Advantages of Self-Directed RRSPs

The mutual fund market has now grown exponentially over the last 20 years. Equity investing has become more popular than ever and investors are more knowledgeable than ever. We now have more investment choices than we have ever had and our access to information is infinite.

For these reasons, Self-Directed RRSPs have become more popular than ever. In my opinion, if you have over $50,000 you should consider the merits of a Self-Directed RRSP. This threshold is not scientifically calculated; the threshold to consider a Self-Directed RRSP will depend on each individual investor’s personal situation.

Looking at the cost

Most Self-Directed RRSPs have an annual trustee fee. This fee is paid to the trustee to cover the administrative costs of overseeing the RRSP. In many cases, the trustee only makes income through these fees. Annual trustee fees range as low as $25 per year to $250 per year. In many cases, your financial institution may waive these fees under certain conditions.

The way to look at the cost of the Self-Directed RRSP is to take the annual fee and divide it by the total portfolio balance in RRSPs. If you are thinking about a Self-Directed RRSP, the objective is to consolidate a bunch of little plans into one plan.

For example let’s say the fee is $125 (or $133.75 with the GST) and your RRSP portfolio is $50,000. You fee represents 0.27% of the portfolio per year. The question you have to ask yourself is “Is there value in paying 0.27% for the benefits of a Self-Directed RRSP?”

The benefits of self-directing

  1. Consolidated statements. Often investors who deal with many different companies are inundated with paperwork. Consolidating your RRSPs into a single plan makes reporting easier and you will have one statement per RRSP plan regardless of how many financial institutions you are dealing with.
  2. Product consolidation. Investors who are dealing with many different institutions tend to have too many investments and duplication within their portfolio. Self-Directed RRSPs allow investors to see the bigger picture and reduce the number of holdings in a portfolio. With so many choices available to the investor, over diversification is a common pitfall.
  3. Easier administration. The administration for self-directed plans is centralized. Self-Directed RRSPs make it easier to trade investments particularly when you are moving money between financial institutions.
  4. Product selection. There are a number of products/investments that qualify for a Self -Directed RRSP. You can choose from conventional investments like GICs, Bonds, mutual funds and stocks. But Self-Directed RRSPs also allow you to invest in mortgages, small business corporations, and other non-conventional investments. Self-Directed RRSPs do give you a choice and control over product selection.
  5. Diversification by company. I’ve always believed that no single company has all of the best products in the market place. In fact, according to our research, every company has good products and bad products. If you have all your investments with one company, you are likely to have good products and bad ones. One of the goals of having a Self-Directed RRSP is to try to determine the strengths of different companies (what are they really good at?) and try to select products that play to their strengths. I believe diversification by company is best done with a self-directed plan.
  6. Managing Foreign content. Foreign content is monitored on a plan by plan basis. If you are dealing with more than one financial institution for your RRSPs, each company is responsible for monitoring the foreign content. Self -Directed RRSPs makes foreign content monitoring much easier, because you only have to monitor it from one source. Self-Directed plans also have the added benefit of making it easier to choose the foreign content investments.
  7. Conversion to a RRIF. If you are nearing retirement, many experts advise that you consider consolidating your investments into fewer plans. Converting to a Self-Directed RRSP to a Self-Directed RRIF is easy and seamless.

My two cents

Personally, I am a strong advocate of Self-Directed RRSPs (I have one myself). The more money you have in RRSPs, the more it makes sense. This list of benefits is not exhaustive and will not apply to everyone. Take the time to determine if these benefits apply to you. It will be the first step to determining if you should have a self -directed plan.

Not all self-directed plans are the same. If you decide that a Self-Directed RRSP is right for you, then you should shop around and do your homework. Different companies have different annual trustee fees. Make sure you look at other fees like trading costs, transfer out fees, de-registration, partial withdrawals, etc. Also, different self-directed plans have different stipulations as to what you can invest in. Some self-directed plans allow mutual funds only as an example.

