RRSP Strategies Part 2 Move the Money Where You Want to Keep It. Choosing a Long Term RRSP Investment Account

If you had to rush to contribute to a RRSP to meet the tax deadline, you may have parked your contribution temporarily at an institution that has no or a low transfer-out fee. Or, you may have decided to set up your RRSP account where you want to keep it before making any contributions. Either way, this article will discuss where you might want to host your RRSP account for the long term.

It’s important to understand that an RRSP is just an empty file folder. Inside the folder you can hold cash, guaranteed investment certificates (GICs), term deposits, mutual funds, exchange traded funds (ETFs), bonds, shares, and other investments.

Some financial institutions will offer you an RRSP folder that can only hold a few types of investments.

• Many banks, for example, only allow your RRSP to hold cash, GICs, term deposits and mutual funds.
• Most online self directed brokerage accounts allow you to hold almost everything possible in your RRSP.

Here are some factors to consider when choosing where to set up your RRSP account.

Convenience
Many people set up a RRSP account at the financial institution (bank, credit union etc) closest to where they live or work. Given that you can make a contribution to almost every RRSP by mail, computer or telephone, this does not seem like a great strategy. Unless the RRSP that location offers is the one that meets all of your other needs, I’d suggest you be prepared to be (slightly) inconvenienced in order to save money on fees or to earn more money within your RRSP.

Contributions
Others pick a RRSP account offered by the financial institution with whom they do their regular banking like paying bills and depositing pay cheques. This does make it very convenient to make new contributions to your RRSP. However, most financial institutions can now accept new RRSP contributions electronically so this convenience should not be a huge factor in your decision.

For example, at the time this was written [in 2013], RBC Direct Investing was offering a self directed RRSP brokerage account with no annual fee and no annual minimum balance if you set up contributions of at least $100/month to your RRSP. These contributions do NOT have to come from an RBC bank account. They can be set up using the bill payment option available from most banks. (For further information, please skim RBC Direct Investing has a No Annual Fee RRSP Brokerage Account with No Minimum Balance!)

Investment Choices
There are basically two types of RRSPs you have to choose between:

• Bank RRSPs which limit you to cash, term deposits, GICs, mutual funds and possibly some ETFs. These investments are usually all issued by that bank. For example, you can’t purchase a TD e-series fund from within your BMO RRSP.
• Brokerage RRSPs which allow you to invest in cash, term deposits, GICs, mutual funds, ETFs and shares issued by a wide variety of banks and financial institutions and traded on various stock exchanges.

Many people start with a Bank RRSP. When they have accumulated a large amount of money (often $25,000-$50,000) they then move it to a Brokerage RRSP.

Costs, Fees and Commissions
The costs, fees and commissions charged to host a RRSP account are a very important consideration when setting up a RRSP. Most of these costs must be paid from within the RRSP, reducing your retirement savings. (For example, if you have to pay $200 in fees per year from within your RRSP you have lost the ability of that money to earn income from now till the year you retire. And yet you cannot contribute any more money to your RRSP to make up for it if you have already maximized your contributions to your RRSP.)

Typical costs include

• A quarterly fee for a RRSP account whose balance is less than a minimum amount of dollars. Most banks do not have any minimum balance requirement and charge no fee. Most brokerages do have a minimum balance requirement or they do charge a fee. (Please see RBC Direct Investing has a No Annual Fee RRSP Brokerage Account with No Minimum Balance! and Questrade Has the Lowest Annual Fee RRSP Brokerage Account With No Minimum Balance: Or Does It? for details.)
• A cost to purchase or sell shares and ETFs. These types of investments can be purchased within RRSPs provided by brokerages. For most bank brokerages, the cost to purchase or sell depends on the total value of your RRSP account. Generally, the more money you have in your account, the lower the trading cost. For example, if you have $50,000 or more, at BMO InvestorLine, CIBC Investor’s Edge, RBC Direct Investing, ScotiaBank iTrade, and TD Waterhouse [now TD Direct Investing in 2014] you’ll pay $9.95-$9.99 per trade.
  (A trade is one completed request to purchase or sell one type of stock or ETF on one day.)
  The trading costs can be lower at independent brokerages. For example, Questrade charges $4.95 for most trades regardless of the account balance.
  UPDATE FEBRUARY 2014: Both RBC Direct Investing and TD Direct Investing have suddenly dropped their trading commission to $9.95 per trade (or less) for all investors regardless of their account balance.
• It looks like you are not paying a fee when buying a bond. In reality, the fee is already included in the purchase price. The fee is set by the financial institution selling the bond. It is very difficult to easily determine whether one brokerage is offering a higher or lower fee to purchase a bond than another brokerage. I ignored bonds when choosing where to invest. Bond funds are a type of mutual fund or ETF and the usual fees and constraints for purchasing other types of mutual funds and ETFs apply.

Less common costs include

An inactivity fee for a RRSP where the investments are not being changed. (At the time of writing I am only aware of Questrade charging such a fee. It only applies to accounts with balances of fewer than $5000 held by persons aged 26 and older.)

Free Transactions

Most discount brokerages and financial institutions allow you to purchase GICs and term deposits for no fee. Banks and credit unions, however, usually only let you buy these products when they are issued by themselves which may reduce the interest rate you can earn.

For example, if I buy a GIC from BMO InvestorLine I can buy one issued by over a dozen companies. If I buy one from BMO, I can only buy a BMO GIC. Today, I could get a one-year term for 1.7% from Home Trust via InvestorLine. If I buy a GIC today at BMO, the best 1-year rate I can get is about 1.3%.

