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Beginners’ Guide to RRSP Investments in Canada

RRSP or Registered Retirement Savings Plan is a type of investment account that aids people in growing their money and saving it for their retirement in the future. After all, retirement comes with a lot of decisions that you need to make, so, you should be at least strong on the financial part to proceed stress-free. Your RRSP investments in Canada are not levied with any taxes. You will be saved from paying this amount until you make a withdrawal. 

This money also comes with benefits like being deductible from your current earning and hence lowering down the amount of tax that you pay currently. RRSP investments in Canada are crucial and you should keep reading to learn the in-depth details about the program and align it with your retirement plans.

Read:Amazing Investment Options in Canada to Grow Your Money

Top RRSP Investments in Canada

You can invest your money in several instruments through an RRSP account which depends on how much you are willing to invest, the goal you stand to achieve, and the risk that you can bear. 

For example, if you are retiring in one year or retiring in 30 years, your investments will also differ in goals and type. A 60-year-old retiree has goals of keeping his savings safe and creating a stream of income to support him/her. While a millennial who is 30+ would want to go for a diversified portfolio of equities.

The most prominent RRSP investments in Canada are as below. 

Read: Can You Withdraw RRSP Without Paying Taxes?

GIC or Guaranteed Investment Certificate

A GIC has a fixed rate of returns and is best for people with fixed-income goals. You get returns on your deposit after a stipulated period has been completed. It is for people with low-risk tolerance. Your principal is 100% safe, so the scenario of losing money is invalid.

The GIC has a variable or fixed rate and option for choosing custom terms like 2 years, 7 years, etc.

The returns on GIC can be synonymous with the returns on a savings account or a little higher than that. These deposits also qualify for CDIC insurance.

Read: What are GICs in Canada?

Savings Accounts

RRSP Investments in Canada

This account must’ve crossed your path at least once and it is the most common of all. All you have to do is deposit money in a savings account and let it grow over time. This is a safe option and you will incur interest on the money that is currently in your account.

Your savings in this account are insured by CDIC (Canada Deposit Insurance Corporate) for a sum of up to $100,000. In case of any loss that the bank buffers up to this amount, you will not lose your money.

Also know: Leading Bank Accounts for Students in Canada (2022)

This kind of RRSP does not offer the rates that are very lucrative and to find the best options you will have to do extensive research for the same. 

For instance, the EQ bank’s RRSP savings account has a rate of 1.25% which is one of the highest in Canada.

Read: A Comprehensive List of High-interest Savings Accounts in Canada

ETFs or Exchange-traded funds

ETFs allow you to diversify your portfolio with only one investment and you can invest in a group of stocks and bonds all at once.

You can invest in an ETF on the stock exchange like stocks or bonds of any kind. You can diversify them to carry many stocks, commodities, or securities which can help you to invest in the industries or geographical location of your choice.

These are less costly than mutual funds and comparatively easier to purchase and sell.

The risk in an ETF depends on the type of commodities and securities that it holds and has the spectrum from conservative towards the growth portfolio. The returns on ETF monitor a benchmark. Hence, if the market is rising, so is your ETF. And if the market is falling, so is your ETF. 

To invest in an ETF, you can invest through brokerage or room-advisor. 

Read: All-in-One ETF in Canada, you can’t ignore it at all! 

Robo- Advisors 

Robo advisors are online wealth managers proficient in managing your portfolio and creating it on your behalf at a comparatively low fee. All you have to do is relax while they do your work like rebalancing, investing, for you. The most used Robo-advisor is Wealthsimple invest.

The clients of Wealthsimple are always satisfied due to the automatic rebalancing that saves their time and also love how they can get financial advice. Other features include automatic contributions, dividend rebalancing, personalized portfolio, with a minimal fee of about 0.50% to 0.40%.

ETFs in Canada are protected against any major losses by the CIPF (Canadian Investor Protection Fund) for an amount of $1 million if your holding company has the membership of CIPF.

Read: Avoid These Biases for Making Investment Decisions in Canada!

Brokerages

If you are knowledgeable in investing and handle all your investments independently, you can use a discount broker to purchase your ETFs. In Canada, you can do that through: 

Wealthsimple: They charge a $0 commission when you buy stocks or ETFs. You are also eligible for a $50 cash bonus when you open a new account and invest a mini amount of up to $150.

Questrade: Through Questrade, you can invest in bonds, stocks, ETFs, options, etc. You can trade for free in ETFs if your minimum funding in the account is $1000 and you also stand the chance to gain $50 to invest in your trading account. 

Read: All You Need to Know About Canada Fed Deposit in 2022!

Stocks

Stocks are the most common kind of investment. When you invest in a share, you become a part-owner of the company and have a share in the profits. If you have a share, you can make money by reselling it and you receive the profits from the company as dividends. 

Purchasing stocks solely is a two-sided bet. Either you get high returns, or you lose all of your funds. 

For investing in stocks in Canada, you can use:

  • Wealthsimple Trade with $0 commissions. 
  • Questrade has a low trading fee.

Read: How to Buy Stocks in Canada: The Ultimate Beginner’s Guide

Mutual Funds

Mutual funds hold prominence in the investment world of Canada and they can be easily bought at your credit union or bank. 

Since mutual funds are managed professionally, they are comparatively costly, you have to pay 2% annually for an equity mutual fund alone.

However, Exchange-Traded Funds are less expensive, and you can get them with a Robo advisor at a cost of only 0.70% per year. 

Read: Guide to Investing in Mutual Funds in Canada

Bonds

Bonds provide a steady and fixed income to you. When you get a bond, you are just giving a loan to the company with an interest rate until the loan matures. Once it matures, you will get back the amount that you invested fully reimbursed. 

