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

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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.

RRSP Strategies Part 1: How To Best Get your RRSP Money Contributed Before the Tax Deadline

My first advice is completely maximize your TFSA before you contribute to your RRSP. If you have maxed out your TFSA contributions you may want to open your first RRSP account. Perhaps you’ve decided to open it before March 1 so that you can claim the contribution on your previous year’s taxes by April 30. What should you do to open your RRSP and make your contribution in the best possible way on such short notice?

Opening an RRSP to Meet the March 1 Deadline with only Hours to Go

Let’s look at a common situation. Say it’s February 25 and you’ve decided you want to open an RRSP and make a contribution in time to claim it on this spring’s tax return. You have not read any books about RRSPs. You have not read any websites about investing (although obviously you are starting to!). You don’t have a clue about what investments to hold in your RRSP or where to buy them. And time is running out.

Don’t Fall into the Bank RRSP GIC and Mutual Fund Trap

It’s one thing to go to your bank and deliberately open an RRSP and buy a GIC or units in a mutual fund. It’s another thing to accidentally do it. If you are choosing this route, that’s fine. But if you’re thinking of rushing to the bank just because you can’t think of anything else to do, slow down.

Banks Charge Large Fees to Transfer RRSPs to Other Banks and Brokerages

Most banks charge a fee to transfer assets from an RRSP to another financial institution. The fee can be quite large:

  • CIBC is going to charge me $100 to transfer my RRSP assets to my RRSP at another company. [Checked 2014 02 https://www.cibc.com/ca/retirement/rrsp/rrsp-daily-int-svgs-acct.html]
  • BMO would charge $50. [Checked 2014 02 http://www.bmo.com/home/popups/personal/investments/rsp-faqs]
  • ScotiaBank charges $150. [Checked 2014 02 http://www.scotiabank.com/itrade/en/0,,3694,00.html]
  • TD charges between $50-135 depending on the type of investments you have in your RRSP and how long you’ve held them. [Checked 2014 02 http://www.td.com/to-our-customers/tdhelps/#psce|cid=871|lid=1|tid=001|vid=b0127f826]
  • RBC Direct Investing charges $135 to transfer out an RRSP. I couldn’t find the fee for a regular RBC RRSP transfer out.
  • PC Financial charges a $50 fee to transfer an RRSP. [Checked 2014 02 http://www.banking.pcfinancial.ca/mkt/investments/interestplusRRSP-en.html?region=ON&language=en&signinop=OB and click on the Fee link in the Legal section.
  • Canadian Tire Financial Services, as of January 2013, does not offer RRSPs.
  • Ally, as of January 2013, does not offer RRSPs.

These fees can hurt if you change your mind later about where you want to hold your RRSP.

Learn from My Mistake! Keep your RRSP Assets Together or Keep Them Safe from Transfer Fees

One year at about 4 p.m. on February 28, I realized I had enough cash to make another contribution to my RRSP. (They didn’t have TFSAs back then when the dinosaurs roamed.) It was a long way to my own bank where the bulk of my RRSP was filling up the safe. So I decided to go to my husband’s bank which was a mere 5-minute walk from our home. After all, he had his RRSP there so why not? I bought a GIC because it was the simplest fastest totally secure investment I could get there.

Fast forward about 15 years. I still have one, count them 1!, RRSP GIC at that bank. I never made any other contributions to my RRSP through that institution. And as I started sorting out our financial tangles, I discovered I was getting a lousy rate on that GIC. (And that’s even though I was smart enough to phone each renewal and get the extra 0.5% you get for whining. See Investing in GICs at the Banks an Exercise in Anger Management to Optimize Earnings.) I could get a considerably higher rate if I invested in a CDIC-insured GIC from a trust company purchased through BMO InvestorLine or CIBC Investor’s Edge.

So now I will have to pay $100 to transfer that GIC to one of our self-directed accounts. Since it’s a very small face value, it will take almost a year of profit to pay that fee. Ouch!

