Canadian RRSP is a Savings Account
Understanding what an RRSP is helps to plan for retirement in Canada
In Canada, a Registered Retirement Savings Plan is a basic way to save for retirement. It is like a savings account in some ways.
Everyone needs a retirement plan
It's well-known that people in the developed world are living long lives after retirement. Unless you are independently wealthy, a retirement plan is important.
Saving for retirement is almost essential for most Canadians. The days of relying on government and employer pensions are almost gone. Many people are self-employed or work part-time, with no one to pay for a pension other than themselves.
RRSP - Registered Retirement Savings Plan
In the USA, there are savings plans called the 401(k) and the IRA, Individual Retirement Account. In Canada, we do not have the 401(k) or the IRA exactly. We have the RRSP, which stands for Registered Retirement Savings Plan. Whether the money going into the plan comes from an employer or from the person saving directly, the plan is still called an RRSP.
An RRSP is often confused with a GIC or Guaranteed Investment Certificate, or with a mutual fund. Part of the reason for this comes from the way the banks and other financial institutions market RRSP investments.
An RRSP is a special kind of savings account
In simple terms, a Registered Retirement Savings Plan is very similar to a savings account. You set up an RRSP account, deposit money into it, and then the money is invested and you earn a return on it.
Think of the RRSP as an account rather than a particular kind of investment.
Setting up an RRSP through a bank, mutual fund company, or other institution
The reason many people think that RRSPs are the same as mutual funds or GICs is because almost every financial institution will sell you an investment which is called an RRSP or has RRSP in the name.
What they are doing - which is very common and not improper - is combining the steps of setting up a savings account, accepting your deposit, and investing that money in one of their products (a GIC, mutual fund or other investment).
Self-directed RRSPs
Another way to have an RRSP is to set up a self-directed RRSP. You can do this through a securities dealer. Each of the major banks has a securities dealer affiliated with it, and there are independent securities dealers as well.
When you have a self-directed RRSP, you get an account number and you deposit money into that account. You decide how the money will be invested. Thus, each step (setting up the account, making deposits, investing the money) is separate.
The cost of having a self-directed RRSP is a fee charged by the financial institution every year. Typically it is between $100 and $150, although this is negotiable and varies between institutions.
There is some risk involved in every investment. Do not assume that the value of mutual funds, for example, will always go up. To protect your investment, you need to understand exactly what you are buying and who is standing behind it. Just because the money is in an RRSP doesn't mean it is going to keep its value. The value depends upon what investments have been made with the money.
