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Back to Basics: How Self Directed RRSP’s Work





All about self directed RRSP’s

A reader, who is just starting out in the finance world, wrote me an email asking me to explain self directed RRSP’s.  More specifically, here is the email:

I was wondering if you could write something about self-directed RRSPs -
what exactly they are and how to open and manage one, where we can hold
them, etc.

I thought that this would be a great opportunity to get back to basics to explain some of the fundamental concepts of personal finance in Canada.

Let’s take a look at the questions that the reader asked.

What is a self directed RRSP

To start, an RRSP is a type of account and not an investment.  So when people say “did you buy any RRSP’s this year?” what they really mean is “did you contribute to your RRSP account this year?”

There are many “types” of RRSP’s, off the top of my head:

  • You can have a mutual fund based RRSP from the bank, which can either be self directed or with a bank advisor.
  • A self directed RRSP with a discount brokerage where you can trade stocks/ETF’S and mutual funds.
  • A savings account RRSP like with PC Financial
  • An RRSP with your work place (which can/cannot be self directed)

A self directed RRSP is just that.  It’s where the account holder is responsible for the investments within the RRSP, thus the reason why it’s called “self-directed”.

Where Can You Find Them

I assume that the reader is interested in controlling her own investments.  In this case, it may be best to open a self directed RRSP account with a discount brokerage.  Which brokerage should you choose?  In my opinion, investors should be looking to reduce investment costs as much as possible. However, other factors such as investment choices offered should be weighed.

If the investor chooses to go the mutual fund route, it seems that the td e-series has the lowest cost.  If they want to stick to lower cost ETF’s or other stocks, then a low cost discount brokerage account will most likely be the most cost efficient choice.

Check out my discount brokerage comparison to see some of the features/costs of various brokers in Canada.

How to Open a Self Directed RRSP?

Simply go to the institution that you’re interested (either online or B&M) and sign up for an account.  Within the forms, you’ll need your personal information and your named beneficiary (preferably your spouse for tax reasons).  From there, you can contribute to your account up to your contribution limit for the year.

How to Manage One

Now that is the million dollar question.  First, if you’re willing to buy/sell your own investments, research is required.  However, the easiest way to get involved is to index your portfolio with ETF’s or low cost mutual funds instead of picking and choosing stocks.

Before choosing your investments however, your risk tolerance should be factored into the equation.  This will help determine your equity/bond allocation.  The higher your bond allocation, the more resistant your portfolio will be to the wild swings of the market.  This protection comes at a cost however, as it will also reduce your long term gains.

I’m not an asset allocation expert but I’ve read many times that the amount allocated to equities should be around 100 (or 110) minus your age.  So if you’re 30, then approximately 70% of your portfolio should be in diversified equities.    The key is to find that balance where you are comfortable with the volatility but without sacrificing too much in gains.

Check out my RESP Portfolio for an example of a diversified and indexed low cost mutual fund portfolio.  As well, if you are just starting out, see my recent article about how to invest small amounts per month.

If, on the other hand, you have a larger amount to invest, here’s an example of a simple low cost indexed ETF portfolio.

I realize that a lot of you are well past the novice personal finance stage, do you have anything to add?





28 Comments, Comment or Ping

  1. I just want to add that I think the prefix “self” is a bit of a misnomer – it appears that almost all rrsp accounts are self-directed on some level.

    I think the only rrsps that aren’t self-directed would be an account where you have signed over trading authority to an advisor.

    I’m not too sure of this however – if anyone knows of any “non self directed” rrsps I’d be interested to hear of them.

    Great post!

  2. 2. Chris

    I’ve already got a RRSP account through work where my employer will match a certain amount. The problem is that I’m limited to a few mutual funds. Am I allowed to open a second RRSP account somewhere else so I can invest in something other than mutual funds (assuming I don’t go over my contribution limit)?

    Thanks, its nice to revisit the basic stuff once in a while :)

  3. Chris, you are allowed to open as many RRSP accounts as you like. However, the limitation is not the number of accounts, but your contribution limit. If you do open an extra RRSP account, make sure to keep track of your (and your employer match) contributions to avoid the over contribution penalty.