You may be asking “Why don’t you just cash out the RRSP and pay the taxes then make a new contribution to your RRSP elsewhere?” In my case, I’ve already maxed out my RRSP. So if I withdraw the funds, they are permanently withdrawn. Any investment income I make on that money for the next twenty-five years would be taxable income. It could make a lot of income in twenty-five years, so I’d rather take the penalty for one year and keep it sheltered.

Where Should You Invest Your RRSP Money if you are in a Hurry and Time is Running Out?

If you must make a contribution quickly to get your tax receipt on time and you don’t have a plan, at least invest the money somewhere where there is no fee to transfer it elsewhere later.

Consider Contributing to an ING Direct RRSP Cash Account for the Short Term

At the time this was written in 2013, and still in February 2014, ING Direct does not charge a fee to transfer out RRSP assets.

Please confirm this is still the case before making any investment in a RRSP product at ING Direct. ScotiaBank bought out ING Direct from its parent company. They may make changes including adding fees at any time.

Personally, I would recommend starting a cash savings account RRSP at ING Direct. You can set up the account over the telephone or online then mail in your cheque and your forms. They will issue the tax receipt after your cheque clears and your forms are approved.

Then, after some calm reflection and planning you can choose where you really want to have your RRSP and what you want to invest in. When your decision is finalized, you can transfer this contribution into your long-term planned RRSP.

Yes, you might waste a bit of time and a bit of money. Transferring an RRSP requires filling out a T2033 form. Your new financial institution sends it to your old one. They then sit on it for 2-6 weeks, but eventually get moving and send your funds to your new RRSP. Since you have your RRSP money sitting in a cash savings account while you wait for the transfer, you will not earn a lot of interest on it. However, you will also not lost $50-135 in transfer fees when you shift it!

Option 2: If ING Doesn’t Work for You at Least Go Lowest Fees

If you decide you prefer to go with one of the other financial institutions instead of ING Direct, at least try to pick one for the right reason. Two considerations include:

  • low transfer fee
  • best self-directed brokerage service

The low fee is self-explanatory. Check convenient credit unions as well as banks.

The other option is to set up your RRSP at a financial institution that has an appealing self directed brokerage arm. For example, BMO has BMO InvestorLine, CIBC has CIBC Investor’s Edge, RBC has RBC Direct Investing. Transferring a RRSP between a bank and its brokerage is usually free. So if you think you may switch to a self directed account at a later date, you may want to make your initial investments at their related bank.

For more information on InvestorLine, and Investor’s Edge, you can check articles on this site. Over time, I will be adding articles about other brokerages too, including some of the super-discount brokerages like Questrade. UPDATE: I also have articles about RBC Direct Investing.

What to Do After You Park your Cash in a RRSP at ING Direct

Once you’ve made your contribution and received your tax receipt, please keep going. Don’t just leave your RRSP money parked in a savings account. Keep reading the next articles on this RRSP Strategy topic. Read books and websites on investing. Then, armed with a plan that suits your goals, transfer the money and implement your strategy. By taking your time and moving forward in small planned steps you can earn a huge investment portfolio.

Fee Information
Some fee information at the time of writing:

  • BMO is at http://www.bmo.com/home/personal/banking/everyday/fees-agreements/add-services-fees
  • ScotiaBank is at: http://www.scotiabank.com/ca/en/files/11/09/SMcL_Administration_and_Service_Fees.pdf#xml=http://www.scotiabank.com/cgi-bin/search/texis.cgi/webinator/search_ca_en/pdfhi.txt?query=rrsp+fees&pr=db_can_en&prox=page&rorder=500&rprox=500&rdfreq=500&rwfreq=500&rlead=500&rdepth=0&sufs=0&order=r&cq=&id=50ca513830
  • TD is at: http://www.td.com/to-our-customers/tdhelps/#psce|cid=871|lid=1|tid=001|vid=b0c1bf6f6

Further Reading

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Have you found a better place to park a hurried RRSP contribution that lets you move it easily with no fees later? Did you, like me, fall into the bank trap and live to regret it? Please share your experiences with a comment.