Category Archives: InvestorLine

Simplifying and Improving Our RRSPs: a Review of the Progress Made Over 4 Years

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It’s amazing how much more time you have once your children are in school and the eldest is old enough to be left “home alone” even if only for a 5-minute bike ride to the mailbox. When we reached this milestone in parenthood, I finally had the time to start looking at where our money was and why and deciding what changes were needed. One of the first messes that needed to be cleaned up was our RRSPs: It’s taken 4 years to simplify and improve our RRSP holdings but things are progressing well.

What We Started With

Four years ago I wasn’t even sure

  • where our RRSP money was,
  • how much was in each place,
  • what the rate of return was on the money, and
  • whether we should be doing something differently with it.

I read a few books about RRSPs and one piece of advice struck home immediately.

Why You Should Always Designate a Beneficiary for Your RRSP

Four years ago, we already had our wills and the wills designated that my husband and I will inherit each other’s assets if one of us dies. What I didn’t know, though, was that if a RRSP has a designated beneficiary, the value of the RRSP is not included in the amount that the government uses to calculate the probate fee or, as Ontario now calls it, the Estate Administration Tax.

For example, say I had $100 000 in my RRSP and I died. If my RRSP did not have a beneficiary named, that $100 000 would be added to my other assets and that total amount would be taxed by the Ontario government as a condition of probating my estate. If my other assets were worth, say, $50 000, the government would charge an Estate Administration Tax of $1 750.

If I had designated my husband as the beneficiary of my RRSP, he would not have to include the $100 000 value of my RRSP in the amount used to calculate the estate administration tax. That means the tax would be calculated based on the other $50 000 in my estate. The total payable would be $250.

That’s right. He would not have to pay $1 500 in tax.

Just for having his name on a slip of paper filed at the bank!

So the first thing I did was get a Beneficiary form filled out and properly filed for each of our RRSPs.

Neither of us has died yet but it still feels like we’ve saved thousands of dollars.

Where Our RRSP Money Was

We had quite a collection of RRSP accounts 4 years ago.

I eventually determined we had

  • a RRSP invested in mutual funds and GICs at CIBC
  • another RRSP in a GIC at CIBC
  • a RRSP each holding Canada Premium Savings Bonds in the Canada Retirement Savings Plan
  • a RRSP each in GICs and cash at ING Direct (now Tangerine)
  • a spousal RRSP in GICs at ING Direct (now Tangerine)
  • a locked-in RRSP at BMO in GICs and high interest savings accounts
  • a RRSP at BMO in mutual funds and GICs
  • a RRSP at BMO in a high interest savings account

Argh! Can you see why I desperately needed to fix this up?

For anyone who is deadly curious, the mutual funds included

  • index funds mirroring the performance of the TSX and the NYSE (purchased before ETFs existed)
  • funds holding mortgages
  • funds holding bonds in Canada, the USA and internationally

Where Our RRSP Money Is

We are not finished consolidating our RRSP holdings yet. Unfortunately, you cannot simply transfer GICs from, say, CIBC to CIBC Investor’s Edge. Don’t ask me why. I’m pretty sure it has to do with making the bank more money at our expense, though.

Still, it’s looking a bit better:

  • a RRSP each at BMO InvestorLine
  • a LIRA at BMO InvestorLine
  • a RRSP at CIBC Investor’s Edge
  • a spousal RRSP at RBC Direct Investing
  • a GIC RRSP at CIBC that we will be able to transfer to Investor’s Edge in 2015 on maturity
  • a GIC RRSP at Tangerine that we will be able to transfer to BMO InvestorLine in 2015 on maturity

The CIBC Investor’s Edge RRSP could be consolidated with one of the BMO InvestorLine ones, but to avoid paying transfer fees it’s best to wait till the GICs at CIBC mature and the money can transfer fee-free up to the Investor’s Edge account. Then, if desired, the entire amount can transfer out to InvestorLine. Or, conversely, the InvestorLine account could transfer in to Investor’s Edge. That would bring us down from 10 accounts to 4.

The spousal RRSP is at RBC Direct Investing primarily so I could investigate their trading platform in more depth! It could be transferred out at any time but I’m happy to keep it there. As a spousal it cannot combine with any other RRSP so it really makes little difference which brokerage it is kept at. (All of our RRSPs qualify for the lowest trading commissions etc at their respective brokerages.)

