar on this. Here’s the First Investment Primer post out of 5

GIC (Guaranteed Investment Certificates) or Bonds

They kind of act like your Savings Accounts, but give you a higher percentage rate, except that you’re locked in. So you can buy Bonds to give you a GUARANTEED return of 10% to be paid out over the next 3 years or 5 years.

The only problem is that the GICs and Bonds are at 3% or 3.75%. Not at 10%.

I WISH!

You might as well (in my humble opinion) throw them into your retirement savings account and let them accrue at 3% but to have the flexibility of having them more liquid and less locked in, since each certificate (GIC) you buy, locks you in and you can’t cash out or touch the money until the 5 years is up.

Individual company shares

Come to think of it, I am not sure you can do this. I forget if you can or not. My best guess is no because TD Bank won’t let me do it, but then again, I’m paying for a basic plan at $25/year instead of the fancy plan that lets me do whatever I want.

Anyone care to weigh in? I find this option quite risky however, if it was possible. Individual company shares is like putting all your eggs into one basket. Buying one share of a mutual fund is like putting your eggs into many baskets (or industries).

Anyway, back to your PC Financial question.

On the site, it says that you have a selection of 13 index funds to buy from (which are also called mutual funds.. read my right sidebar for my investing post series)

You can use the money you have in your RRSP to buy shares in any of the 13 index funds and that’s how you start buying shares.

You can’t buy individual company shares as an RRSP investment with PC Financial. That’s not being offered via PC Financial, nor ING. Only TD Bank or the big banks offer that (if at all…I can’t recall).

Implications at Tax time

You will benefit at tax time because you’ve been investing money into your RRSP, and an RRSP is a tax-sheltered investment, meaning you actually take what you invested in an RRSP out of your taxable income, and pay LESS taxes overall!

This is great especially if your income is ridonkulously high, and you pay a lot of taxes. Putting 18% of your income or $20k max (is it $20k max or $18k max?) into your RRSP lowers your taxable income by a whopping amount, and could have you shift DOWN a tax bracket and pay less taxes in general.

On top of that, it’s still your money in your hands 🙂 And get to watch it grow.

Imagine doing this for the next 30 to 40 years? You’d save a ton of taxes, and then when you go to retire, you can remove the money but in small quantities, which keeps your taxes (when you withdraw the money), really low.

You will not get hit with taxes UNLESS you sell or take the money out (which means you are in an UNLOCKED RRSP account). You will then get taxed on the money.

What are my other options?

You must have heard about this, every major bank including ING and PC Financial have been advertising this since Novemebr.,

Canada just passed a new alternative to retirement savings that will be in effect in early 2009. It’s letting you save up to $5000 a year in a savings account that is TAX FREE, meaning it acts like an RRSP, by benefiting you at tax time, but if you were to withdraw the money before retirement (like let’s say in 5 years), whatever interest or money you made on that, you won’t get taxed on it. It’s like an actual savings account that is sheltered from taxes.

The beauty with this, is that you can also put that $5000 into mutual funds and purchase shares with them, and let the money grow higher than 3% from a savings account, and you won’t get taxed when you withdraw the money even if you made a profit on it.

Hope that helps!

-FB