The Transparent RRSP: Interest

Action taken the week of June 26
  • Transferred $150.00 into the RRSP. That gives me $170.90 in cash.

If I see anything that looks interesting, I’ll be ready to take action with some cash in the account again. I’ve been looking around and I found a few compelling charts. However, the market is just so uninspiring right now. I’d much rather wait for it to settle down before I do anything. It would be great if there was nothing to do until next month.

Another thing to note: If we raise interest rates sooner, that will greatly impact the market. I plan to consider, over the next week or so, some good trading/investing ideas.


July xic

XIC ETF in freestockcharts.com

Let’s look at the monthly chart of my favourite TSX index ETF, the XIC. I would like the market to pull back until the blue line. I mentioned in a previous blog that I’d like a market correction to come down to the same area we were at around November last year.

I think, though, that we’ll likely only pull back to the orange line, which is where we were at in December. This year so far, we had the heaviest selling volume in June. To get significantly below June’s levels we’d have to sell a lot more.

If interest rates do actually go up, a lot of sectors like retail and housing will be impacted. The financials, on the other hand, have been recovering since late May. Higher interest rates will be better for their business, especially after they’ve been running on low interest rates for so long.

I wrote previously that I think there’ll be a recovery in energy (oil) this summer – and I still think that. It’s worth considering swing trade opportunities in this sector as it could go up over the next few months to a year.

After a quick search, I noticed that the following stocks have had heavy selling volume the last few months:

  • SU.TO
  • PD.TO
  • CVE.TO
  • BTE.TO
  • ENB.TO
  • ECA.TO

If you feel conflicted about putting money into the yucky oil industry, you can just treat this as a study into my process when I look at sectors that have been beaten up. Here is a general run down of my process:

  • Watch the daily and weekly charts of stocks;
  • Look for signs of sideways trading;
  • Watch for reduction in trade volume. The volume should indicate less selling some more buying;
  • Check the monthly chart – it should look like a reversal is happening;
  • Compare all this to the sector ETFs;
  • Among the sector’s stocks, watch for the ones that are looking the best;
  • For swing trades, look at the strongest stocks that meet your criteria for entry, price, and trading ranges. In other words, figure out which ones that will give you the most bang for your buck.

I’ll share my ideas on this more recent trade idea and if I do take a trade, I will let you know. If this makes you nervous, then you can sit back, relax, and enjoy watching me fall flat on my face. I often go into trades thinking that I will do just that, but it’s exciting enough for me to take action. This mindset forces me to only risk enough so that I won’t be devastated if I’m totally wrong. Personally, it’s more devastating to not financially benefit from an idea I had that actually worked.

What is the RRSP?

I’m being transparent when I say that I’d been searching all week for good stocks that would make good candidates for the Transparent RRSP Challenge…and I found nothing that really made me want to take action. I have this is saying that has helped me throughout my trading career: When in doubt, stay out. 

It’s hard not to feel some regret if something that I checked out looked like a mediocre setup and ended up working out. I learned the hard way that if I always took action on so-so setups, I would lose more in the end. For your retirement account, you want to make decisions with a bit more care.

Waiting a while for the next good opportunity is totally fine and normal. You don’t always need to buy and sell stocks. In fact, doing that too much will really add up in commission fees. Until then, I will just keep looking for stocks, building a watch list of potential candidates, and watching the sectors and markets.


I actually know people considered middle-aged who haven’t yet opened their first RRSP account. This year’s March 1 deadline to claim a tax deduction won’t have any meaning to them. Not only could they be building their retirement fund, they could also be getting back a bigger tax return if they deducted their RRSP contribution amount from their income.

If you don’t have an RRSP anymore or haven’t opened one yet, please don’t be embarrassed. The only shame would be to never take advantage of these wonderful registered investment accounts as they have so many benefits that will save you money and help you keep more of your earnings.

Below is an excerpt from Loonie to Toonie about investment accounts, specifically the RRSP and TFSA. Please have a read or forward this to anyone you think would benefit from learning about registered accounts. All the terms in bold are defined in the Financial Terminology page.


INVESTMENT ACCOUNTS

When you first open a bank account, you’re usually given two choices of either a savings account or a chequing account for standard day-to-day banking transactions. Investing is a longer-term strategy which is not intended for regular banking activity, so you will need to have a separate investment account as a place for you to deposit your investment money, hold your gains, transact your investments, and track your portfolio’s performance. Investment accounts are either registered or non-registered. You may open these up at any financial institution.

Accounts that are linked to registered plans with the federal government come with tax advantages to encourage saving and investing. There is a limit to the amount you can invest towards registered plans, since beneficial taxation can only go so far. A non-registered account is not in a registered plan with the government and does not offer any tax advantage. You should be primarily investing in registered accounts, but once you’re at or near your registered plan limits, then it makes sense to invest the rest in a non-registered account which has no investment limit.

