Best RRSP Investments for Canadians
There have never been more ways for Canadians to invest their RRSPs. But with so many options, it can be downright difficult to pick the right investment. If confusion around RRSP investing sounds like a familiar problem, you’ve come to the right place. In this article, I’ll show you some of the best places to invest your RRSP, regardless of your age or risk tolerance. I’ll also explain the basics of asset allocation to help you make the best investment decision for your RRSP.
What Is an RRSP?
Created by the federal government in 1957, RRSPs are a registered investment vehicle designed to encourage Canadians to save for their retirement. RRSPs have two key benefits; contributions are tax-deductible, and the plan is fully tax-sheltered until the funds are withdrawn. There is an annual contribution limit of 18% of income reported on last year’s tax return, up to a maximum of $27,230 for 2020. Unused contributions in previous years can be carried forward.
Before You Invest – Understanding Asset Allocation
Before you invest in your RRSP, it’s essential to have a basic understanding of asset allocation, and why choosing the proper asset allocation model may be the most important investment decision you make. Asset allocation separates investment types into different categories, with each having its own unique objective. These categories are generally known to be safety, income, balanced, and growth.
An asset allocation model may include one or more of these asset classes in various weightings. An investor’s recommended asset allocation takes into account several factors, including investment time horizon and personal risk tolerance. The following is a breakdown of each asset class.
The safety component of an asset allocation model focuses on the preservation of capital. Investors in this asset class are less concerned with returns. Instead, the focus is on ensuring that the principal balance of an investment does not lose value. Safety investments mostly comprise principal guaranteed products such as savings accounts and GICs, or money market instruments. Because of the importance of diversification, safety investments can be included in various asset allocation models, with the weighting dependent upon the investment objective of the portfolio.
The income component of the asset allocation model focuses on investments that provide a steady, reliable income for investors. Unlike safety investments, income assets are not principal guaranteed. However, they lack the volatility of long term equity investments. The income asset class is primarily made up of government and corporate bonds, and real estate investments, in the form of Real Estate Investment Trusts (REITs). Generally speaking, the closer an investor is to retirement, the larger the income component of their portfolio will be.
The growth asset class is focused purely on long term capital appreciation through the purchase of equities. An investor may choose to buy the stock of individual companies, or opt for pooled investments, such as mutual funds or ETFs, to get instant diversification. An investor with a heavy weighting in the growth sector has a long investment time horizon and a moderate to high level of risk tolerance.
A balanced asset allocation is one that includes a mix of income and growth investments. Because these components are not correlated i.e.: when stocks go up, bonds generally decline, a balanced asset allocation offers the potential for growth with moderate levels of risk. A large segment of investors will fall into this asset class, which is ideal for those with a medium to long term investment time horizon.
Best Ways to Invest Your RRSP
Drawing on each of the asset classes listed above, here are some of the best places for Canadians to invest their RRSP in 2020. As always, remember to consult with an investment professional who can help you determine the right asset allocation.
RRSP Savings Account
An RRSP Savings account offers safety investors a principal guarantee, with a very modest rate of return. Because there is little to no growth potential, an RRSP savings account should only be used as a place to temporarily park funds that you plan to invest elsewhere, or that you plan to withdraw from your RRSP in the near future.
While all of Canada’s big banks will have a place to put your RRSP savings, their interest rates will be next to nothing. Your best bet is to open a high-interest savings account with a Canadian online bank. Here are two of the best options available today:
Tangerine RRSP Savings Account
Tangerine is the online banking arm of Scotiabank. If you become a new Tangerine client and open an RRSP Savings Account by July 30, 2020, you’ll earn 2.80% on your RRSP savings for the first five months. This is an incredible offer, considering that interest rates have dropped sharply in recent months.
A GIC is similar to an RRSP savings account in that it offers investors a principal guarantee. GIC returns are often favourable to savings accounts, however, because they require the investor to lock in funds for a predetermined period of time. Most GICs require a minimum investment of $500 or $1000. Here are some of the top RRSP GIC rates being offered today:
Tangerine Bank: 2.30%
Simplii Financial: 2.20%
Stocks and Bonds
For long term growth investors wanting to purchase individual stocks, bonds, or REITs, by far the cheapest and easiest way to do this is by opening a discount brokerage account. It’s also a great way to purchase US and international stocks, which are ideal for your RRSP. This self-directed approach to investing places the decision making squarely in the hands of the investor.
There is no shortage of online brokers available to Canadians, but here at MapleMoney, our top choice is Questrade, for its combination of low fees and a rock-solid trading platform with mobile app functionality. Another option for newer investors is Wealthsimple Trade, a mobile-only app offering no trading fees on thousands of Canadian stocks. Let’s take a closer look at each:
Questrade is a top choice for thousands of Canadian investors for its low fees and ease of use. There’s no need to step inside a brick and mortar building or meet with a bank advisor. You can open a Questrade RRSP account online within minutes, and start investing shortly thereafter. Trading fees are as low as $4.95 each, and unlike many of its competitors, Questrade does not charge an annual fee for registered accounts, ie. RRSP, TFSA.
