• SELF DIRECTING YOUR RRSP OR TFSA…NOT AS HARD AS YOU THINK!

  • The RRSP deadline has just passed and statistics show that on average in Canada, just over half of the population has a RRSP and of that only a third max it out each year. Not everyone chooses to contribute to an RRSP. Many of us who are self-employed, have opted instead to contribute to a TFSA.

    Many of us, who start out contributing to a TFSA are more concerned with accumulating cash in our TFSA than how to grow it – initially that is! What about when you have a substantial amount that’s sitting there not earning any interest – what can you do then?

    RRSP OR TFSA

    First let’s back up as to the big difference between the TFSA and the RRSP and why you might want to invest in one or both depending on your situation. RRSP contributions are made with pre-tax dollars and TFSA is after-tax dollars. You will incur taxes upon withdrawal from your RSSP, but not when you take out of your TFSA. On the other hand, if you are employed you can use the RRSP as a tax-deductible vehicle.

    Only you can decide which option is best for you and luckily enough as Canadians we can do both. But how you choose to invest is more important.

    You can invest in the same kinds of products in both – mutual funds, ETF’s, Dividend stocks, mortgages, etc. The important thing to remember is that your return must beat the rate of inflation and take into account fees you pay.

    When I started out I started by just keeping my TFSA in a high-interest savings account– wait I know where do you find a high interest savings account? Ok I can be funny right? It was the best I could get at the time, but even then I was not beating the rate of inflation, so in fact my growth was negative!

    When researching where to invest my TFSA I investigated Mutual Funds (ah no – fees are too high); ETF’s or Exchanged Traded Funds – too confusing! I have been a dividend investor for years so I thought why not invest in those. I have written about this before but briefly Dividend investing is choosing blue chip stocks, that have a consistent dividend payout every year and in most cases increases year after year. I also like this because the money I invest every month or quarter goes to purchase new shares, which reinvest themselves to buy more shares and so on…and the best thing it does not cost me to accumulate more shares.

    Instead of trusting somebody else with my money and paying money to them to invest I chose to learn how to self-direct. There are numerous ways to self-direct. You can open up a brokerage account with one of the banks but you pay $29 per trade and that can add up or like me you can open up a free account with QTrade. Trades are $8 per trade unless you have a minimum balance of $25,000. With this account I can now invest in dividend stocks, ETF’s or whatever and it does not matter how much I choose to invest, I only pay a small fee. Better than MER’s (management expense ratio’s), which significantly can cut into my profits.

    No matter where you decide to open up an account, remember to look at not only what the costs will be, but how you want to invest your money to grow. Leaving your money to grow in a savings account, GIC or bond might be safe but it won’t grow at the rate you need it to and might be safer than investing it with a bank or financial expert as it will cost you less but why not get the best of both worlds and take the bull by the horns and learn how to invest yourself – not only will you save money but you might learn a thing or two!