An RRSP isn't just a fancy savings account. You can use your RRSP to buy all kinds of investments and defer the tax on your earnings. Your RRSP can hold stocks, bonds, mutual funds, GICs, exchange-traded funds (ETFs) and more. For that reason, it is possible today to trade in your RRSP.
But should you day trade in your RRSP? That’s another question, entirely.
What is day trading?
Day trading is a catch-all term for making short-term investments, particularly in stocks, to take advantage of the potential increase in the investment's value. Day traders purchase stocks when they think there's a high probability the value will go up in the next few minutes, hours or days, and sell as soon as they believe the price will dip back down. It's a risky venture. Day trading requires attention, skill, and luck, which is why many day traders lose a lot of money, and some do just the opposite.
What is an RRSP?
A registered retirement savings plan (RRSP for short) allows Canadians to defer taxes when saving for retirement. Any money you contribute to your RRSP doesn't count towards your taxable income in the year you contribute. Any money you withdraw in retirement as a Registered Retirement Income Fund (RRIF) is when you'll pay the tax.
For most Canadians, the theory is that you can reduce the amount of tax you owe during your highest-earning years and pay a much lower rate when you withdraw the money in retirement because you'll be in a lower tax bracket.
Why would you want to day trade in an RRSP?
When you invest in things like stocks, you have to pay tax on your investment income. When you invest for the long-term, that income is taxed as capital gains at a favourable rate. But when you day trade, the Canada Revenue Agency (CRA) considers it business income and requires you to pay tax on it at your marginal rate.
The same is true when you use your RRSP, but you don’t have to pay that tax for as long as the money stays in your RRSP. If you prove to be a successful day trader, you can withdraw (and pay tax on) only the money you need and leave the rest in its comfy tax shelter until you need it.
Another upside is that RRSP contributions reduce your taxable income in the year you make them. If you have a relatively high marginal tax rate, contributing money to your RRSP can help you save a considerable amount of tax regardless of how you invest it.
And, as a way of earning money for your retirement, day trading has the potential to be quite lucrative. (It also has the potential to see you retire in poverty, buried in a cardboard box). While more traditional retirement investments like mutual funds are for slow and steady growth over the long term, riskier investments while you're young can (potentially) be a good way to jumpstart your retirement savings. The more money you start with, the greater its ability is to grow over time.
What are the downsides of day trading in an RRSP?
Just because you can do something doesn’t necessarily mean you should. If you use your RRSP for day trading, you could be setting yourself up for trouble.
- There’s an RRSP contribution limit. The amount you can contribute to your RRSP each year depends on your income, and there are expensive penalties for contributing too much. Unused contribution room does carry forward to future years, but if you have a lot of money to invest, you might not be able to contribute the whole amount to your RRSP.
- You can only use your contribution room once. When you contribute to your RRSP, that contribution room isn't returned to you. Whether you lose money or withdraw it later, you won't get that contribution room back. If you're day trading to save for retirement, that could impede your ability to save as much as you want in your RRSP. And if you're day trading for income now, it can limit the amount of money you can invest.
- Withdrawals add to your taxes. When you take money out of your RRSP, you have to pay income tax on it. If you plan to day trade to make money to fund your lifestyle, your RRSP can only help you avoid taxes if you contribute when you make more money and withdraw in times when you make less money. The fortune you may or may not make by day trading doesn't count if you make those trades in your RRSP.
- You can’t take advantage of capital losses in your RRSP. When you lose money on an investment, you can use the capital loss to reduce the tax on capital gains from other investments. However, per CRA rules, that's typically not the case for day traders, but in an RRSP, capital gains and losses are out of the picture for all investments regardless of how long you hold them.
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Can you day trade in a TFSA?
You might get better results by using your tax-free savings account (TFSA) for day trading rather than your RRSP. Your TFSA has a contribution limit like your RRSP, but the contribution room is returned to you in the year after you make a withdrawal. And all investment income earned in a TFSA is done so tax-free. You don't have to worry about paying tax when you take your money out, and you don't have to worry about making a mistake in your RRSP that could jeopardize your retirement.
Can you day trade in an RESP?
You can day trade in a registered education savings plan (RESP), but not efficiently. The primary value in an RESP is to earn grant money for the beneficiary to attend school. The yearly limit on these grants, combined with the RESP's lifetime $50,000 contribution limit, heavily favours regular contributions over the long term. What's more, the plan's beneficiary has to pay income tax when they withdraw the money. So not only is there no advantage over using your TFSA or RRSP, but you have the icky ethical quandary of risking a young person's future while you're at it.
What's best for you?
When saving for retirement, the best investments are the ones made for the long term. Low-cost ETFs that cover broad segments of the market deliver steady returns when left alone for long periods.
For day trading, a much better tax shelter is the TFSA. The taxes are taken care of before you start, withdrawals aren’t penalized nearly as heavily as they are with RRSPs, and you can leave your RRSP for passive investments that will grow through the decades and leave your estate with enough money to give you a proper burial.
The bottom line
Yes, you can day trade in your RRSP. But doing so could cause a tidal wave of problems that haunt you for years to come.
Because withdrawals are taxable, your RRSP won’t save you any money if you plan to withdraw before you’re retired. Because contribution room is limited and non-renewable, you can only add so much capital to your account before you start to face expensive penalties. And if you lose money, you might not be able to put it back, leaving you stuck with more expensive options for your retirement savings.
Instead, choose your TFSA or an unregistered account for your foray into day trading so you can have the flexibility you need today, and let your RRSP grow slowly over time so you can have the retirement you want tomorrow.
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