Finally, having a Self-Directed RRSP does not mean you have to do everything yourself. You can still seek the advice and help of a financial advisor. For more information on RRSPs, check out my annual RRSP kit that can be downloaded from my website. Good luck!

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace.For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

23 Responses to Advantages of Self-Directed RRSPs

  1. Rob says:

    Hi Jim,

    Great posting. Is it possible to convert to a self directed RSP from a traditional RSP and then use the funds to invest in a franchise (ie small business)? I have been told by several financial types, the answer is no.

    If that is infact the case, what about using the self directed RSP to hold our mortgage (ie the self directed RSP lending us the money and holding the mortgage on our house)?
    I am having trouble getting in touch with people who are truly experts in dealing with anything “outside the box” as far as investments go. I get a lot of “I have never seen that done before”. Can you give advice on where we can go for solid knowledgeable advice on using self directed RSP’s?

    Thanks.

    • Jim Yih says:

      Hi Rob,

      I like outside of the box thinkers! Here’s the challenge. Your question is an institutional question. You have to find a self-directed RRSP institution that can do what you are trying to accomplish. For example, someone might want to buy stocks for their RRSPs but you can’t do that at all institutions. For example, life insurance brokers and companies are not in the business of individual stocks.

      In theory, I likes shares of a small business and a mortgage on house are eligible (check out this link – http://www.taxtips.ca/rrsp/qualifiedinvestments.htm.

      As for the business, I think you can invest in SHARES but not sure if you can invest directly in a franchise. I think the approach you have to take is to call different self-directed RRSP carrier and ask them if they do that.

      As for the mortgage, you can definitely do that. Any self-directed company should be able to help you. I know for fact TD and RBC have done it for people I know. There are fees and your house must be Clear title to do it but it can be done.

      Good luck!

  2. Rob says:

    Thanks Jim for your response. I spoke with Rev. Can. and they pointed me to the following document on their website (it320), found directly at http://www.cra-arc.gc.ca/E/pub/tp/it320r3/it320r3-e.pdf

    This basically states in chapter 6 that to use your self directed RSP money to invest in a company, you cannot own more than 10% of the company. Seems to me to discourage small business ownership with this money.

    As for the mortgage, to use the self directed funds to hold a mortgage, you must fully own the property in order to take out the mortgage with the self directed funds

    So it looks like thinking outside the box often just puts you in yet another nested box.

    Thanks again for your response.

    Robert

    • Jim Yih says:

      Thanks for sharing. This will help many people.
      Don’t be discouraged and keep thinking outside the box. Too few people do it!
      Good luck!
      Jim

    • Daniel says:

      To Rob, YES it is possible to utilize your RRSP funds to fund your business. We specialize on just that. Email me (rrlp at danieldennie dot com).

      Looking forward to hearing from you “out of the box” thinkers!

      Cheers,

      Daniel.-

  3. James says:

    Hi Rob,
    You stated…
    “As for the mortgage, to use the self directed funds to hold a mortgage, you must fully own the property in order to take out the mortgage with the self directed funds”

    Wouldnt you be able to invest in 2nd mortgages with a self directed RRSP?
    James

    • Jim Yih says:

      Hey James, you can invest in second mortgages through a company that sells them but I do not think you can write a second mortgage on your own with your RRSP funds against a property that you own.
      Jim

  4. Sam says:

    hi jim, my wife and i have a joined mortgage with RBC and also have seprate RRSP accounts with various financial institutions.
    can we open a self directed RRSP mortgage by bringing all our RRSP funds to this account and use it on our mortgage?

  5. Bill says:

    is it possible to more my rrsp into a self directed rrsp and loan the money to a family member to purchse or build a home

    • Dean says:

      Great article

      as per self directed RRSP, You can loan it to yourself or a family member as long as you and or the family member can get a mortgage from the Bank holding your RRSP monies ( TD for instance).

