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When should an investor consider a self-directed registered retirement savings plan (self-directed RRSP)? How do you put together an effective self-directed RRSP?

Similar to an RRSP - a government registered savings plan where money held in the plan is tax deferred until cash is withdrawn - a self-directed RRSP is managed by the planholder rather than by a third-party manager such as a trustee. In a self-directed plan, you can choose from a wider variety of investments, and you control the decisions. The same contribution rules apply: you can contribute up to 18% of your earned income to an RRSP or upto the annual contribution limit ($14,500 in 2003) less any pension adjustment.

RRSPs, whether ordinary or self-directed, are an umbrella to hold your retirement investments. You receive a tax deduction when you make the contribution, and the growth of that money is sheltered from taxes as long as the money stays inside the plan.

A self-directed RRSP might suit you if you want to actively manage your retirement savings and are willing to take more risk than investing in mutual funds or guaranteed products like GICs. These plans are usually set up through an investment dealer, a bank or a trust company.

Self-directed plans are aimed at investors who are comfortable making their own decisions on what individual stocks or bonds to buy and sell. When you make those trades, regular commissions are charged.

You will probably face an annual administration fee, particularly if you have less than a certain minimum amount to invest. Fees vary widely -- and so does the method for determining them.

Some institutions charge an annual administration fee, but waive that charge if you keep a minimum balance of $25,000 in your self-directed plan. Others charge a yearly fee of $125 and require you to have at least $15,000 to open a self-directed account. But these fees will often be reduced or eliminated if you negotiate, particularly if you have a large sum to invest.

There may be restrictions on the specific types of investments you can hold in your self-directed plan, so check the rules when you shop around. Make sure you will be able to buy the full range of investments you want. For example, if you want to invest in strip bonds or mortgage-backed securities, you usually need a self-directed RRSP to do that. You can also hold the bonds of certain foreign governments and company shares listed on selected foreign stock exchanges.

Consider seeking professional advice before making investment decisions.

YOUR INVESTMENT OPTIONS

When it comes to investment options in a self-directed RRSP, there are a variety of choices. Depending on your preference and risk tolerance, the many choices include:

guaranteed investment certificates (GICs)

mutual funds

bonds

stocks

mortgages

5 KEY STRATEGIES

Diversification:

By spreading investments among asset classes such as cash, fixed income and equities - as opposed to concentrating in just one stock or one area - an investor will lower his/her risk exposure.

Frequent Contributions:

By making regular contributions, instead of one lump-sum amount, you can take advantage of dollar-cost averaging. This also means that you don't need to come up with a lump sum to contribute at the RRSP deadline, since you've been contributing on a regular basis.

Patience:

Remember, investments inside an RRSP are usually intended to be for the long term. Equities, for example, while volatile, have outperformed other investment vehicles over the long term. (But remember point 1 about diversification.)

Tax-free Compounding:

Studies have shown that contributing $250 a month for 30 years (at a 10 per cent rate of return) will return more than $500,000 in an RRSP, compared to approximately $240,000 outside a tax-sheltered RRSP.

SOME RELATED QUESTIONS

Q: How long should a person contribute to an RRSP?

You should contribute up until age 69 for the tax advantage. By the end of the year you turn 69 you must convert the RRSP into a Registered Retirement Income Fund (RRIF), cash the RRSP in or purchase an annuity with the RRSP proceeds.

Q: How does the new foreign content ruling affect a self-directed RRSP?

You can now contribute 30 per cent of your RRSP into foreign stocks, based on the book value of your RRSP, including commissions. There are penalties if you go over the foreign content limit (1 per cent a month on the amount that you are over the limit or 12 per cent a year). By selecting certain investments you can legally boost your foreign content to a maximum of 50%.

Best Tip: If you receive an income tax refund from an RRSP contribution, put it right back into your RRSP.