InvestorLine | Financial Crooks

At this stage, we’re still adding to our RRSPs each year. But all too soon it will be time to change our RRSPs into RRIFs. And once you have a RRIF whether you want to or not, you have to take some assets out each year and pay tax on them. The federal government sets a minimum withdrawal schedule generally starting at age 72. But what if I don’t want to make my withdrawals in cash? I wanted to know if I could take stocks out of my BMO InvestorLine account without selling them.

Why Would I Want to Transfer Out Stocks from my RRIF?

There isn’t a lot of benefit to making a withdrawal “in kind” from a RRIF. Basically, it saves two trading commissions: one for the sale of the stocks inside the RRIF, and one for re-purchasing the stocks in a non-registered brokerage account outside of the RRIF.
There is one other advantage: it reduces the risk that you might sell for a lower price than you have to pay to re-purchase the same shares.

Because you will pay tax based on the deemed value of the shares on the day you transfer them out (not based on the book value, or the price you paid for the shares when you first invested in them) you will not avoid any tax on the capital gain.

In fact any increase in value is not even considered a capital gain. The entire withdrawal is treated as “income” by the government and unfortunately you pay regular tax on it, not just capital gains tax. You can’t claim any capital losses in a RRIF or when making a sale to make a cash withdrawal from a RRIF either. Sorry.

Why Most People Don’t Transfer Stocks out of Their RRIFs

Most people don’t care if you can transfer stocks out or not. They need cash!

If you need the cash right away, there is no need to transfer the stocks out. It’s only worth transferring the stocks out if you have plenty of cash and you want to keep holding that stock for the long term.

For example, you might need the cash value of those stocks to either
(a) live on or
(b) pay the deferred taxes with.

Remember, when you make a withdrawal from your RRIF you have to pay income taxes on it. Generally, you will have to pay when you file your quarterly or annual tax return.

If you withdraw more than the required annual minimum, you will have to pay a portion of the taxes immediately though as tax is “withheld” and submitted to the CRA by your financial institution.

Checking Whether “In Kind” Transfers Out are Permitted to Meet RRIF Withdrawal Requirements

I used the BMO InvestorLine MyLink secure email system to ask whether it is possible to make a required RRIF annual withdrawal “in kind” rather than in cash.

Specifically, I asked whether stocks could be transferred in kind from a RRIF to a regular non-registered InvestorLine brokerage account in order to meet the mandatory government withdrawal schedule.

Stock Transfers Out of a RRIF Are Permitted at InvestorLine

Good news!

Yes, you can transfer shares directly out from an InvestorLine RRIF into a non-registered InvestorLine brokerage account.

The detailed reply included the following information:
“With InvestorLine, the default option is cash payments. If you would like to setup an in-kind payment, they are done on a manual basis. What you would be required to do is contract us, 2 weeks in advance from the scheduled cash payment, and request an in-kind payment. The agent assisting you will submit the request for in-kind shares to be moved to your non-registered cash account and ensure to cancel the cash payment.

Ensure [that a non-registered cash account] is opened prior to the payment being requested to ensure smooth processing of the minimum in-kind RIF payment.”

So it can be done, but you have to be prepared:

Set up your InvestorLine non-registered account well in advance of your first RRIF withdrawal. (I’d suggest opening it at least 2 months in advance.)
Two weeks (or earlier if they will let you) ahead of transfer time, contact InvestorLine and request the schedule cash payment be cancelled.
At that time request the in-kind transfer. You will have to specify
- which shares to move,
- how many shares to move,
- and how you will pay the withholding tax required by the government if you are withdrawing more than the required minimum (which is likely as the shares are not likely to divide evenly into your minimum requirement).

Let’s hope we can all transfer the shares in kind –and hope it’s because we’re all rolling in so much cash we don’t need the money!

Related Reading

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Have you done an in-kind transfer of shares from your RRIF to a brokerage account? Did it go smoothly? Please share your tips or tricks with others facing this same challenge by leaving a comment.

As I mentioned before, we didn’t start RESPs for our children until the eldest was 10 years old. Up till then we were busy paying off our mortgage and dealing with some other financial necessities. That meant, though, that we didn’t want to invest heavily in stocks or anything else that might plummet in value and take a decade to recover. After all, that eldest child will need the money in the year she turns 18 if she goes on to “higher” education. So it wasn’t till very recently that I decided we might want to start a self-directed brokerage account Registered Education Savings Plan, RESP, for them.

Why Would a Self-Directed RESP Be Worthwhile?

Again, as I mentioned before, you don’t have to buy stocks in a self-directed brokerage investment account. You can also buy good-old-fashioned GICs. The kicker is that the smallest GIC you can buy is usually $5000.

On the other hand, once you have one $5000 GIC, each year you could add any amount to it, from $1 on up. That’s because when a GIC matures in a brokerage account it is paid out in cash. You can then use that cash, plus your newly contributed cash, to buy your next GIC.

Why would it be better to buy the GICs in a brokerage account? Because the interest rates available through the brokerage account are usually better than those you can get dealing directly with a bank or financial institution. (There are some exceptions. It appears that you might get a better GIC rate dealing directly with, say, ICICI but many of these institutions do not offer RESPs.)

