After reading about the tax advantages of RRSPs in the previous section, you may be anxious to know whether you're eligible to invest. The good news is that practically any working-age Canadian qualifies for an RRSP. Specifically, you are eligible if you are currently working in
- You are under the age of 69.
- You have contribution room (we'll cover contribution limits later in this tutorial).
- You file income tax with the Canadian government.
OK, I'm Eligible. Now What?
You can open an RRSP account at any financial institution such as a bank, credit union, caisse populaire and most investment houses. If you'd rather not go into a physical location, you can set up an RRSP account online with most online brokerages, or on the website of almost any major Canadian bank.
Managed Versus Self-Directed
Once you've decided to go ahead with an RRSP, the first choice you'll have to make is whether to open a managed or self-directed RRSP. A managed account is a government-registered bank account that holds investments such as Guaranteed Investment Certificates (GICs) or mutual funds. Beyond choosing from one of the many funds offered by your financial institution, no further investment decisions are required on your part. Whoever is responsible for managing the investments in your managed account will make all the necessary investment decisions on your behalf.
The expenses for managed RRSPs can vary widely. They depend on the types of investments held in your account and the way in which they are managed. The cheapest managed RRSPs tend to be investments in a number of mutual funds.
There are a variety of managed RRSP investment options. Some factors that will determine the fees you will pay include the amount of money you have to invest, the types of assets you want to buy and the level of management you seek.
Fees, Fees, Fees
The least expensive option for those who don't want to worry about making regular investment decisions is a managed mutual fund portfolio. A licensed mutual fund representative will invest your money into a number of mutual funds that can be held in your RRSP account. Your mutual fund representative will pay some attention to what is happening with your account and may give you a phone call once in a while if one of your funds is underperforming or should be sold and replaced with another fund. The costs incurred with this kind of management start at approximately 1.5% of the value of your portfolio and may include transfer-in fees, transfer-out fees, administration fees and the commission that is charged upon the purchase or sale of a fund. At the end of the day, this kind of management can cost anywhere from 1.75% of the value of the assets in your account to around 2.25% of the value of the assets in your account. There is usually no minimum account balance associated with this kind of management. (For more insight, see Advantages Of Mutual Funds.)
With the most expensive managed RRSPs, you can expect to pay around 2.5% of the total value of your account, plus annual administration fees of around $150 and transaction costs of 2.25% of the value of any trades made. Typically, investment advisors offering these kinds of services require that clients invest a minimum of $100,000 or be directly related to one of their current clients.
Some investment advisors provide their clients with discretionary services, meaning that an investor can turn over the authority to make decisions on his or her account to the advisor. Advisors make investment decisions on their clients' accounts, and clients agree to pay fees accordingly. Discretionary management comes at a cost of approximately 3% of portfolio value per year, regardless of the amount of trading that happens in the account. Discretionary services are usually only open to clients with at least $300,000 worth of liquid assets to invest. Furthermore, discretionary services are not offered at all financial institutions because of the legalities involved in handing over investment decision-making power to a third party.
Rather than letting someone manage your money for you, you may elect to manage your retirement assets yourself and choose a self-directed RRSP. Unlike with a managed account, you will have many investment decisions to make, but with these decisions comes more control. Choosing a self-directed RRSP over a managed RRSP is much like electing to open a discount brokerage account instead of a full-service account.
If you use an online brokerage to set up your self-directed account, it will be nearly identical to your other online investment accounts. The costs of managing such an account are likely to be as minimal as the costs of opening any online discount brokerage account. Commissions are charged on each trade and most online brokerages also have a minimum initial investment, which will probably fall between $500 and $2,000. Beyond that, every time you buy or sell an investment, the online brokerage charges a fee, or commission.
RRSPs: Contributing - Part 1