There are different types of registered accounts. Two types which every investor will use at some point because of their tax-reducing benefits are the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). Money you invest in a registered account is often referred to as your contribution. You may only hold qualified investments in registered accounts. Some examples of qualified investments are GICs, bonds, stocks, and mutual funds. There are no restrictions on the type of investments for non-registered accounts, but it’s best to hold tax-favoured securities such as stocks in these accounts.

REGISTERED RETIRED SAVINGS PLAN (RRSP)

The RRSP isn’t necessarily a specific ‘plan’, but it’s meant to be comprised of your investment portfolio which makes up your retirement fund. Investing in your RRSP has two key benefits which last for as long as the money stays in your RRSP account: 1) RRSP contributions may be deducted from your income to reduce taxation, and 2) gains from the investments in your RRSP are not taxed. When you take money out of your RRSP account at a later time, you will be taxed on the amount you’re withdrawing. This amount will be taxed as regular income, even if some of that money comes from capital gains. 

If you invested $2000 in mutual funds to go into your RRSP, you may reduce your taxable income by $2000 for the 2016 tax year by claiming a deduction for that amount. In 2045, that investment and its gains are worth $5,500. If you sell your mutual funds and withdraw that $5,500 in 2045, then $5,500 will be added to your income for that tax year. At that point, you’ll be taxed according to your tax bracket.

The above example is a tax-deferring benefit you should take advantage of during your active earning years. You defer paying taxes on some of your income and investment gains. It’s a better time to withdraw when you’re making less, such as during retirement. If you make any lump-sum withdrawal from your RRSP before retirement, your financial institution withholds a minimum percentage. This withheld amount is a portion of your income tax which goes to CRA. When you file your taxes, you pay the remaining difference based on your income tax rate for that year.

Contributing to Your RRSP

Every year you’re allowed to contribute up to a certain amount called your deduction limit or contribution room. If you look at your income tax’s Notice of Assessment for 2015, it will tell you what you can contribute up to in 2016 – this amount is also the most you can deduct from your income. Your deduction limit is calculated as a percentage of your net earned income in the previous year. You can contribute 18% of your earned income in 2015 up to a maximum amount of $25,370. This maximum amount changes annually. Also added is any RRSP contribution room carried forward from previous years. If you are enrolled in a retirement plan at work, whatever was contributed towards the plan that year is subtracted. This amount is known as the pension adjustment. After everything has been added and subtracted, you have your RRSP deduction limit for the following year.

You’re able to exceed your contribution room by $2000, but if you contribute more than that you will be taxed on that exceeding amount at one percent per month until it’s taken out. Once you take out the excess, it’s then taxed as income. It’s important to keep track of how much you’re contributing. If your numbers aren’t adding up with what you see on your Notice of Assessment, then contact CRA to clear things up. You may also make a contribution during a year when your income is lower and choose to hold off and claim your RRSP deduction during a different year when your earnings are higher, as long as you’re within your deduction limit.

You may open your RRSP account after you start working and filing your income taxes. You can only make contributions until the year you’re 71. After that, your RRSPs collapse and you either suffer from a tax attack on your entire retirement fund all at once or you may opt to transfer your RRSPs into other tax-deferring options involving smaller annual withdrawals or regular payments. We will explore this further when we discuss retirement.

Some Additional RRSP Features

There are additional RRSP features to help you pay for important things without permanently taking money out of your retirement fund. When you make a withdrawal from your RRSP, your contribution room won’t increase and allow repayment with the exception of the following circumstances. Under the Home Buyers’ Plan, you can use up to $25,000 of your RRSP savings to put towards your first home. You won’t have to pay taxes on this withdrawal, but you must pay back the funds over a 15-year period. Any amount not paid back after those 15 years is treated like a plan withdrawal. This amount is added to your income and you’ll be taxed accordingly. The Lifelong Learning Plan behaves similarly, but you’re allowed to use up to $20,000 towards higher education for you or your spouse and your repayment period is 10 years.

The Spousal RRSP allows a spouse to contribute to the other spouse’s RRSP and still get a tax deduction. If your spouse earns less than you and can’t contribute much to his or her plan, you may contribute to both of your RRSPs and deduct up to the full total of your contributions from your own income. However, your own contribution room doesn’t increase by contributing to your spouse’s RRSP, so be sure to not exceed your limit.

Withdrawals from your spouse’s RRSP will be taxed to your spouse at his or her lower tax rate. If your contributions remain in your spouse’s plan for less than three years, however, any withdrawals on your contributions will be taxed to you. This spousal plan is especially advantageous if you’re 71 and can no longer contribute to your RRSP, but you may still claim a deduction on your income by contributing to your spouse’s RRSP as long as he or she is younger than 71.

TAX-FREE SAVINGS ACCOUNT (TFSA)

There are two main benefits to the TFSA: 1) TFSA contributions don’t result in tax deductions from your income, but any gains from your investments will not be taxed – ever; and 2) withdrawals from your TFSA are not taxed as income – ever. The only time you will get taxed is if you exceed your contribution room. At that point, you’ll be hit with a penalty tax of one percent on the excess amount which will be applied monthly until you get rid of the excess. 