The optimization of the holdings within the RRSPs continues. I’m sure it will be the subject of more articles in the future.

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Did you make the mistake of opening a new RRSP at a different bank each time you moved? Did you ever despair and refuse to read your RRSP mutual fund statements for over a year? Please share your RRSP escapades and foibles with a comment.

What Are the Common Types of Registered Education Savings Plans and Which is Best?

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There are three common types of Registered Education Savings Plans. In the linked articles is information about them explaining some of the pros and cons of each. This article aims to help you choose which type of RESP will best meet your needs depending on whether you wish to invest in equities or not and on how much money you have to invest.

The Three Common Types of RESPs

Which is the Best Type of RESP for Someone Who Won’t Take Any Risks With Their Money?

Some people flatly refuse to invest RESP money in the stock market. There can be many reasons:

  • Their child will need the money to go to university, college or trade school in fewer than 5 years.
  • They have only managed to save a very small amount per year, perhaps $250, and would be horrified if they lost even $1 of it.
    (Note, though, that investing in savings accounts and in guaranteed investment certificates could mean losing money due to inflation. A text book that cost $100 10 years ago may cost $120 now. If the person put $100 into their RESP 10 years ago, and if it is not worth $120 today, it has lost ground to inflation.)
    Still, many people would rather lose a fraction of their money’s value to inflation rather than lose 10-50% if the stock market drops just when their child needs the money for school.
  • Their RESP only offers investing in the stock market through mutual funds which have very high fees and expenses.
  • They may have lost a large amount of money in the past by selling their shares or equity mutual funds when the stock market had dropped.

For these people, a bank or a brokerage held RESP is often the best.

If they only have small amount saved, the fees for using an online brokerage will probably be too high. (CIBC’s Investor’s Edge offers a RESP brokerage account with no minimum balance however there is a minimum purchase size of $5 000 per GIC.) In this case, a RESP at a credit union (which usually offers higher interest rates on GICs and cash deposits) or a bank is usually the best choice.

If they have a lot of money (about $15 000 or more) in the RESP, they may want to check the details of using an online brokerage to host their RESP. This is because brokerages offer GICs sold by many financial institutions which usually pay higher rates than those offered by a single bank. For example, today, in October 2014, BMO is offering 1.6% for a GIC that matures in 5 years. The minimum GIC purchase size is $1 000. At BMO InvestorLine they are offering 2.5% for a GIC that matures in 5 years issued by Home Trust. The minimum GIC purchase size, though, is $5 000.

Both banks and brokerages usually offer a daily interest savings account within their RESPs. Today, in October 2014, BMO is offering a rate of 1% in its RESP savings account. BMO InvestorLine is offering 1.25% in a savings account with a minimum $5 000 balance.

NOTE: It is worth checking what Credit Unions and Trust Companies are offering for their RESP accounts if you are interested in investing only in daily interest savings accounts and GICs. Some of these institutions offer the highest rates on fixed income investing. Always check what type of deposit insurance is provided, however, before setting up a RESP.

Personally, I do not recommend investing in group RESPs. For some reasons, please see the Advantages and Disadvantages of Holding a Group RESP through a Private Company.

Which is the Best Type of RESP for Someone Who Wants to Invest in Equities and Bonds But Who Doesn’t Have Much Money?

Other investors want to invest their RESP contributions in a variety of ways including some in bonds or a daily interest savings account, some in GICs and some in the stock markets.

If they do not have much money in the RESP (perhaps less than $15 000) it may be too soon to consider a discount brokerage account. That would depend on what the annual fee is for the brokerage, and what commissions and fees it may charge to purchase various investments.

If discount brokerages are out, that tends to leave RESPs held at banks, credit unions and trust companies. Of these, one is most popular: the TD Canada Trust e-Series Index Funds RESP.

One very popular “couch potato” method of investing for this type of person uses the TD Canada Trust e-Series Index Funds option.

These funds are bought and sold online which reduces the costs for TD to offer the funds. The management fees and expenses are relatively low compared to most other mutual funds. For example, the MER for the Canadian Index fund is 0.33 and for the Canadian Bond Index fund is 0.50. Like other funds, however, you can buy new units with no additional fee and you can invest small amounts.

