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Investing in an RRSP means using this tax shelter to hold investments suited to your time horizon, risk level, and goals. You can hold eligible GICs, bonds, stocks, ETFs, and mutual funds.
However, opening an RRSP isn’t enough to invest. You need to choose a financial institution, select your investments, and set a strategy suited to your situation. Here’s how to invest in an RRSP in a simple, structured way.
Investing in an RRSP means putting your contributions into eligible investments. An RRSP is therefore a tax shelter, not an investment in itself.
Depending on the financial institution you choose, you may be able to hold GICs, bonds, stocks, ETFs, or mutual funds.
Income and gains generated in an RRSP are generally not taxed as long as they remain in the plan. Tax is instead deferred until withdrawals.
As a result, two people can have RRSPs of the same value, but with completely different investments and risk levels.
To learn more, see our complete guide to the RRSP.
The main advantage of an RRSP is its tax treatment. Eligible contributions can be deducted from your taxable income.
In addition, investment income is generally not taxed each year when it stays in the RRSP.
This combination allows you to defer tax on the amounts invested and their returns until withdrawal.
However, an RRSP does not make withdrawals tax-free. Amounts withdrawn are generally included in your taxable income for the year of withdrawal.
Tax deferral allows returns to remain invested in the RRSP. Interest, dividends, and gains can therefore contribute to the portfolio’s future growth.
Over the long term, this compounding growth can have a significant effect on a portfolio’s value.
As a result, the RRSP’s advantage also depends on your investment time horizon. The longer your money stays invested, the more valuable the tax deferral can be.
You can open an RRSP with a bank, a credit union, a trust company, or an insurance company.
You can also use a brokerage platform or a robo-advisor. Your choice of institution determines, among other things, the investments available, fees, and your level of control.
A self-directed RRSP lets you choose your own investments. The CRA confirms that self-directed RRSPs can hold cash, GICs, mutual funds, and most securities listed on a designated exchange.
With self-directed investing, you choose your investments and manage your portfolio yourself. This option is better suited to investors who want to make their own decisions.
You can use Wealthsimple Trade, Questrade, or Qtrade Direct Investing, among others.
With a robo-advisor, your portfolio is managed automatically based on your risk profile.
Finally, a financial advisor can support you in your decisions. This approach can be relevant if your financial situation is complex or if you want to delegate management.
You may also want to see our guide to online brokerage platforms to compare the different options.
Choosing an RRSP investment depends mainly on your investment time horizon, risk tolerance, and goals.
There are many eligible investments. However, they don’t all offer the same return potential or the same level of risk.
Conservative investments can be a good fit when preserving capital is the priority or when your time horizon is shorter.
You could use, for example:
GICs generally guarantee principal, depending on the product’s terms. You can, for example, look at Tangerine GICs or EQ Bank GICs.
However, a lower-risk investment generally offers more limited return potential.
In addition, risk level should be assessed based on your overall portfolio, not just your RRSP.
Growth investments generally fluctuate more in the short term. In return, they offer higher return potential over a longer time horizon.
You could invest, for example, in:
Volatility is part of these investments, however. A temporary drop in value doesn’t necessarily mean your strategy is bad.
What matters is choosing a level of risk you can truly live with.
Asset allocation ETFs combine several investment categories into a single product.
They can, for example, combine stocks and bonds according to a set allocation.
This approach provides significant diversification with a single ETF, which can simplify RRSP management.
See our guide to asset allocation ETFs to understand how they work and what to look for.
Your investment time horizon is the period before you’ll need your money.
An investor with several decades until retirement can generally tolerate more fluctuations than someone who plans to use their savings soon.
As a result, your time horizon should influence the split between riskier investments and more conservative ones.
Risk tolerance is your ability and willingness to withstand a drop in value.
A portfolio made up mostly of stocks can lose a significant portion of its value during a market correction.
You therefore need to choose a strategy you’ll be able to stick with during difficult periods.
Higher potential returns don’t necessarily justify a level of risk you can’t tolerate.
Diversification means spreading your portfolio across multiple investments, sectors, regions, or asset classes. It helps reduce the risk tied to any single investment.
For example, holding several companies across different sectors and countries is generally less risky than relying on a single company.
ETFs can make this diversification easier, since a single product can hold hundreds or thousands of securities.
Fees directly reduce the return an investor earns. Over a long period, a relatively small difference in annual fees can add up to a significant amount.
So compare management fees, commissions, and other costs associated with your strategy.
However, cost shouldn’t be the only criterion. Diversification, risk, and portfolio simplicity are also important.
You can invest your RRSP contributions gradually, for example each month.
This approach lets you invest on a set schedule rather than trying to predict market moves. It can also support saving discipline and reduce the pressure of choosing the “right” time to invest.
However, investing gradually doesn’t guarantee a better return than investing right away.
You can also invest a large amount as soon as it becomes available.
This approach gets your money invested sooner, which can be worthwhile when you already have a sum earmarked for your portfolio.
However, investing a large amount right before a market drop can be psychologically difficult.
The choice between the two approaches therefore depends as much on your strategy as on your ability to stay invested.
Interest and dividends generated in your RRSP can stay in the account and be reinvested.
This approach keeps your money working and lets you benefit from the potential of compounding growth.
Depending on the investment you choose, reinvesting can be automatic or require action on your part.
Investing in an RRSP isn’t just about opening an account. You also need to choose an institution, select investments, and set a strategy suited to your situation.
For many investors, a diversified, low-cost approach can simplify portfolio management.
However, the best RRSP investment depends on your time horizon, risk tolerance, and goals.
Finally, don’t forget that an RRSP is a tax shelter. The investments you hold inside it determine your portfolio’s return and risk level.
Savings are this way:
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