The average one-year return for Canadian money market funds is 0.4 per cent, which means you’re losing money on an after-inflation basis if you use this old favourite of a parking spot for cash.
A reader with a registered retirement savings plan wants to escape this money market fund trap. “What are some better options for receiving higher cash rates within an RRSP?” he asked.
To start, let’s define what the term cash means. In this case, it applies to money that an investor wants to keep 100 per cent safe from stock or bond market fluctuations. It’s accepted that the cost of this security is a low return.
There are two possible ways to go in maximizing the return on cash held in an RRSP or tax free savings account, the first being the investment savings account. Offered by virtually all brokers, these accounts are bought and sold like mutual funds and, as of late April, had a yield of up to 1.15 per cent. Holdings in these accounts are typically covered by Canada Deposit Insurance Corp.
There’s also an ETF version of these accounts – the Purpose Premium High Interest Savings ETF (PSA-T), which delivered an after-fee return of 1.2 per cent in the 12 months to March 29. Note that you’ll likely have to pay brokerage commissions to buy and sell this ETF. A few brokers offer no-cost ETF purchases, but regular commissions apply when you sell.
The second RRSP cash option offers much less flexibility, but better rates. Instead of keeping your cash with your other RRSP investments, you hold it separately in an RRSP savings account offered by an alternative bank with competitive high rate savings accounts.
Alterna Bank, an online operation that is a CDIC member, offers 2.05-per-cent interest on its regular High Interest eSavings Account and the RRSP version, and 2.1 per cent on TFSAs. Hubert Financial, an online bank that is part of Manitoba-based Sunova Credit Union, offers 2.1 per cent on its regular account as well as RRSPs and TFSAs. Online banks Tangerine and Simplii Financial offer 1.1 per cent interest on their regular, RRSP and TFSA accounts
The drawback to using accounts like these is you’ll have to manage your cash as a satellite of your RRSP investment portfolio. On the plus side, you’ll be earning as much as four times what money market funds paid in the past 12 months.
Rob Carrick