Wealthsimple Trade is the online trading platform of Canada’s leading robo advisor, Wealthsimple. It’s not well suited for sophisticated investors, due to its lack of a desktop trading platform and subpar research tools. However, it shines in one key area. No account fees, and no trading fees whatsoever. This makes it an ideal RRSP option for new investors looking for a cost-effective way to invest in the stock market.
Mutual Funds and ETFs
The easiest way to invest in the stock market is by purchasing mutual funds or ETFs. Both offer instant diversification, as well as automatic rebalancing, to ensure that you remain within your recommended asset allocation. If you prefer to meet with an advisor to invest your RRSP, you can purchase mutual funds by visiting any Canadian bank branch, or through an independent investment advisor.
If you prefer the convenience and low cost of online investing, you can buy mutual funds and ETFs through an online broker, like the aforementioned Questrade. I should point out that Questrade offers no-fee ETFs, making them one of the lowest-cost investment options available to Canadians today.
Income Splitting With a Spousal RRSP?
In addition to contributing to your own RRSP plan, you and your spouse can set up a spousal RRSP, to take advantage of eventual tax savings through income splitting. To make the best use of a spousal RRSP, the account would be opened in the name of the spouse who will have the lower-income at retirement, while the higher-income earning spouse will be the one making contributions to the plan.
At retirement, the funds will be taxed in the hands of the planholder (lower income earner), reducing the tax burden when the funds are drawn out as income. You can contribute to your spouse’s RRSP plan in addition to your own, providing that you stay within your RRSP contribution limit.
Home Buyers Plan
There are two ways that investors can withdraw from their RRSPs without incurring a penalty; via the Home Buyers Plan (HBP) and Lifelong Learning Plan (LLP). The Home Buyers Plan is designed to make it easier for first time home buyers to purchase a home by allowing them to withdraw up to $35,000 from their RRSP to use towards the down payment or other related costs. The funds withdrawn are not taxed, but must be paid back into the plan in equal installments over a 15 year period.
Lifelong Learning Plan
Similar to the HBP, the Lifelong Learning Plan allows Canadians to borrow from their RRSP to help pay for their post-secondary education. You can withdraw up to $10,000 per year, up to a maximum of $20,000. The funds can be used to pay for your education or your spouse’s, and you have ten years to repay the amount in full, into your RRSP. With both the HBP and LLP, you will be penalized if you do not adhere to the repayment guidelines.
Common RRSP Misconceptions
When it comes to personal finance, people’s opinions are often absolute. For example, you may have heard someone say that it’s always better to pay down your mortgage before investing in RRSPs. While this may be true in some situations, it’s certainly not always the case. Let’s take a look at a few common misconceptions surrounding RRSPs.
TFSAs: A Better Investment Than RRSPs?
Since the Tax Free Savings Account was first introduced by the Canadian government as an alternate tax-sheltered investment vehicle back in 2009, the debate has raged as to where Canadians should prioritize their long term savings. This is mainly due to the fact that you are not taxed when you withdraw funds from a TFSA, a key benefit.
Here at MapleMoney, we’re big fans of TFSA investing, for the flexibility that the program offers. That said, the vast majority of Canadians should still be investing in RRSPs. In fact, the best solution is to contribute to both a TFSA and RRSP. Higher-income earners will benefit significantly from the tax-deductibility of an RRSP, something a TFSA cannot offer.
Pay Down Mortgage vs. Invest In RRSPs
If you have credit card debt at 20% interest, your focus should be on paying off that debt rather than boosting your RRSP contributions. On the other hand, it may be better to fund your RRSP instead of applying extra payments to your low-interest mortgage or home equity line of credit. For most people, their mortgage is something that they will be paying for 20 or 25 years, and rates have been low for almost a decade. Ignoring your retirement savings during your working years means less potential for growth, and possibly not having enough income in your golden years.
Why Invest in an RRSP When I’ll Pay Taxes Later?
I get it. No one likes to pay taxes. But just because your RRSPs will be taxed when they are withdrawn at retirement doesn’t mean that you shouldn’t contribute in the first place. The benefits of the upfront tax deduction, as well as decades of tax-sheltered growth far outweigh the taxes you’ll pay at the time of withdrawal.
Final Thoughts on RRSP Investing
After reading this article, my hope is that you feel more confident about where to invest your RRSP. Whether it’s an RRSP savings account, GICs, or you’re ready to dive into the stock market, there are some great options to choose. For RRSP savings, your best bet will be to open an account with an online bank, due to their superior interest rates vs. the big banks.
Same goes for GICs, although your local credit union may also be a solid bet. If you want to buy stocks or ETFs, I recommend an online broker, like Questrade or Wealthsimple Trade. The most important thing is to choose an asset allocation that matches your investment objectives. If you can do that, you’ll be well on your way to securing a comfortable retirement.