Contributing to Your TFSA

TFSA contribution limits are set at a certain dollar amount every year. You are able to start contributing once you turn 18, the age at which you’re allowed to open a TFSA. The contribution limit is not based on your earned income as it is with the RRSP. Since 2009, every Canadian citizen and resident age 18 and over has been granted an annual contribution limit. This dollar limit is decided by the federal government. So from 2009-2012, the contribution limit was $5000 per year. From 2013-2014, the contribution limit was $5,500 per year. For 2015, the contribution limit was $10,000. For 2016, the contribution limit is $5500. If you haven’t yet contributed to your TSFA, your contribution room to date is $46,500. If you turned 18 in 2015, then the most you can contribute so far is $15,500. 

Your contribution room accumulates and is carried forward, similar to RRSPs. Once you start contributing, you will be notified in your Notice of Assessment of how much contribution room you have available for the current year. The TFSA differs from the RRSP in that if you make a withdrawal from your TFSA one year, that amount will be re-added to your contribution room the following year and can be carried forward. Unlike the RRSP, you’re allowed to repay funds you’ve withdrawn from your TFSA without requiring special circumstances.

Another benefit is that you don’t ever have to collapse your TFSA the way you do the RRSP when you’re 71. Your TFSA and any contribution room will follow you to the end. Because of the ease of depositing and withdrawing from TFSAs, these are ideal for shorter-term goals, but they can be useful for longer-term goals too.  

Investing in TFSAs in conjunction with RRSPs will truly help maximize your money as an investor. You may hold multiple TFSA and RRSP accounts as long as you don’t exceed your respective contribution room limits.


If you found the above information useful, please read the rest of the book!

The Transparent RRSP: Post #2

Actions Taken This Week of January 9th

  • Deposited $150 into the RRSP account which increases my principal to $1150

After buying 50 shares of ZPR at $10.86 per share, I have $456.50 left in the RRSP (I paid 0.50 cents in commission). With another $150, I give myself a better chance to buy enough shares of something else when the opportunity arrives. Having more money gives me the ability to diversify my portfolio.


For most of my working life, I mainly saved any extra money that my expected budget permitted. While this allowed me to contribute more than I normally would from time to time, it still fostered sporadic saving rather than regular savings that could’ve compounded nicely in my investments. There is power in consistency. 

When you’re consistent, you’re better able to determine where you’ll be headed in the future. If you can figure out your rate of return from year to year and factor in your regular contributions, you can see the actual potential of your financial growth. This where a goal is more likely to become a reality, rather than just exist in the back of your mind as a half-baked wish.

The first fundamental concept of investing refers to the compounding effect of your invested money + its previously earned interest = more interest on top of your growing money. I, too, wrote about it in my book because it’s the most basic concept of growth. Interest on growing money is going to be more than interest on a static amount money.

It gets complicated when you try to calculate the rate of return on your portfolio of investments. Ultimately, you want your portfolio at the end of the year to be worth more than it was at the beginning of the year and not just because you’ve been putting money into it. 

So if you put $3000 in three stocks. The best-case scenario would be for them to be worth more year after year so that should you have to sell them at any point, you will make money. You buy stocks to make more money on the sale of them. Never forget this.

Another reason to buy stocks is to make dividend income. For some people, this is their primary reason to buy stocks. It’s a very good reason because if you buy enough dividend-paying shares, you can live off that money. Or it can be reinvested in a DRIP to buy more shares or you can use the cash to buy other stocks.

HOWEVER, you must keep in mind that dividends aren’t a company’s obligation and not all companies pay one. If a company does, it can increase, reduce, or stop its dividend payments to investors if it makes financial sense for them. So, if a company is in trouble and over the years you bought many dividend-paying shares, you’re not only out of income, you face a big capital loss once you sell your shares.

A lot of people can’t get over the varying outcomes that stock investing offers. I mean, you might not make a profit and you might not get your dividends! The reason why I feel it’s important to regularly pump money into your investment account is so that you have capital to buy more than the three stocks in my example. You need to diversify. 

Not all stocks go up and down at the same time. Just because a stock price is less than the price you got it at doesn’t mean it’s in trouble – it’s normal for this to happen and sometimes it’s even healthy. It could take a while before it shines and becomes the star of your portfolio.The nice thing about a well-diversified portfolio is that as performances may be cyclical, over time they should all be going up in value. Having different stocks can smooth out the negative effects of underperformance, capital loss, or a stop on dividend payments.

Having said that, if you diversify too much and have too many stocks from all the sectors, it could start to look like the market. It’s a lot of trouble (and commissions) to diversify only to look like the market (or worse) when you could’ve just bought shares of an index ETF. Don’t over-diversify or else you can dilute the overall performance of your portfolio.

My takeaway point is that you invest your savings regularly so that you can afford to diversify.

I believe investing regularly, reinvesting your gains, plus diversifying your holdings lead to a growth effect that transcends the old compound interest model. With lower interest rates and the negative impact of inflation on your money and investments, you must start thinking about stocks and their ability to do more for you than anything else.