Exchange-traded funds (ETFs)
Exchange-traded funds (ETFs) are relatively new to the investment scene in Canada, but are an excellent choice for people interested in exploring a self-directed RRSP that gives you more control over your investments. ETFs are collections of stocks and bonds that are designed to track the stock market over time. So, as the market goes up over time, so does your investment. When the market dips, however, you will also lose money. ETFs are a good option for those who can tolerate some risk and are not considering withdrawing money from their RRSPs in the short term. Robo-advisors that calibrate your investments with a computer algorithm rather than a professional advisor are great options for saving on management fees with ETFs. Consider firms such as Questwealth*, BMO’s SmartFolio and Wealthsimple, among others.
Stocks and bonds
Self-directed investors who want to buy individual stocks and bonds can certainly hold those investments in an RRSP as well. Stocks, in particular, tend to be more volatile investments and should be geared toward people with a higher tolerance for risk who are comfortable taking a long view of maximizing their investment. You can either work with a conventional broker or use an online broker to manage your investments on your own.
What are some ways to leverage my RRSP savings without paying a penalty?
In addition to giving you a tax-deferred place to save towards your retirement goals without, an RRSP is a tool you can tap into to help with two major life expenses: buying your first home; and pursuing further education. In both cases you can withdraw a portion of your RRSP funds without having to pay tax or penalties, as long as you adhere to a specified repayment plan.
Home Buyers’ Plan (HBP)
The Home Buyers’ Plan (HBP) is a program that allows first-time home buyers to leverage their tax-deductible RRSP savings to use as a downpayment on their home. It essentially allows home buyers to borrow up to $35,000 per person from their RRSPs and then repay that money back into their RRSPs over a 15-year period. Any failure to meet the scheduled repayments in any given year will result in having the unpaid amount taxed at your top rate.Â
Lifelong Learning Plan (LLP)
The Lifelong Learning Plan (LLP) is a similar program that allows RRSP holders to withdraw money for the purpose of pursuing additional education. You can withdraw up to $10,000 per year and up to a total of $20,000 and are given 10 years to repay the full amount, in the same way HBP withdrawals are repaid. The LLP can be used to pay for your own education or your spouse’s, but not your children’s. Once it is repaid in full, you are free to use the program again.
What’s my RRSP contribution limit?
Your allowable RRSP contribution for the current year is either: 18% of your earned income from the previous year, or the maximum annual contribution limit. (For 2022, the RRSP contribution limit is $29, 210. For 2021, it is $27,830 and for 2020, it was $27,230). Whichever amount works out to the smaller of the two will be your contribution limit.
RRSP alternatives: TFSA vs RRSP
Canadians can also choose to invest their savings in tax-free savings accounts (TFSAs). There are circumstances that would make a TFSA (which does not defer tax on contributions and instead offers tax-free growth and withdrawals at any time) a smarter choice. If you think you might need the money before your retirement, a TFSA will allow you to withdraw as much as you want, whenever you want. The flip-side of that equation, however, is that easier access to your money might derail your retirement planning in the long run.
Should I invest in a TFSA instead?
Remember that the tax advantage of an RRSP relies on the assumption that you will be in a lower tax bracket when withdrawing the money in retirement than when you are contributing to it. So, if you earn less than $50,000, it makes more sense from a tax perspective to invest the money in a TFSA. If you earn more than $50,000 and are investing solely in your retirement (and perhaps saving for a home or planning more education), an RRSP makes more sense.
