As sure as more winter follows winter, every February Canadians debate the merits of the registered retirement savings plan.
There are good arguments for and against putting money in a RRSP, but in the end the government is cutting us a break – and you take what you can get.
In this case you get to shelter your contributions, and any gains they generate from taxation until you retire in a lower tax bracket. The deadline to deduct a contribution from your 2012 taxable income is March 1.
According to the latest data from Statistics Canada just over a quarter of Canadians contribute to an RRSP, which means many could be contributing for the first time. If you are one, or your RRSP holds an odd assortment of mutual funds or bonds, here are some suggestions to plant the seeds for an investment portfolio.
Setting the record straight
The most common misconception about RRSPs is that they are investments. In fact, they are accounts registered with the government that hold whichever investments you choose.
Most financial institutions offer RRSPs but many people hold them where they normally bank.
There are several types of RRSPs that give investors different options and degrees of control, such as a self-directed RRSP.
For novice investors, financial advisors will normally recommend pre-packaged mutual fund portfolios that cover the basic asset classes for a diversified portfolio – Canadian stocks, U.S. stocks, international stocks and bonds. Some only offer funds sponsored by their company – others offer a wide variety.
There are thousands of mutual funds on the market. With some research, you can also build your own portfolio, eventually covering the basic asset classes. Compare fees and past performance on fund company websites or independent websites that track Canadian mutual funds.
RRSP administrators can also set up regular payment plans so you don’t need to scramble every February to make the previous year’s contribution.
Professional management has a price
The Canadian mutual fund industry is notorious for high fees. Every mutual fund charges a portion of the amount invested – about 2.4 per cent on average – called the Management Expense Ratio.
A portion of the MER goes to the financial advisor each year for ongoing advice.
To further compensate the financial advisor some funds also charge a fee, called a load, when it is purchased or sold. Be sure to ask about all fees before committing.
Going it alone
Investing for your retirement is long term and requires solid, safe investments – and that often means moderate returns. Fees can eat away at those returns, so you may want to manage your RRSP through a brokerage account where you pay a commission on each trade.
In addition to mutual funds, brokerage accounts provide access to the basic asset classes through Exchange Traded Funds. ETF fees are normally lower because they simply mimic an index such as the S&P/TSX Composite Index or the S&P 500. Your investments will rise or fall with the broader markets.
It’s important to moderate that risk by allocating a significant portion of your portfolio to government bonds or guaranteed investment certificates (GICs).
Managing your own investment portfolio isn’t easy but with the help of a fee-based advisor, you can branch out to a diversified collection of individual stocks as your nest egg grows.
Don't sweat it
If you’re not sure where to invest your RRSP contribution, but want to take advantage of the tax rebate before the deadline, you can park it in cash. Don’t get rushed into a decision.
If you want to keep your contributions safe for a longer period before starting an investment portfolio consider holding it in a money market fund or high interest savings account so returns can keep pace with inflation.
Even if you can’t contribute this year any amount below the annual contribution limit accumulates and can be used in future years. The 2012 limit is 18 per cent of your income to a maximum of $22,970.