Tag Archives: RRSP

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

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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.

Budgeting for Retirement Requires a Good Estimate of My Personal Rate of Inflation for 2012

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I find the rates of inflation quoted in financial plans for retirement fascinating. I remember in the late 1980s when they were estimating 10-15% rates of inflation. Now they tend to estimate 2 or 3% as the rate of inflation we should use for retirement planning.

The reality is that no one really knows. You have to pick a number out of a hat and use it.

However one number I can truly know is what my personal rate of inflation was for the previous year (2012.) Actually, since I track my expenses every year, I could figure it out for the last 13 years easily and for more with a bit of digging for an older file.

What Was My Personal Rate of Inflation for 2012?

There were a few surprises when I worked through it. The following are my rates of inflation on various goods and services:

  • Water 11.34%
  • Internet access 6.7%
  • Electricity 6.57%
  • Cable for TV 5.2%
  • Car 2 insurance 3.96%
  • Property taxes 2.1%
  • Telephone including long distance 1%
  • Car 1 insurance 0.7%
  • House insurance 0.1%
  • Natural gas -13.3%
  • Gasoline -38.1%

A bit of thinking led to the following interpretations:

Water rates went up to help fund waste water treatment. We only used 1 m3 more water despite the drought.

Electricity switched from a two-tiered pricing structure to time-of-use pricing in mid-year. Given the hot summer compared to 2011, it’s surprising our rate didn’t increase more. We did, however, only run the air conditioning after 7 p.m. and before 6 a.m.

The insurance increased on Car 2 because it is not the same car. It is now a 2012 to replace the former 2004.

Natural gas was much cheaper in 2012 due to shale gas production volumes. I went back and checked and the price is down 1% per m3. The bulk of the savings, though, was due to the extremely mild winter and therefore lower natural gas usage.

Gasoline was way down because we didn’t have 2 cars for 6 months, we only had 1. We also didn’t make a road trip to the Maritimes this year. The actual average price per litre was up for the year.

The Combined Rate of Inflation for 2012

Now the above figures are a good explanation for why percentages are not always reliable indicators. It’s very hard to look at those numbers and estimate our total inflation for 2012.

I did calculate the percentage increase in spending to pay for all of the above items, with gasoline included. Our rate of inflation was minus 3.1%. That’s right; we actually spent less on those items in 2012 than in 2011.

However, a more realistic rate of inflation took out the impact of the substantial savings for gasoline. When I recalculated without our gasoline costs, our personal inflation rate for 2012 was 1.6%.

That’s right, only 1.6%.

I was quite surprised. Admittedly, it would have been worse if we’d had 2 cars for the whole year and if the weather had been colder in the winter.

What Inflation Factor Do I Use to Plan for Retirement?

For retirement purposes, I usually assume inflation will be astronomical and investment returns will be pitiful. This gives me more incentive to save lots.

I doubt you can have too much money for retirement. Your heirs will love you if you can provide for your own needs in your old age. And your heirs will love you even more if you die prematurely and they get all the loot!

Further Reading

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Do you ever calculate your personal rate of inflation? What was it for 2012? Please share your experiences with a comment.