(If you buy Exchange Traded Funds, or ETFs, from most brokerages, you will have to pay a commission of $5-$10 for each purchase or sale. There are some brokerages that offer free ETF purchases, though.)

You can read more about this type of TD e-Series Funds portfolio on the Canadian Couch Potato website.

For personal insights, the Big Cajun Man appears to have used these funds for his children’s RESP; you can read about his experiences at the Canadian Personal Finance site.

Remember as your child approaches the age to start using the money, you will probably want to shift your investments from equities to fixed income. For example, if you have $1000 invested in a TSX index fund, you may not want to take the chance of a sudden drop in its value to $500-$900 just before your child needs to spend the money. In that case, you should move the $1000 from the TSX index fund to a daily interest savings account fund or, less desirably, to a money market fund.

You can also set up a “couch potato” portfolio of mutual funds that mirror the stock exchange indices in a RESP at most major banks. The management costs and fees, though, for the funds (the MERs) may be much higher than for the TD e-Series funds. Please check all the costs carefully before choosing where to invest.

Personally, I do not recommend investing in group RESPs offered by private companies. For some reasons, please see the Advantages and Disadvantages of Holding a Group RESP through a Private Company.

Which is the Best Type of RESP for Someone Who Wants to Invest in Equities and Bonds and Has a Fairly Large Amount Saved?

This type of investor usually wants to have some of the RESP portfolio invested in

  • bonds,
  • GICs and
  • cash, and some invested either in
  • Exchange Traded Funds (ETFs),
  • mutual funds, or
  • individual shares and stocks.

Discount online brokerages offer an easy way to invest RESP funds in all of these categories.

Examples of these brokerages include

  • BMO InvestorLine,
  • CIBC Investor’s Edge,
  • RBC Direct Investing,
  • Scotia iTrade, and
  • TD Direct Investing.

There are also independents like Questrade. And, in fact, many large Canadian financial institutions have an associated online brokerage.

Are There Any Important Considerations When Choosing One Discount Brokerage Over Another for a RESP?

Yes.

In addition to the usual factors when choosing a brokerage such as

  • Which financial institutions’ GICs does it offer for sale? What is the minimum purchase size? Can they be purchased online or does the client have to phone in an order?
  • Does it offer a daily interest savings account no-fee fund? What is the minimum holding amount?
  • Are the screens easy to understand?
  • Is it simple and quick to execute a buy or sell of an investment?
  • Are the statements useful?
  • Does it offer a synthetic DRIP for the stocks and ETFs that I want to hold?

You should also be asking RESP-specific questions such as:

  • How much money does my account have to hold to avoid any annual fees, inactivity fees or maintenance fees?
    (Different brokerages use different names for these costs.
    For example, Questrade advertises that it does not charge an annual fee, but the fine print shows it charges an inactivity fee on small accounts if a certain number of trades are not made each quarter-year.)
  • What is the commission charge for each purchase or sale of units of an ETF or block of shares of the same company?
  • Does the brokerage support all of the government matching grants and bonus programs from which my child is entitled to receive money? (Most brokerages support the Canada Education Savings Grant, CESG, but not all support QESI for Quebec nor some of the other provincial grants such as the Saskatchewan one.)

Right now, in November 2014, it looks like CIBC Investor’s Edge may be offering one of the better deals for a RESP held by a “Big Five” Canadian bank online brokerage:

  • Investor’s Edge does not require a minimum balance in a RESP to avoid annual fees.
  • Investor’s Edge offers trades for a commission of $6.95 no matter how much you have in your account. This means to buy units of one ETF costs $6.95. To sell those units costs another $6.95.

There are other factors to consider, however, such as the fact the minimum GIC purchase size is $5 000 and they don’t offer GICs from Home Trust for sale.

Still, if our RESP was not at BMO InvestorLine, I would seriously consider hosting it at Investor’s Edge.

Group RESPs also often invest in stocks, bonds and funds on behalf of their clients. Personally, though, I do not recommend investing in group RESPs offered by private companies. For some reasons, please see the Advantages and Disadvantages of Holding a Group RESP through a Private Company.

Related Reading

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Do you have a RESP? Where did you choose to set it up? Did you choose one of these options, or another? Please share what led to your decision and whether you’re pleased about it with a comment.