Q: I have a locked-in RRSP that has some stocks. The companies for those stocks offer dividend reinvestment plans. However, because my RRSP is with a bank, I am not able to access the DRIP programs. Can I split out those stocks and put them into a self-directed RRSP so that I can access the DRIP programs?
A: There are generally no restrictions on transferring a registered account to another institution, unless it’s a group RRSP or defined contribution pension plan and you are still working for the sponsoring employer. Personal RRSPs and even locked-in RRSPs are therefore fair game, Paulina.
The “locked-in” aspect of a locked-in RRSP or LIRA just refers to the inability to take withdrawals prior to age 55 (unless there are eligible extraordinary circumstances) and the maximum withdrawal limits in retirement (unlike regular RRSPs, which have no maximums).
Registered account transfers can be done on a tax-deferred basis from one institution to another using Canada Revenue Agency form T2033. You may be able to transfer an account “in kind”, meaning the investments move from one account to the other, or some investments may need to be moved in cash. It all depends on whether or not the investments you hold are specific to the transferring institution and may therefore not be available at the receiving institution.
Beware deferred sales charge (DSC) mutual funds, which may levy a fee of up to 5% to sell the funds on transfer. A nominal fee of a couple hundred dollars may also be charged to close an RRSP account if you are moving your account entirely.
A dividend reinvestment plan can be a good way to put your excess cash to work and benefit from dollar-cost-averaging, buying on the ups and downs of the markets. This works in favour of your desire to set up DRIPs for your eligible stocks, Paulina.
On the other hand, if your stocks are going up and you’re using your dividends to buy more shares, you might end up changing your asset allocation. That is, if you are 60% in stocks and 40% in fixed income, for example, I’d wager your stocks are yielding between 2-3% in dividends and your fixed income is yielding 1-2%. If you reinvest your income into each, over time, your stock exposure will increase. If stocks are rising, your stock exposure will also increase as a result of capital appreciation. On that basis, I could make an argument for not reinvesting your dividends so that you have cash to rebalance appropriately and maintain your desired allocations, Paulina.
If you’re invested with the bank, I gather there may be non-stock investments that you own that you can buy without incurring transaction costs and rebalance your portfolio frequently in that manner.
Another argument against transferring your stocks elsewhere might be that you aren’t getting consolidated advice on your portfolio from your investment adviser. You may also lose a sense of visibility if your investments are in multiple places that you can’t get back unless you do a little work to look at your overall holdings and asset allocation across all accounts.
In summary, a good idea, in theory, may have consequences, Paulina. For the benefit of having your dividends reinvested, you may have less efficient asset allocation, disjointed advice on your investments and less visibility to your overall holdings. A DRIP can be convenient in some instances, but it is by no means the holy grail of investing.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.