Of course, if you start contributing to a RESP when your child is a toddler, you have a much longer time to recover from a market downturn and you might want to buy some index funds (ETFs) with a very low expense ratio (MER) which try to capture the return of an entire stock exchange like the TSX or NYSE. You could buy units in these ETFs within the self-directed RESP brokerage account as well.

Or you could buy shares. That has a much higher risk of losing money, though.

OK, If I’m Going to Open a Self-Directed Brokerage RESP, Where Should I Go?

There are two sets of brokerages to consider:

The “Big 5” Canadian banks all have brokerages. BMO has InvestorLine. CIBC has Investor’s Edge. RBC has Direct Investing. ScotiaBank has iTrade. TD has (get this) Direct Investing. They used to be TD Waterhouse, but they recently changed their name. It may cause a little confusion!
Then there are quite a few independent or smaller brokerages. These include ones like QTrade, Questrade, Disnat, Interactive Brokers, HSBC InvestDirect, National Bank Discount Brokerage, Credential Direct, Virtual Brokers and I’m sure there are other ones whose names elude me at this time.

(I’m not very familiar with the independent or smaller brokerages so most of this article is about the Big 5. However, you can research the others using the same ideas described below.)

Narrowing Down the Choices for a Brokerage for a RESP

Stick With Your Existing Brokerage to Reduce Fees

If you already have a discount brokerage account, chances are good your best choice is to host your RESP brokerage account at the same institution. Usually this will allow you to get the lowest possible commissions on buying and selling ETFs and stocks as you can pool your capital to meet the discount requirements. (If you’re only buying GICs and/or no-load mutual funds, though, this may not matter.)

Check Minimum Investment Requirements and Annual Fees for RESP Brokerage Accounts

Many brokerages require a minimum balance in the RESP account in order to waive an annual or quarterly fee. These balances can change often, so always double check before signing up with a brokerage.

As of September, 2013, here are some of the annual RESP fees and minimum balances required to avoid paying them:

BMO InvestorLine: A minimum balance of $25,000 is required or there is an annual fee of $50.
Source: http://www.bmoinvestorline.com/home/getting-started/il/accounts/resp
CIBC Investor’s Edge: NO minimum balance is required; no annual fee!
Source: https://www.investorsedge.cibc.com/ie/features/no-fee-resp.html
RBC Direct Investing: A minimum balance of $15,000 is required but can include investments in other Direct Investing accounts, or else a fee of $25/quarter ($100/year) is charged for the RESP account.
Source: http://www.rbcdirectinvesting.com/commissions-fees-schedule.html#fees
ScotiaBank iTrade: A minimum balance of $15,000 is required but can include investments in other iTrade accounts, or else a fee of $25/year is charged for the RESP account.
Source: http://www.scotiabank.com/itrade/en/0,,3694,00.html
TD Direct Investing: A minimum balance of $25,000 is required or else there is an annual fee of $50 plus tax.
Source: http://www.tdwaterhouse.ca/products-services/investing/td-direct-investing/accounts/resp/index.jsp
http://www.tdwaterhouse.ca/products-services/investing/td-direct-investing/accounts/index.jsp

Consider Investor’s Edge For Low Balance RESP Accounts

If you only have one child and you are just starting your RESP, you may only have a small amount to invest. If it’s $5000 or more, though, you could want to get a brokerage account to get better GIC rates.

One place to check into in this situation is CIBC. As of September, 2013, CIBC’s Investor’s Edge was advertising that there is no annual fee for a RESP brokerage account.

Consider Brokerages with No Fee ETF Purchases

If you plan to buy ETFs within your RESP, you may want to consider brokerages which offer ETF purchases with no fees. Some brokerages, like Questrade, advertise no fees on all ETF purchases. Others like iTrade offer no fees on some ETFs. (Source: http://www.scotiabank.com/itrade/en/0,,4200,00.html ) You’d have to check whether the brokerage you are considering is selling the ETFs you want for no fee. Also be aware that most of these brokerages are actually refunding the fee AFTER you’ve paid it which may or may not suit you.

Not All Brokerages Offer Excellent Paperwork and Customer Service

It’s also a good idea to check public chat areas like RedFlagDeals and the Canadian Money Forum for feedback on any problems investors have been having with their brokerages. Cost is not the only factor to consider when picking a place to invest your hard earned dollars.

Check Whether the Brokerage Can Handle Any Grants Your RESP Contributions May Receive

Generally, most brokerage accounts can handle the Canada Education Savings Grant, CESG, monies.

If you are also eligible to receive other monies, such as the Canada Learning Bond or the Alberta Centennial Education Savings Plan you may not be able to use a brokerage account. Some of them juts can’t (or won’t) handle the paperwork and accounting required for these other sources of money. Be sure to check the details for each brokerage you are considering before signing up.

Which Brokerage Did We Pick?

To be honest, I still haven’t decided! That’s near the top of our financial “to do” list, though.
UPDATE: As of January 2014, we have a self-directed RESP at BMO InvestorLine. Search for posts on how it’s going!

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What do you think? Where should we open our RESP brokerage account? Where did you open yours? Please share your opinions with a comment.