Back to Basics: How Self Directed RRSP’s Work

All about self directed RRSP’s

A reader, who is just starting out in the finance world, wrote me an email asking me to explain self directed RRSP’s.  More specifically, here is the email:

I was wondering if you could write something about self-directed RRSPs – what exactly they are and how to open and manage one, where we can hold them, etc.

I thought that this would be a great opportunity to get back to basics to explain some of the fundamental concepts of personal finance in Canada.

Let’s take a look at the questions that the reader asked.

What is a self directed RRSP

To start, an RRSP is a type of account and not an investment.  So when people say “did you buy any RRSP’s this year?” what they really mean is “did you contribute to your RRSP account this year?”

There are many “types” of RRSP’s, off the top of my head:

  • You can have a mutual fund based RRSP from the bank, which can either be self directed or with a bank advisor.
  • A self directed RRSP with a discount brokerage where you can trade stocks/ETF’S and mutual funds.
  • A savings account RRSP like with PC Financial
  • An RRSP with your work place (which can/cannot be self directed)

A self directed RRSP is just that.  It’s where the account holder is responsible for the investments within the RRSP, thus the reason why it’s called “self-directed”.

Where Can You Find Them

I assume that the reader is interested in controlling her own investments.  In this case, it may be best to open a self directed RRSP account with a discount brokerage.  Which brokerage should you choose?  In my opinion, investors should be looking to reduce investment costs as much as possible. However, other factors such as investment choices offered should be weighed.

If the investor chooses to go the mutual fund route, it seems that the td e-series has the lowest cost.  If they want to stick to lower cost ETF’s or other stocks, then a low cost discount brokerage account will most likely be the most cost efficient choice.

Check out my discount brokerage comparison to see some of the features/costs of various brokers in Canada.

How to Open a Self Directed RRSP?

Simply go to the institution that you’re interested (either online or B&M) and sign up for an account.  Within the forms, you’ll need your personal information and your named beneficiary (preferably your spouse for tax reasons).  From there, you can contribute to your account up to your contribution limit for the year.

How to Manage One

Now that is the million dollar question.  First, if you’re willing to buy/sell your own investments, research is required.  However, the easiest way to get involved is to index your portfolio with ETF’s or low cost mutual funds instead of picking and choosing stocks.

Before choosing your investments however, your risk tolerance should be factored into the equation.  This will help determine your equity/bond allocation.  The higher your bond allocation, the more resistant your portfolio will be to the wild swings of the market.  This protection comes at a cost however, as it will also reduce your long term gains.

I’m not an asset allocation expert but I’ve read many times that the amount allocated to equities should be around 100 (or 110) minus your age.  So if you’re 30, then approximately 70% of your portfolio should be in diversified equities.    The key is to find that balance where you are comfortable with the volatility but without sacrificing too much in gains.

Check out my RESP Portfolio for an example of a diversified and indexed low cost mutual fund portfolio.

If, on the other hand, you have a larger amount to invest, here’s an example of a simple low cost indexed ETF portfolio.

I realize that a lot of you are well past the novice personal finance stage, do you have anything to add?

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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3 years ago

Hi there,
Wondering if my spouse should contribute to a spousal RRSP – He currently makes approximately 30K more a year than I. We plan on retirement in 5 years – He currently has 60K in RRSP and will get 5K monthly from his pension at retirement. I have 120K in RRSP and my pension will be 2K per month at retirement.
Is it wise for him to contribute in a spousal RRSP to try an equalize when we retire?
Thanks so much

7 years ago

I have a self-directed RRSP transferred from a prior workplace pension (Federal fund) and wondered if I am able to purchase my own mortgage (or part thereof) with it or are there regulations regarding this kind of investment being included in a self-directed RRSP. Further to that, if it is not possible to purchase my own mortgage, is it possible to purchase the mortgage another arms-length party and how would go about doing so if at all possible?

9 years ago

Got fired this afternoon by our Investment advisor after challenging him 2 weeks ago about questionable short term stock trades resulting in substantial losses. He’s given us 30days & no charge to move our RRSP & Joint acct. somewhere else!!!!! We have not faith in him…..he’s got that right!
We’re both retired & I’m preparing to move to a riff in 4 years time…… 2008 & 2011 & so far 2012 horrible rates of return concern us.
So now instead of meeting with us again on Sept 4th we’re off to various banks to check out self directed RRSP’s & somewhere to park our joint acct. Not a nice feeling and curious why he would take such drastic action since its the first time we’ve challenged him in the 5 years we’ve been with him?
So we’re “Back to Basics” at this stage of our life…..YIKES

9 years ago

Can i use my self directed rrsp account to pay off my mortgage or lend money to somebody else at a higher interest rate.
I can get a much better interest rate than, the banks.

10 years ago

Once you create a self-directed RSP, how do you actually transfuse funds from previous accounts?

11 years ago

Is there a difference between a SDRSP and a SDRRSP account?

11 years ago

How can I pay for my own home with a self directed RRSP

John D.
12 years ago

I’ve been out of the country for awhile and have questions regarding the relative benefits of the supposedly ‘self-directed’ RRSP. If it is ‘self-directed’, why the limitation on what may be invested within said? Can one hold real property in an RRSP? Can one invest in Futures or Options on real material (commodities) rather than on Forex (pure speculation on fiat standing) through their RRSP? And are the current limitations based on the differentiation between ‘Inventory’, ‘Capital’ and ‘Income’ in the Canadian tax code?

The RRSP, to my mind, seems a tool giving only marginal tax benefit over time because any possible capital gain is retarded via sub par ROI vehicles.

Are there niceties within the tax code of which I am not aware that strongly mitigate my assumptions?

All comments/answers appreciated.

12 years ago

As an employee of an IDA firm, a “self-directed” account is essentially a brokerage account. You can hold a variety of investments including stocks, bonds, mutual funds and currency (cash).

There are a couple of advantages; consolidated reporting, and a wider array of investment types.

In our business, it means that an advisor can act upon your telephone or electronic instructions vs. opening an account with a mutual fund company which requires a client’s signature for every transaction.

P.S. – I love your comment about buying “RRSPs”.