Author Topic: New investor - question. How RRSP and TFSAs work. Confused.  (Read 2388 times)

Mae80s

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New investor - question. How RRSP and TFSAs work. Confused.
« on: February 26, 2014, 12:22:39 PM »
X-posted on the Ask a mushtashian branch.

I'm still figuring out how investing works. Have the other stuff down - budgeting, no debt, live under my means and saving...

... now figuring out how to make my money grow while I sock it away.

I've had an RRSP with RBC for a few years. It's the Canadian dividend fund with an MER of 1.21%. I've been doing some research and it seems that this isn't a wise bet. My money would be better in an ETF, particularly over the long-haul. So the question (and this might seem dumb) is this:

1) Can I have an ETF within an RRSP? RBC will ding me $50 for transferring the money out of the fund, but so long as I put it in another RRSP, I'm okay paying this.

2) Apparently the FTSE Canadian High Dividend Yield Index ETF (VDY) with Vanguard performs similarly to the RBC Dividend. Again, confused... is this an RRSP?

3) I have a TFSA with 10K in it ... earning a lame 1.6% interest. Can I put it in another investment product (that performs better) but that's still under the umbrella of a TFSA ? I can't seem to find a straight answer. Is a TFSA always a savings account? Again apologies if this is a dumb question.

There's so much info out there and I'm relatively new at this, I find it all very confusing!

Thanks!

(MOD EDIT - TFSA: Tax Free Savings Account)
« Last Edit: February 26, 2014, 01:53:41 PM by FrugalToque »

Le0

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Re: New investor - question. How RRSP and TFSAs work. Confused.
« Reply #1 on: February 26, 2014, 01:39:15 PM »
Ok here is my simple answer. If you want more information just ask.

TFSA & RRSP are investment vehicles. Think of them as cars you can put your money into. Each car drives different.

A TFSA doesn't incur taxes on any money you make as a result of your investment/ interest. However you will have paid your income tax on any money you deposit into this account.
 
A RRSP is a tax deferred account, which means you have to pay taxes on that money when you withdraw it. This is the type of account that pensions pay into (not exactly but for the purpose of explaining).

1) You can invest in ETF's via RRSP's or TFSA

2) The FTSE is similar to the RBC dividend. They are investments that are travelling in your car. In your case you have your RBC investment in your RRSP car, therefore you only pay taxes when you withdraw.

3) You can change your investment in the TFSA no problem. If you have to move to another bank or investment provider there are ways to move you investment 'in kind' so you don't reduce the total amount of money you can contribute in this year.

I haven't done it yet, but my goal is to setup both a TFSA and RRSP with Questrade or similar and buy my own ETF's. First max out the RRSP to maximize my tax refund, then put the rest into a TFSA .
« Last Edit: February 26, 2014, 01:54:30 PM by FrugalToque »

FrugalToque

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Re: New investor - question. How RRSP and TFSAs work. Confused.
« Reply #2 on: February 26, 2014, 01:52:43 PM »
First of all, I wrote a post on this:

http://www.mrmoneymustache.com/2013/09/21/canadian-investing-with-mr-frugal-toque-part-1/

You can move your money around inside that Royal Bank RRSP however you like without charge (although they get upset if you're changing it around a lot).

You can also move it from there to an RRSP-sheltered account where you do direct trading.  So you can buy ETFs from inside your RRSP (I'm presently doing this via Questrade, myself, but I still have account with RBC).  Last I checked, Royal Bank does offer this service for RRSPs and TFSAs.

For your TFSA, yes, you can invest in anything you like in your TFSA, including Mutual funds and ETFs.  1.2% interest is crap, obviously, as you may not even be keeping up with inflation.

Pay attention to MERs.  1.2% is also a rip off in that direction!  Someone is stealing your money.  The S&P TSX fund at Royal Bank is 0.7% and the Vanguard ETFs are in the 0.1% to 0.2% area.
« Last Edit: February 26, 2014, 01:54:42 PM by FrugalToque »

Mae80s

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Re: New investor - question. How RRSP and TFSAs work. Confused.
« Reply #3 on: February 27, 2014, 08:23:37 AM »
Thanks guys. I should have clarified that I get the tax difference between TFSA and RRSP, it's just how they "umbrella" under all kinds of  investment types that I find confusing.

The car analogy is good, Le0. Thanks.

FrugalToque, I did read your post, but it assumed a certain amount knowledge already. Anyway, I'm going to read it again now that my RRSP question has been explained.

I really don't think I'm ready to do my own trading, though. I just want a low cost portfolio (managed by someone else) with medium/high risk (I'm young!) for long-term investing and medium/high growth.

Also off to check The S&P TSX fund at Royal Bank. I'm only at 30k saved now, early days, but important to have my 'stache in the right place.

Cheers!

Le0

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Re: New investor - question. How RRSP and TFSAs work. Confused.
« Reply #4 on: February 27, 2014, 10:04:21 AM »
Thanks guys. I should have clarified that I get the tax difference between TFSA and RRSP, it's just how they "umbrella" under all kinds of  investment types that I find confusing.

The car analogy is good, Le0. Thanks.

FrugalToque, I did read your post, but it assumed a certain amount knowledge already. Anyway, I'm going to read it again now that my RRSP question has been explained.

I really don't think I'm ready to do my own trading, though. I just want a low cost portfolio (managed by someone else) with medium/high risk (I'm young!) for long-term investing and medium/high growth.

Also off to check The S&P TSX fund at Royal Bank. I'm only at 30k saved now, early days, but important to have my 'stache in the right place.

Cheers!

I wouldn't worry about doing your own trading. But you can defiantly do your own buying. Check out Canadian couch potato for some ideas of what to buy. Buy it once and leave it. (unless you are rebalancing).

http://canadiancouchpotato.com/