Bonds are less riskier than stocks and have a low return rate too, The different types of bonds are corporate bonds, treasury bills, corporate bonds, and municipal bonds. 

You can get a bond through a broker or as a part of the mutual fund or ETF.

Read: What Is A Bond & How Does It Work?

What is an RRSP Investment in Canada?

RRSP is created by the Federal Government for Canadians as a retirement account that helps to save future money for retirement.

The RRSP has many pros to offer which include tax exclusion from returns or contributions in the market. The Canadian retirees confer it as the third source of income. 

The RRSPs are of 3 types: 

Group RRSP: You can get this kind of RRSP from your employer where they usually match your contribution for the expense of managing the plan.

Individual RRSP: This RRSP belongs to you. You invest in it based on your convenience and can withdraw from it as you please.

Spousal RRSP: You have the right to share contributions in your spouse’s RRSP account. You will enjoy tax deductions, but the assets will belong to the spouse. This can be a good part of an income-splitting plan which will lower the consolidated tax burden of the family when the money is withdrawn at the time of retirement. 

Read: 20 Amazing Ways To Save Money On A House In Canada

What is the Limit for Contribution in an RRSP?

RRSP investment in Canada

You can contribute to 18% of your income in an RRSP every year as directed by the government. For 2021, this limit is fixed at $27,830. For 2022, it is decided as $29,210.

You can either contribute this limit throughout the year or carry forward the remaining amount to future years. You can enquire about your remaining contribution amount by checking the CRA’s notice of assessment. 

If you also have a pension plan that is rendered by your employer, your contribution will be lowered as per the pension contribution. 

Read: Tips On Credit Score Check In Canada? Will It Lower It?

What is the Meaning of Over-contribution in an RRSP?

When you contribute more than the RRSP limit allows, it is known as over-contribution. You have a buffer limit of up to $2,000 as directed by CRA. However, invest more than that, and you will be imposed with 1% funds per month on the excess. 

You can get rid of such a penalty, by withdrawing the excess contribution and filling form T1-OVP to fulfill the penalty that is accrued. 

What is the Deadline for Contributing to an RRSP?

You can invest in RRSP before 60 days of the New year.  In 2021, your RRSP contribution on March 1, 2021, will be deducted from your income for 2020. 

When the RRSP investment is deductible from your taxable income, it will bring tax savings. For example, if you invest $10,000 and 40% is your marginal tax rate, you get $4,000 in refunds. 

Read: All You Need to Know About Annuity Planning in Canada! 

Qualified and Non-qualified RRSPs

RRSP investments in Canada come in varied choices to invest from. However, not all investments can be transferred to your RRSP account. 

They are known as qualified investments, which includes:

  • Savings and term deposits
  • Treasuries
  • ETFs
  • Bonds
  • Stocks
  • Mutual fund
  • Gold and silver (T&C applied)
  • Options and warrants

You might have to pay penalties if you invest through non-qualified investments. These investments include bonds issued by a company that does not allow share investment publicly like OTC, land, investments in small business. 

All of these investment options have different returns and risk appetites. Thus, it is crucial that you decide your financial goals and risk appetite. If you have a higher risk tolerance, equity, mutual fund, options, etc. are best for you. While, if you enjoy lower risk, you can go for bonds, savings account, etc. Also, gain basic knowledge of these financial instruments before you dive into them. The mantra is prevention is better than cure. So, do your homework and then take the lip of faith. 

Read: GIC vs. Mutual Funds – Which One is Best for You?

What Benefits Can You Get by RRSP Investments in Canada?

RRSP investment in Canada can help you to grow your retirement savings over time. Some of these benefits include.

  • Spouses can divide their retirement income with the spousal RRSP and also reduce the tax burden with it.
  • These are tax-deductible contributions that save on taxes and you can use those savings to pay the retirement savings when you have to pay lower taxes.
  • You can borrow tax-free money to pay for a house, or school through the various Home buyers’ plans or Lifelong learning plans.

Read: What Do You Need To Know About Locked-in Retirement Account In Canada?

The Case of RRSP versus TFSA

TFSA (Tax-free savings account) has some similar functions like RRSP for retirees in Canada. In an ideal scenario, you should max your limit in both accounts, but in reality what should be your course of action?

  • An employer can choose to match your contributions for a group RRSP. In such scenarios, you can take advantage and take the free money to maximize your RRSP account.
  • TFSA is non-tax deductible but the withdrawals are tax-free.
  • TFSAs are ideal short-term and long-term instruments. Hence, savings for a vacation, down payment, wedding, etc. can be done through a TFSA.
  • The contribution limit of 2021 for TFSA was $6,000 and in 2022 it is still $6,000. While for an RRSP, it is $27,830 in 2021 and is $29,210 in 2022. If you have good savings, RRSP has a wider savings room.
  • People of higher tax brackets save more with an RRSP. If your tax bracket will be higher in the future or the same as current, you should consider a TFSA.

Read: 10 Vital Financial Must-Haves for Newcomers to Canada

The Bottom Line

Making investment decisions is a crucial part of whether you are planning for your retirement or any other goals. It requires you to be mindful of your earnings, and how comfortable your lifestyle would be after making investments. You need to be aware of your investment outcomes and gain knowledge of the same.

I hope this guide on RRSP investments in Canada has helped you and made your investment procedure easier.

Read: Government Benefits Available For Seniors In Canada!

Read: How to Invest in TFSA in Canada?


Devanshee Dave

Devanshee is a staff writer at YourFirst.ca. She is a finance enthusiast and has completed her Master’s degree in Mass Communication & Journalism. She has worked as a journalist in a local business newspaper, multiple start-ups as well as finance and economy-related online media houses.

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