      I have helped many people use their RRSP monies to invest into real estate in one way or another. You just have to know how to arrange it and what is in your best interest ( no pun intended)

  6. Aamir Khan says:

    I have my RRSP with TD mutual funds. I do trading in US. Can I loan my RRSP amount to invest in trading?
    Could you pls. advise if this is possible.
    Thanks,
    Aamir

    • Daniel says:

      To Aamir, YES it is possible to utilize your RRSP funds to fund your business. We specialize on just that. Email me (rrlp at danieldennie dot com).

      Looking forward to hearing from you “out of the box” thinkers!

      Cheers,

      Daniel.-

  7. Dave says:

    Self-directed RRSP’s. Opens up a whole other dimension to investing adn truly gets you out of the box. Invest in companies,stocks,lend/borrow your own mortgage, privately lend a mortgage to another’s property, joint venture projects on land, contruction financing and other lending vehicles. TD Waterhouse is ending their arm’s length Self directed RRSP mortgage product. A great product for investors, not for TD. Think outside the box ! The possibilities are there.

  8. Bob says:

    In the case of a bankruptcy is an SDRSP protected or is it considered as an attachable asset?

  9. Al says:

    We will be moving to the US probably before the end of this year. We currently reside at our residence in Quebec. That property will be sold before we move.

    We have an RIF plan. I understand we cannot access that money for withdrawal until we have been away from Canada for two years. In the meantime, we want to use some of that RIF for a self-directed mortgage on a US property which we would buy and occupy as our principal residence.

    Could you direct us to a Canadian company that does allow a self-directed mortgage on a US property?

    • Dean says:

      Hi Al

      As far as I know, no you are unable to do self directed RRSP’s outside of canada. There are other options that may work, depending on how much you have in the RIF, How much liquid you have and require.

      And FYI everyone, TD is no longer allowing Self Directed RRSPs so I suggest Olympia Trust as your Holding agent.

      Dean

  10. Al says:

    I have a self-directed RLIF account with TD, and they say they do allow self-directed mortgages but only on Canada properties, and those properties must be mortgage insured to qualify. I just confirmed this today on the phone.

  11. Dean says:

    Al

    Yes you rare right its the Arms Lenth that TD stopped back in march ( see link)
    http://www.mr-arms-length-mortgage.com/2012/03/td-waterhouse-closes-doors-on-arms-length-mortgages-effective-april-12-2012/

    But yes its Canadian properties only.

  12. Les says:

    What are the tax consequences if you lose all the value in a self-directed rrsp? Am I liable to still pay taxes on the amount that was originally put into that self directed account? For example 50,000 the original amount on the self-directed rrsp then current value is 0 and the account is closed, will the government tax me on the 50,000?

    • Daniel says:

      You are NOT liable. The law states that you can only put your RRSP money into what they consider a viable vehicle to begin with, it’s not for playing the lottery. Therefore, since you cannot control the market, the law of gravity kicks in (if you know what I mean). This is where creativity and out of the box thinking comes into the picture according to each specific case/situation.

  13. Mike says:

    If you do a self directed plan and consolidate all your funds how does that effect the Government Insurance? Is your money protected fully?

  14. theresa johnstone says:

    I am 80 and a widow, and have a self-directed RRIF, that helps pay the remaining mortgage on my house. Now I want to sell my house and become a renter for my remaining years. Can I use the RRIF to just pay off the remaining mortgage in one foul swoop?

  15. Mario says:

    I am the owner of a small business and have some RRSPs. My question is, we use a line of credit and credit cards to finance our day to day operation of our business on which we pay interest. In the mean time the interest we receive from the bank on our RRRSPs is dismal. Is there a way to use my RRSPs to finance the day to day operation of the business and pay a comparable interest rate to what we are paying the banks into the RRRSPS?

    Looking forward to hearing your thought on this.

Leave a reply

Notify me of followup comments via e-mail. You can also subscribe without commenting.

Headline Name: Email: subscribed: 0 We respect your privacy Email Marketingby GetResponse