Self-Directed RRSPs: Rules and Options

Self-Directed RRSPs: What to Know

A self-directed RRSP, or SDRSP, gives you more control over your retirement savings by allowing you to invest in multiple assets within a single plan.

Registered retirement savings plans (RRSPs) are an excellent tool to help you save for your future while enjoying tax benefits. Of the several types of RRSPs that exist in Canada, the self-directed RRSP, sometimes referred to as an SDRSP, will give you the most control, by letting you pick the investments in your account.

General RRSP investment rules

A registered retirement savings plan (RRSP) is a tax-deferred savings vehicle that’s registered with the federal government. It allows you to make tax-deductible contributions from your earned income up to a maximum annual amount and lower your income tax. Any interest or investment income you earn is sheltered from taxes until withdrawal. It’s a popular way for Canadians to grow their retirement savings.

There are rules to be mindful of, however. For example, there’s a cap on how much you can invest annually in an RRSP and restrictions on what types of investments you can hold in the plan.

You must pay a withholding tax if you make early withdrawals from your RRSP (with a few exceptions, like Canada’s RRSP Home Buyers’ Plan).

And you can contribute only until December 31 of the year in which you turn 71.

Qualified investments in RRSPs

One of the most attractive features of an RRSP is that it can hold a wide range of investment options. The list of qualified investments for an RRSP is long and complex, but in general it includes:

Cash: This can be in Canadian dollars or foreign currency, but cryptocurrency isn’t allowed.
Guaranteed investment certificates (GICs): Though its earnings are on the low end, a GIC offers a guaranteed rate of return over a set period of time.
Mutual funds: These investments buy securities like stocks and bonds by pooling the funds of individual investors. Not all mutual funds are eligible to be held in RRSPs.
Government and corporate savings bonds: These bonds allow investors to lend money to a company or government for a fixed rate of return.
Securities on Canadian or foreign stock exchanges: Securities are stocks (aka shares) in a publicly traded company.
Exchange traded funds (ETFs): An ETF is an investment fund that holds a mix of investments (like stocks and bonds) and is traded on a stock exchange.

Investing via a self-directed RRSP

Once you decide to open an RRSP through a financial institution or a brokerage, your next step is to choose a plan to invest in.

If you’re looking for simple approaches to RRSP investing, you can put your contributions in a GIC, a mutual fund account or a high-interest savings account.

If you like a more hands-on approach to financial planning and want to potentially get bigger returns with a mix of investments, a self-directed RRSP can be an ideal option.

What is a self-directed registered retirement savings plan?

A self-directed RRSP, or a SDRSP, gives you the freedom to control the type of assets in your plan. You can hold different kinds of investments in a single RRSP account. Instead of holding a single GIC, for example, you could hold a mix of income-generating assets like equities, GICs, mutual funds and ETFs in a single plan. You can also take an active role in managing your plan or leave the management of your SDRSP up to a broker or robo-advisor.

How an SDRSP works

As the plan holder of a self-directed RRSP, you’re in charge of which assets (such as stocks, GICs or ETFs) go into the account. You can manage those assets (buy, sell or hold them) as you see fit as long as you don’t break any contribution or withdrawal rules.

Don’t let the term “self-directed” scare you. SDRSPs don’t require you to go it alone — they can be entirely managed by a bank or brokerage. For example, you can open an SDRSP with a full-service investment brokerage. You then consult with a broker, who selects investments based on your goals and comfort with risk. The broker oversees the management of the account with as much or as little input from you as you’d like.

Another option is to use a robo-investing firm to manage your SDRSP. You may have to respond to an online questionnaire that gauges your risk tolerance and investing goals. Based on your answers, you’ll be matched with a specific portfolio of funds for your RRSP account. This self-directed RRSP option doesn’t provide the human interaction or hand-holding of a full-service firm, but it saves you money on fees.

More experienced investors who have the time and are confident enough to choose their own investments and balance their portfolios independently can opt for a self-directed plan with a do-it-yourself online brokerage.

How to open an SDRSP

You can set up a self-directed RRSP with a bank (usually via a bank’s full-service or DIY investment arm), an online broker or an online robo-advisor. With a bank, you may have the option of opening an account in person or online. With an online brokerage firm, you’d have to open your account online.

To open an SDRSP, you may need:

Proof that you are a resident of Canada and the age of majority in your province or territory.
A minimum initial investment.
An external bank account (for online-only investment brokerages).
Your Social Insurance Number, or SIN number.

What to consider before opening an SDRSP

In addition to ensuring that you don’t exceed RRSP contribution limits, be aware of the following when deciding whether to go with a self-directed RRSP:

You could lose money: Nearly all forms of investment come with risk. If you hold any assets like stocks or ETFs in your self-directed investment RRSP, the performance of your portfolio will be at the mercy of the markets. If the economy does poorly, the markets could crash and you could lose money.

Fees: SDRSPs usually come with fees. Look out for set-up fees, annual maintenance fees and potential sales or commission fees. A “hidden” fee that many people may not consider when buying investments is a management expense ratio (MER) fee, which covers the management and operating costs associated with a fund. Online-only and robo-brokerages usually have lower overall fees and also tend to offer equities with lower MERs.

SDRSP Alternatives

If you’re risk-averse, you may prefer to to open a high-interest savings account RRSP. Returns may be more moderate, but you also don’t risk losing money. Holding a GIC in your RRSP is also a lower-risk investment option.

If you have contribution room in your tax-free savings account (TFSA), consider maxing out your TFSA before investing in an RRSP. While TFSA contributions aren’t tax-deductible, the amount you invest and its earnings can be withdrawn tax-free — unlike the money in an RRSP, which is taxed when you withdraw it early or in retirement.