"I just bought an RRSP": One of the most common RRSP misconceptions

RRSP Binder

“I just bought an RRSP.”

“This is one of the most common misunderstandings I have to clear up when someone walks into my office for the first time.” says David MacRae, Director, Wealth and Advisory Services at Cambrian Credit Union. “They might have contributed to one…and while that doesn’t sound different than buying one, it is, and the difference is pretty important. The good news is that difference means you may have a lot more options than you realized before.”

The short version is you don’t ‘buy’ an RRSP because it’s a type of account, not a type of investment.

You don’t buy a chequing or savings account, you open and maintain one. It’s the same with an RRSP – you don’t buy it, you open, contribute to and manage one.

"Think of an RRSP account as a binder, or a basket, envelope, bag, or bucket," says MacRae. "An RRSP is just a container."

In the binder analogy, the different pieces of paper in the binder are your individual investments. Unlike a chequing account that can only hold cash, you can put almost any type of investment into an RRSP, such as mutual funds, stocks, bonds, ETFs, or GICs, and they’re what you’re actually buying and selling, not the RRSP itself.

The binder analogy is a favourite when describing RRSPs because it helps explain the protection RRSPs can give as well. The binder cover (the RRSP) protects the pieces of paper (your investments) until they are taken out of the binder. Investments within an RRSP are shielded from taxes until they’re withdrawn, so your retirement savings can grow faster over the long term.

“It’s fantastic that so many Canadians are aware of the RRSP, but unfortunately there are still a lot of misunderstandings about what it is and how it works.” says MacRae. “It’s something I’d often find myself explaining to new investors, and even some folks that aren’t necessarily new, as they aren’t fully aware of all the details involved.”

“If you have an RRSP but you’re not sure what’s in the binder, when you make your contribution take a bit of time first to call your adviser and get more information from them on what you’re invested in and why.”