Can I use RRSP for day trading?
An RRSP is not a regular saving account which you can use anytime. RRSP is a retirement account which allows you to save money which can be used to hold stocks, bonds, mutual stocks Guaranteed Investment Funds(GIC), Exchange Traded Funds (ETFs) and many more.
You can also learn the difference between GIC and Mutual Funds in order to choose the best option for your future investment.
It can be said that trading with your RRSP is possible as you are already investing in a variety of stocks or planning to start your investing journey. But choosing your RRSP account for the purpose of Day Trading is an entirely different topic.
Let’s find out the best thing to do with your RRSP in 2023 to get the maximum returns from your savings.
What is Day Trading?
Day Trading is a short-term investment option where you can buy stocks, and shares to take potential advantage of an increase in their value to make money. In simple words, Day Trading means buying and selling of shares within the same day or a few minutes.
Stocks and Foreign Currencies are the most commonly traded investment option by day traders. You can try day trading but you need to focus on increasing your understanding of Day Trading before jumping into the market.
Personally, I have tried day trading which is fun but very hectic at the same time. Day Trading requires a good psychological balance as the market continuously goes up and down which can create fear of missing out(FOMO) on new traders.
What is RRSP?
A Registered Retired Savings Plan (RRSP) is a saving account which allows Canadian to defer their taxes annually. Here, you need to deposit money every year from your income as a part of your savings.
As per the Government of Canada, “An RRSP is retirement savings plan that you establish, that we register, and to which you or your spouse or common-law partner contribute. Deductible RRSP contributions can be used to reduce your tax.
Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan; you generally have to pay tax when you receive payments from the plan.”
Is Using RRSP For Day Trading A Good Option?
Day Trading is a great way to generate extra income that you can keep as savings, an emergency fund or financial security. But using RRSP savings for day trade is not a good option.
The income generated by day trading is considered business income by Canada Revenue Agency (CRA) which requires you to pay taxes at a marginal rate.
However, if you put that savings in your RRSP account, then you don’t have to pay taxes as long as you are using an RRSP account for investing your money.
Another benefit of using RRSP is you can save money on your annual income from taxes. If you come under the high marginal tax bracket, then contributions in your RRSP can save you a major chunk of money from taxes.
What are the Cons of Trading in RRSP?
Dat Trading with your RRSP account is totally your choice. But if you are planning to trade then there are possibilities that you can put yourself in trouble.
Limit to RRSP Contribution
There is a limit to putting money in your RRSP account which allows you to save more money in your taxes. However, the contribution amount depends on your annual income and over-contribution can lead to penalties.
It may happen that you are not able to utilize the full limit of your RRSP, then I recommend you not to fill the gaps unnecessarily.
Withdrawal From RRSP can lead to Taxes
Withdrawing from your RRSP account can lead to paying more taxes on the amount taken out. In case you are planning to day trade to level up your standard of life, your RRSP contribution can help you save money on taxes if you come under a high-income slab.
No Benefit for Capital loss
If you lose money from your investment portfolio, you can always use the capital loss option to lower the tax on capital gains on different investments. Whereas, in terms of Day Trading, you will not get this benefit.
However, in an RRSP, the money you invest will not be taxed until and unless you are withdrawing. And capital gain and loss are out of the picture for all investments regardless of how long you hold them.
Final Words
Yes, you can use your RRSP account for day trading. But using your RRSP account can lead to a number of issues with your investment journey.
The reasons are withdrawing any money will be taxed, and you will get a small contribution room which carries a number of benefits and losses. So, you leaving your RRSP account as it is can help you grow your money slowly when feeling stressed about all the mentioned issues.
Finally, I recommend you choose your TFSA account or any other non-registered account for Day Trading.