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
You can invest in savings, mutual funds, stocks, bonds and some derivatives within an RRSP. To move the funds from an RRSP savings account to another investment vehicle you must open an account at the financial institution that will be housing the investment. The funds can then be transferred to the new RRSP account using a form T2033 – this will not cause a taxable event because the funds retain their sheltered status.
It is a good idea to do nothing with the RRSP funds until you have educated yourself further on your options and have an investment plan in place. You must consider your time horizon and risk tolerance. Good luck.
Gotcha. Finally. Thanks 🙂
You’re not technically taking money out to invest.
You’re investing WITHIN the RRSP, using Investing in mutual funds for example as one of your vehicles of investment. Much like how you put money into savings, you are putting it into your RRSP
When you put money into your mtuual funds, you’re putting it in your RRSP (if the mutual fund is ‘eligible for RRSP’)
RRSP does not mean it has to be a savings account. You can invest, buy bonds, buy mutual funds, etc, all under the “RRSP” umbrella if they are eligible
Whatever you invest in mutual funds, is considered to be part of your RRSP unless you really invest the money OUT of your RRSP…
Does that make sense?
Thanks for covering this. My question was inspired by your investing primer series, which I will probably re-read a few more times to get the hang of investing.
I’m still a tad confuzzled though, about withdrawing from my RRSP. I was afraid that I would have to pay taxes if I withdrew funds to put into investments. Am I missing something here?