Canadians are turning their attention to investing as the deadline looms for making an RRSP contribution. When you contribute to your RRSP (Registered Retirement Savings Plan) you can lower your income taxes owed, the funds then grow tax free. It’s more than a good deal. You might contribute enough to your RRSP to generate a tax refund. Who doesn’t want a cheque from the government? With respect to your investments, you want to keep more of that money in your portfolio pocket. You want to invest in a low-fee manner. Today, we’ll have a look at how to invest this RRSP season.
The deadline for making an RRSP contribution (that can be applied to your 2021 tax return) is March 1, 2022. From MoneySense, here is a very good post that covers the RRSP basics for Canadians.
Some important RRSP details.
You can contribute up to 18% of your annual earnings. You can also carry forward any unused RRSP space from previous years.
How does the tax break work?
Let’s say you have $70,000 of earned income in 2021. You make a $20,000 RRSP contribution. You will only have to pay tax on $50,000. The RRSP contribution reduces your taxable income for the year. In that scenario you will generate a tax refund. That would mean that you paid too much in taxes in 2021, so the government will cut you a cheque.
You might then direct that tax return to your RRSP. You might invest the refund in a Tax Free Savings Account.
From that MoneySense post.
The maximum someone can contribute
For 2021, the RRSP contribution limit is $27,830. For 2020, it was $27,230; and for 2019, the limit was $26,500.
Unused/carry forward contribution
RRSP contribution room accumulated after 1990 can be carried forward to another year. If you aren’t able to top up your RRSP contribution this year, you are allowed to make up the difference in a later year.
On the Tangerine Forward Thinking blog I demonstrated how you might be able to play RRSP catch up.
That said, it is certainly much more beneficial to begin as early as possible and invest on a regular schedule. You want to “set it and forget it”. “Wind it up and let it go”.
Put your portfolio on auto pilot. Build wealth over time.
Get rich slow.– smart investors
And there’s no need to be on the sidelines. Here’s a must-read post on dollar cost averaging. There’s no need to be spooked by the markets.
Tangerine Investments is a good place to set up that automatic investment plan.
Invest for growth
“Investing” in a savings account will make building wealth (and any retirement) very difficult. There’s simply no growth. If you factor in inflation you are likely losing about 3% annual in real spending power. Your money is actually going backwards.
That said, having an emergency fund in cash is important. We use EQ Bank. It is easy to use, and it was easy to set up. In fact, EQ Banks offers RRSP accounts if you’re looking to park some funds as you figure things out.
You want to invest in stocks. When you invest in stocks you are owning companies that generate considerable profits. While there is no guarantee of future returns, stocks and stock markets generate about 9% t0 10% annual returns. That’s an average over long periods.
You can invest in funds or ETFs (Exchange Traded Funds) that make it easy. Those funds will hold big baskets of blue chip companies in Canada, the U.S. and around the world. In fact with ETFs it’s easy to hold one fund and own most of the big blue chip companies in the entire world.
What is index investing? That post offers an explanation of ‘buying the market’.
Keep your fees low
Canadians pay some of the highest investment fees in the world. Fees are wealth destroyers. ETFs allow you to invest in well-diversified global portfolios with fees in the range 0f 0.10% to 0.28%. The typical Canadian mutual fund carries total fees in the range of 2.0% to 2.5%.
Lower fees could help you generate double or triple the returns over decades. There is a negative compounding that occurs as time amplifies the effect of high fees.
Have a look (and play around) with the investment fee calculator on the site of Larry Bates. Larry is the author of –
Simple low fee investing with advice and managed portfolios
I get it. You don’t care much about investing, but you want to build wealth over time. You want to end up here one day.
Instead of high fee mutual funds, you might consider a Canadian Robo Advisor.
A Robo Advisor will put you in the appropriate ETF portfolios. You’ll have access to investment advice.
Robo advisor Fees: 0.40% to 0.80% range
Those fees are all in. At some of the Robo Advisors, you can also have access to financial planning. Don’t be spooked by the “Robo” name. You have access to humans. You are not on your own.
Here’s a post on Canada’s best performing Robo Advisor.
In that post, you’ll see the returns for Canada’s leading Robo Advisors. You will also get a taste of how superior are the returns compared to higher fee mutual funds.
It might be nothing short of life changing.
Building an ETF portfolio
There are two routes you can go here. You can use an all-in-one asset allocation ETF.
Those portfolio ETFs are also called one ticket or even one click portfolios at TD.
Asset allocation ETF fees: 0.20% to 0.28%
With those ETFs you enter one ticker symbol and have a well-diversified global portfolio. They are available at various risk levels.
They trade like stocks. You would open a discount brokerage account. It is a very simple process. You might open an account with Questrade where you can buy ETFs for free. Questrade is Canada’s top-rated discount brokerage (from many sources including MoneySense).
I have a Questrade account. It was a quick and simple process to get that set up. It is easy to use to build that ETF portfolio or buy one of the asset allocation ETFs.
Building your own ETF portfolio
It will take more knowledge and confidence, but you can also build your own ETF portfolio. You will be able to keep your fees even lower. You have the ability to shape your portfolio risk level, growth potential and portfolio income.
Build your own ETF fees: 0.10% to 0.15%
Other mutual funds
Not all mutual funds are bad, just most of them, ha. In fact, Canada’s largest mutual funds from RBC are not so bad. Please have a look at the RBC Select Balanced Portfolio.
You can do a little bit better by way of ETFs, but those RBC options are quite good.
In this recent post I had a look at a few Canadian mutual funds.
Mawer Investments is a wonderful consideration.
The greater financial plan
Most Canadians will benefit from a financial plan. You’ll need to make sure that you are protecting your wealth and your family. You will need to know how and where to build that wealth (RRSP vs TFSA vs non registered vs other income). And you’ll need a retirement funding plan, estate plan and more. There is a whole host of financial planning considerations.
Consult with a fee-for-service financial planner, where you’ll receive conflict-free advice. There are many options from a lower fee checkup to the full and detailed financial plan. Not everyone needs robust advice and financial planning. You can choose what is right for you.
Here’s a post that covers the financial planning basics and checklists.
Cashflows & Portfolios
The self-directed investor might also consider the service provided by Mark Seed from My Own Advisor. He runs Cashflows & Portfolios where they will provide options for that optimal retirement funding strategy. That service is provided for a very reasonable fee.
In the wealth building stage they can also have a look to make sure you’re on the right path. If you do head to Cashflow & Portfolios, be sure to tell them Cut The Crap Investing sent ya.
See you in the comment section
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We’ll see you in the comment section. What are you doing with your RRSP contribution this year?
How to invest this RRSP season? Please share your thoughts.