Most financial institutions only allow you to purchase mutual funds they issue. Those funds may not offer what you want, or they may have high MERs.

A MER is a fee you pay for owning the fund BEFORE the fund pays you any profits. So if the fund makes 5% profit for a year, and the MER is 2.5%, you only make 2.5% profit for the year. If the fund makes 2% profit for a year, and the MER is 2.5%, you actually lose 0.5% of your fund’s value that year! NOTE most sales brochures quote the performance of the fund AFTER the MER is subtracted. So if it says it earned 7% last year, then it really earned (7+MER)%, perhaps 9.5%, last year.

Most discount brokerages allow you to purchase a wide variety of mutual funds issued by many institutions for no fee. They often set required minimum purchases, however. For example, at BMO InvestorLine you are required to buy at least $1000 of a non-BMO mutual fund for a first purchase, and at least $500 at a time for each additional purchase of that same fund.

Transferring to a Self Directed RRSP Brokerage Account in the Future

If you don’t start with a self-directed brokerage account, you may want to position yourself for a future transfer to one. There is usually no fee to transfer a RRSP account from a bank to its corresponding brokerage. For example, there is no fee to transfer a RRSP account from BMO to InvestorLine or from CIBC to Investor’s Edge.

If you think you want to start with a bank RRSP and then transfer later to a brokerage, you may want to choose the bank that matches the brokerage you ultimately want.

Some brokerages, by the way, will pay the transfer fee for you if you are bringing in a large enough account. Usually they want you to be bringing $50,000 or more before they will pay your transfer fee.

Transferring Your Parked RRSP Contribution to your Permanent RRSP

If you parked your RRSP contribution in a daily interest savings account at ING Direct, or elsewhere, it is fairly easy to transfer it to your permanent RRSP.

Ask the provider of your permanent RRSP to supply you with the T2033 form to transfer the money. On this transfer form you will

• provide the name and address of the place where the money is now (e.g. the address for ING Direct).
• provide your account number and information about the current balance of the account
• fill in the name and address and account number of your new RRSP

You often have to attach a photocopy of a recent statement from your existing RRSP.

The form and photocopy are mailed to the financial institution that is holding your current account. For example, either you or your bank/brokerage would mail the form to ING Direct if they have your cash RRSP. After 2-8 weeks, they will electronically transfer the money to your new permanent RRSP.

Can I Transfer my RRSP GICs to my RRSP Brokerage Account?

You usually cannot transfer GICs from one RRSP to another. Also, you cannot cash GICs until they mature. If your investments are in GICs, you will have to set instructions to have the GICs mature to a RRSP daily interest savings account. Once they are in the cash account, you can easily transfer them.

Can I Transfer RRSP Mutual Funds to my RRSP Brokerage Account?

It depends. Specifically it depends on whether the broker sells the type of mutual fund you want to transfer. For example, I was able to transfer some BMO RRSP mutual funds to my InvestorLine account. I could also transfer some CIBC RRSP mutual funds to my Investor’s Edge account. However, neither BMO nor CIBC offers ING Streetwise funds for sale. So it would not be possible to transfer Streetwise funds to their brokerages.

If you want to transfer RRSP mutual funds, you should call your brokerage to discuss whether it is possible. If you have not yet picked a brokerage, you might want to call and ask before setting up an account. Perhaps one brokerage would be better than another for this purpose.

My Recommended Strategy for Setting Up a Long Term RRSP Account

Strategy for RRSP Accounts of Fewer than $15,000 for Several Years

If you expect to have less than $15,000 in your RRSP for several years, I would recommend setting up your RRSP account with a bank or financial institution. (Please see RRSP Strategies Part 3: Keep It Safe to Start.)

I would choose the bank that offers the best mutual funds and/or ETFs for my current needs.

Most of them could meet those criteria, so next I would choose the bank that is affiliated with the self directed brokerage I am most likely to want to use in the future. This will save an account transfer fee in the future.

Bank	Brokerage
BMO	InvestorLine
CIBC	Investor’s Edge
RBC	Direct Investing
Scotia	iTrade
TD	Waterhouse [now, in 2014 “Direct Investing”]

Generally if you have a balance of $25,000 or more you can get an independent brokerage like Questrade to pay your account transfer fees. So if you choose a potential bank brokerage today and change your mind to an independent brokerage when the time actually comes to make the shift it should be fine.

One choice you should thoroughly research is the TD BASIC SDRSP (which means self directed retirement savings plan). It is sort-of a step between a bank RRSP and a brokerage RRSP account. It allows you to invest in very low MER e-series TD funds. (For details, you might want to read an article by the Canadian Couch Potato about this plan.

Another choice to take a close look at if you have at least $10,000 is the RBC Direct Investing self directed RRSP. If you are willing to commit to pre-authorized contributions every month it is fee-free and gives a wide range of investment choices. (You generally need a large balance to buy GICs within a self directed plan. InvestorLine, for example, requires you to buy GICs with a minimum size of $5000 each.)

Strategy for RRSP Accounts of More than $25,000

If you already have $25,000 in your RRSP I would start researching self directed brokerage RRSP accounts and pick one and set it up immediately. It will increase your investment flexibility without any significant drawbacks. You can always keep all of your money in GICs even within a brokerage account.

Related Reading

• RRSP Strategies Part 1: How to Best Get your RRSP Money Contributed Before the Tax Deadline
• RRSP Strategies Part 3: Keep It Safe to Start – Use Cash, Bonds and GICs to Build Your RRSP Base

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What made you choose where you would keep your RRSP? Was it the physical location of the institution? Where you keep your chequing account? Fees? Please share your experiences with a comment.