Nowhere does it state that you must hold your RRSP assets with a financial institution, mutual fund company, or life insurance company. Instead, you can set up your own self-directed RRSP. To do this, you must first establish your own account with a trust company. After that, you can invest in whatever eligible investments appeal to you.
Not all assets qualify to be held in an RRSP. Unless you're familiar with the rules surrounding which assets are eligible, you should avoid setting up a self-directed RRSP. Unsophisticated investors beware: There are severe penalties for holding non-qualifying assets!
There are several advantages to setting up a self-directed RRSP.
The Sky's the Limit
You can hold any RRSP-eligible investments inside a self-directed RRSP. You're not limited to specific investments, as you would be if you purchased from a financial institution or mutual fund company. Everything is available to you, all in one place. This becomes more important if you decide to adjust your holdings, or move from riskier investments to more conservative ones.
Organized system
A self-directed RRSP eliminates the need for you to hold a variety of investments in a variety of accounts. This means less paper. Come December 31, you won't be bombarded with statements from every investment company. As well, you'll be able to see clearly how each investment is performing because all the information is contained in one place. No more keeping track of which company holds what investments.
Diversification
More than ever, Canadian investors are recognizing the need to invest in the global market. After all, Canada represents just 3 percent of the world market. There are restrictions, however, on how much foreign content you can hold in your RRSP. In 2001, no more than 30 percent of the cost base of your property may be held in foreign investments. This restriction applies to each account, not to your total RRSP holdings. Here's where people who don't have a self-directed RRSP may run into some problems.
Suppose that in 2001 Bill held his RRSPs with two different financial institutions. In one account he holds only Canadian securities with a cost base of $70,000. In the other he holds only foreign securities with a cost base of $30,000. In total, his foreign content is 30 percent. There is a problem, however, since the foreign content limits apply to individual accounts. You see, the account where he holds only foreign property will be subject to penalties because that account is 100-percent foreign. If he held all his investments in a self-directed RRSP account, he'd avoid the penalties.
The administration fees for a self-directed RRSP are often higher than those of other plans — generally more than $100 annually. You should wait until you've accumulated more than $20,000 in retirement assets before you set up a self-directed plan. Paying $100 per year on a $20,000 account means sacrificing only 0.5 percent of your return, which is reasonable.
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