  4. 4. Sarlock

    I was stuck in the same trap at my last job, Chris. We were with Standard Life and the only selection of mutual funds available had 2.5%-3.5% MERs. Evil. Needless to say, my funds left Standard Life the moment I moved jobs. My main RRSP is a self-directed brokerage account. I try to keep my trading fees below 0.5% to keep the overhead down. I’d rather keep the MERs than pay them to someone else. A 2%-3% MER per year on your investment adds up to a lot of money when the lost earnings are compounded annually.

  5. 5. Ray

    Asset allocation is an important part here as FT pointed out, from experience the 100-age doesn’t really always work well. Have had clients in their late 20′s who could only handle 60% Equities, it works out better if you do a little bit of self-assessment and fill out a risk profile questionnaire. I have posted on some basics of asset allocation
    http://financialhighway.com/asset-allocation-what-it-is-and-why-its-important/

  6. 6. Ray

    Another thing I forgot to mention is that you pay extra for self-directed accounts even with discount brokers this can be up to $100 with the big banks, a few online discount brokers do offer free RRSP account FT has a review on them as do I. That’s a cost you might want to keep in mind

  7. 7. Sarlock

    I’m with RBC Direct Investing. No annual fee for RRSP accounts over $25,000. Trading fees are $9.95/trade if you have over $100,000 in your trading account. It’s not the super cheapest option out there, but I really like their interface and trading options. I’m a long-term hold investor for the most part, so I only do about 10 trades per year in both my registered and non-registered accounts.

  8. 8. mojo30

    The only RRSP account I have is through my work with TD..the scandal is that TD will not allow me to buy their Efunds. So until I am employed here I am forced to stay in high MER funds. Once I move on I will be removing all the money from TD and putting it through my broakerage account that I have other investments with. Its practices like this that make me stay away from the big banks. Truly a shame.

  9. 9. DAvid

    mojo30 stated:“The only RRSP account I have is through my work with TD..the scandal is that TD will not allow me to buy their Efunds.”

    Actually, it is your employer that is responsible for the ‘scandal’ you describe. They chose a product for their pension plan. Since many of these plans have an employer contribution, it is responsible on their part to ensure the appropriate (from their point of view) management of their funds. Since your contribution is matched by them, they also want to try to ensure that you don’t spend (or lose) the monies contributed.

    I, too, have no say in where my pension plan invests it’s income, though I do have certainty of the income it will eventually produce.

  10. 10. Jewel of Toronto

    mojo30- my husband is in a similar situation. He makes only the bare minimum contributions to the employer-selected TD funds so he can get the match. the rest of his contributions go into another RRSP account with another bank.

  11. 11. Ray

    @ Mojo30- I would do what Jewel’s husband does. Problem with group plans is that there arent a lot of option, but good thing is that it is free money from your employer and usually they pay some of the fees for you. So just contribute enough to get your match and have the rest somewhere else.

  12. 12. mojo30

    DAvid – sorry but you are wrong.

    I make no contributions at all, the company gives me $X for every hour that I work. I am allowed to pick any fund I want with the EXCEPTION of the Efunds.

    You know why TD does that? because they know until I work there I dont have a choice but to do business with them so they put the restrictions on for their own benefit. My employer has nothing to do with the funds I have, I can add, trade or remove funds as I please..with the exception of EFUNDS.

    My problem is that they imposs big business mentallity and at this point I have no choice, when I do leave the company I will be trasnfering my money. They are making short term gains just so they can lose a long term customer..poor business in my opinion..oh well

    If th

  13. mojo30,
    efunds have their own hoops to jump though… maybe the reason you can’t pick them in your employer’s plan is the same as how you can’t walk into a TD bank and get efunds?

  14. 14. bank deals

    Owners of self-directed RRSPs are responsible for ensuring that their RRSP investments meet the legal requirements set by the Canada Revenue Agency. The penalty for not meeting these requirements is the loss of the income tax deduction.

  15. 15. DAvid

    mojo30,
    If the company “gives” you X dollars, why can’t you do what you want with it? Say buy a new TV?

    Because they don’t really GIVE you the money, do they? It is, in fact, placed in your Defined Contribution RSP account (a regular TD Group RSP account) which has withdrawal restrictions placed on it, due to your employers contribution. E-series funds are only available to individual investors (not Group RSP contributors) who manage their entire portfolio through the internet interface, thus the overhead of managing the transfers, reporting, etc. from your employer is covered in higher MER.

