No one likes to pay fees, but the rate you pay for your investments and how you pay them can be especially troublesome. Making the right decision for your portfolio can be the difference in how much money you earn over the long haul.
When it comes to your Registered Retirement Savings Plans (RRSPs), you will want to watch those fees carefully so you can secure the most income for your golden years. Let’s take a look at some different RRSP accounts and the associated costs.
- RRSP Fees Explained
- How to Pay RRSP Fees
- Why Fees Matter
- Paying Your RRSP Fees From Outside the Account
- Paying Your RRSP Fees From Inside the Account
- A Note on TFSAs
RRSP Fees Explained
RRSPs fees depend on the type of account you have, whether it’s a self-directed plan with a discount brokerage, a simple plan of exchange-traded funds (ETFs) with a robo-advisor, or a more elaborate plan managed by a financial adviser or financial institution.
Self-directed accounts are for individuals who are comfortable with managing their own investments and take the time to research and establish their portfolio. These accounts are the least expensive way to manage your RRSP but require the most effort.
Some institutions have an annual administration fee for self-directed accounts. And, while there may not be fees to open an RRSP, in addition to the yearly fee, there may be fees to close the account or transfer it to another financial institution. Those are details you need to find out when you look at opening an account.
Some online brokerages will waive the annual fee if you keep a certain amount of funds in your account but will charge a fee on trades for stocks, bonds or ETFs. Many mutual funds also have fees already included in their cost.
RRSPs Managed by Robo-advisors
Online investment advisers, also known as a robo-advisers, are great for people who are new to investing and want some advice or guidance but also want to keep fees low. A robo-adviser helps guide your portfolio based on your investment goals, your time horizon, and how much risk you are willing to take.
A robo-adviser may charge a percentage fee, such as 0.5% or 0.6% of the assets in the account. For example, if you have $10,000 in an RRSP, you’d pay $50 in fees annually. Fees often decline as you amass more money in your RRSP, so the fee could be 0.4% if you have more than $25,000 in your account. To start an account, you may need a minimum investment of $1,000 or more.
Managed RRSP Accounts
Managed accounts, which are for investors with more assets — often high-net-worth individuals — cost more because investors get access to detailed advice, professional management of their portfolio, and a full array of sophisticated investment options.
Professional financial advisers handle these accounts and usually charge a percentage fee of 1% to 2% of the assets in the account. So, with $10,000 in an account (which might be small for a managed account), you’d pay fees of $100 to $200 a year. At $100,000, the fee would be $1,000.
How to Pay RRSP Fees
Thanks to a recent decision by the Government of Canada, you now have a choice of how you wish to pay your RRSP fees. The money for the fees can come from within the account or from outside the account.
In the fall of 2019, the Federal government confirmed that investors could pay fees for registered accounts from outside the plan without incurring a penalty tax. Before this decision, the Canada Revenue Agency had decided it was an “advantage” to pay fees from outside a registered account and would levy a 100% penalty tax on the fair market value of that “advantage.”
As you will see below, in most cases, the decision to pay fees from inside or outside of the RRSP account depends heavily on how close you are to retirement (withdrawing from your RRSP).
Why Fees Matter
If you pay your fees from within your account, there will be less money in the fund to grow over the long term, and you will miss out on compounding. When it comes time for retirement, fees may have eaten up a good chunk of your nest egg, which is not ideal. For this reason, you need to pay attention to fees and ask questions about the payments.
The U.S. Securities and Exchange Commission has taken a look at how fees can impact a portfolio.
Let’s say you invested $100,000 over 20 years and earned a return of 4% before fees. Here are a few examples of how the fees can affect your portfolio:
- A portfolio with a fee of 0.25% rose to a value of nearly $210,000.
- A portfolio with a fee of 0.50% rose to a value of about $200,000.
- A portfolio with a fee of 1.0% rose to a value of about $180,000.
That’s a stark $30,000 difference solely due to a fee difference of 0.75 basis points [0.25% to 1.0%].
Paying Your RRSP Fees From Outside the Account
The general rule is that it’s best to pay your RRSP fees from outside of your account, as the funds will grow tax-deferred until it’s withdrawn. This rule is especially true if you are paying the higher fees associated with a managed account.
However, circumstances can differ. So, is it most advantageous to pay fees from inside or outside your RRSP account?
That is best determined “on a case by case basis,” said Matthew Ardrey, vice-president, wealth advisor at TriDelta Financial in Toronto.
“It depends on the amount of the fee and your expected tax bracket when you withdraw funds after your RRSP is turned into a Registered Retirement Income Fund (RRIF),” he said.
As a rule of thumb, for those in a high-net-worth category, “it makes more sense to pay outside the [RRSP] account,” said Ardrey, “as the fee is higher than a self-directed account and that leaves more cash to grow tax-deferred in the RRSP.”
Jamie Golombek, managing director of tax and estate planning with CIBC Financial Planning and Advice, in Toronto, has recently taken a deep dive into the numbers on this debate and offers this example, “the key factors to whether or not it’s better to pay fees from inside an RRSP account depend on the size of the account, its expected rate of return, and your investing time horizon.”
If you’re paying a $100 annual account fee from within an RRSP, “it’s kind of immaterial, the numbers will not make a material difference at the end of the day,” he said.
However, if you’re paying 1% to 2% of assets annually in a relatively large portfolio, “that’s where there can be a significant difference over long periods of time,” said Golombek. “That’s where it can really add up.”
Paying Your RRSP Fees From Inside the Account
As you get closer to retirement, you may have more to consider, as your opportunity for growth is lower. It may be beneficial to pay fees, conveniently, from inside the account.
Your financial institution will withdraw the fees from your RRSP, and you’ll see the charge on your statement. You won’t have to do anything, and there is a benefit to that simplicity. But that does mean the cash is slightly reducing the funds available to invest in the account. This is less of a problem as you are closer to retirement.
Advantage of Paying Fees from Inside the RRSP
The biggest advantage of paying fees from within your RRSP is that you’re using pre-tax dollars.
Golombek explains that if you’re in a 30% tax bracket and pay the $100 fee from within your RRSP account, you’re really only paying $70, and the government is paying $30 — the amount you aren’t paying in tax. “The government is effectively paying for a portion of it,” he said. If you pay that $100 fee from outside the RRSP, you’re using after-tax dollars, and you don’t get the same benefit.
Disadvantage of Paying Fees from Inside the RRSP
However, your account is down $100 because the fee comes from funds held in the account, which results in lower tax-deferred growth over time. Eventually, you would reach a breakeven point where “If you left the $100 in your account to grow, it would have served you better than the savings you get by paying from within the RRSP account,” Golombek said.
The key is the amount of time it takes for that to happen. In Golombek’s example, he looked at a $100 fee paid by someone in a 30% tax bracket with a 5% rate of return.
“After 25 years, the amount of funds in the RRSP is the same whether the fees were paid from inside or from outside the account. But, if you’ve got a long-time horizon until those RRSP funds are used in retirement, it may be better to pay those fees from outside the RRSP to allow for longer tax-free growth of those funds,” says Golombek.
A Note on TFSAs
Both Golombek and Ardrey agree that fees for Tax-Free Savings Accounts should always be paid from outside the account as that cash grows tax-free and is not taxed upon withdrawal.