    Since your Group RSP is entirely contributed by your employer, I suggest you take the rest of your available RSP contribution limit, and invest as you wish. Many Canadians would be delighted to have an employer contribution to their pension.

    DAvid

  16. 16. TStrump

    Great timing … I’m on the verge of starting my first self-directed account.
    The account I have now with CIBC can only hold CIBC mutual funds.

  17. Hi FT – note that RRSP accounts at a full service broker are often self-directed RRSPs. A self-directed RRSP does not mean that the investor makes the decisions. Generally speaking it is where the RRSP administrator offers third party products and individual securities within the account. For example, if you are a client of Investors Group you can hold a directed RRSP through an advisor and you can only hold Investors Group funds. If you want to hold third party funds, you have to open up a self-directed RRSP with them. (At least this is how it used to be, don’t expect it’s changed.)

  18. 18. Jeremy

    As an employee of an IDA firm, a “self-directed” account is essentially a brokerage account. You can hold a variety of investments including stocks, bonds, mutual funds and currency (cash).

    There are a couple of advantages; consolidated reporting, and a wider array of investment types.

    In our business, it means that an advisor can act upon your telephone or electronic instructions vs. opening an account with a mutual fund company which requires a client’s signature for every transaction.

    P.S. – I love your comment about buying “RRSPs”.

  19. 19. John D.

    I’ve been out of the country for awhile and have questions regarding the relative benefits of the supposedly ‘self-directed’ RRSP. If it is ‘self-directed’, why the limitation on what may be invested within said? Can one hold real property in an RRSP? Can one invest in Futures or Options on real material (commodities) rather than on Forex (pure speculation on fiat standing) through their RRSP? And are the current limitations based on the differentiation between ‘Inventory’, ‘Capital’ and ‘Income’ in the Canadian tax code?

    The RRSP, to my mind, seems a tool giving only marginal tax benefit over time because any possible capital gain is retarded via sub par ROI vehicles.

    Are there niceties within the tax code of which I am not aware that strongly mitigate my assumptions?

    All comments/answers appreciated.

  20. 20. Lorne

    How can I pay for my own home with a self directed RRSP

  21. 21. Sam

    Is there a difference between a SDRSP and a SDRRSP account?

  22. Sam, my understanding is that they are the same thing.

  23. 23. mike

    Once you create a self-directed RSP, how do you actually transfuse funds from previous accounts?

  24. @mike, you’ll need to open a new account, then contact your old account to initiate the transfer. Note that the “old account” will likely charge a fee for the transfer.

  25. 25. Rajesh

    Can i use my self directed rrsp account to pay off my mortgage or lend money to somebody else at a higher interest rate.
    I can get a much better interest rate than, the banks.

  26. 26. Cassy

    Got fired this afternoon by our Investment advisor after challenging him 2 weeks ago about questionable short term stock trades resulting in substantial losses. He’s given us 30days & no charge to move our RRSP & Joint acct. somewhere else!!!!! We have not faith in him…..he’s got that right!
    We’re both retired & I’m preparing to move to a riff in 4 years time……..so 2008 & 2011 & so far 2012 horrible rates of return concern us.
    So now instead of meeting with us again on Sept 4th we’re off to various banks to check out self directed RRSP’s & somewhere to park our joint acct. Not a nice feeling and curious why he would take such drastic action since its the first time we’ve challenged him in the 5 years we’ve been with him?
    So we’re “Back to Basics” at this stage of our life…..YIKES

  27. 27. Vanessa

    I have a self-directed RRSP transferred from a prior workplace pension (Federal fund) and wondered if I am able to purchase my own mortgage (or part thereof) with it or are there regulations regarding this kind of investment being included in a self-directed RRSP. Further to that, if it is not possible to purchase my own mortgage, is it possible to purchase the mortgage another arms-length party and how would go about doing so if at all possible?

  28. @Vanessa, this article on holding an rrsp within a mortgage may help: http://www.milliondollarjourney.com/holding-a-mortgage-within-an-rrsp.htm

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