When you start making profit month after month trading options, the next question quickly becomes, is there a way to do this without paying taxes? Should I trade options in my RRSP and TFSA?
The short answer is yes, but be careful.
Some options strategies aren’t allowed in registered accounts. Also, if the CRA thinks you’re day trading, they will penalize you and tax the full amount anyway.
So what and how should you trade options in your TFSA and RSP? Let’s dive in…
Can you trade options in a tfsa or rrsp?
You can sell covered calls, buy calls, or buy puts.
If you’re not familiar with those terms check out our Options for Beginners series to get the full introduction to options.
Usually, when trading options, you want to do it with a “margin account.” This means you are using the broker’s money to hold open an option contract. The broker will always require you to have a certain amount of money ready, but with margin accounts, you can trade with more money than cash you actually have available.
The Canadian government doesn’t want you doing that kind of trading in registered accounts.
So the option trading strategies that you’re allowed to do in registered accounts are covered by cash you pay up front or by stocks you own.
The easiest strategy to start with in a registered account is selling cover calls.
This requires you to own at least 100 shares of any company or ETF. You can sell a covered call on those 100 shares and collect a premium up front. If the contract expires and your shares don’t get called away, you can sell another covered call, piling up the premiums.
Again, if you want to learn more about how covered calls work, read through our Options for Beginners series.
How do you trade options in an RRSP or TFSA?
Most banks barely let you buy your own stocks in a TFSA or RRSP, let alone buy or sell options. You’ll need to register with specialized platforms to trade options.
That being said, CIBC, Scotia and TD all have options trading platforms, aside from their typical investing accounts and products. But the transaction fees can get heavy.
We use Interactive Brokers Canada here at Stock Hacker Academy. They are the cheapest, most robust platform that we’ve found in Canada. It can take some time to learn their app and desktop software. It’s worth the time and effort in our eyes. Their customer support is excellent as well.
You can also trade options with Questrade. But again, transaction fees tend to mount.
Once you’ve picked a platform, register with them and open an RRSP or TFSA account. The sign up process can be tedious. It’s like opening an account at any financial institution, they will need a lot of personal financial information.
With an open RRSP or TFSA, you can deposit money and start to place trades. Keep in mind, depositing and withdrawing money can take some time. Depending on the money transfer method you chose, it can take 2 days or up to 2 weeks for money to land at its destination.
Which account should I use, TFSA or RRSP?
This is largely a question for your accountant. Ideally you want to know how to maximize the use of both a TFSA and RRSP. Each comes with its own advantages.
Depositing funds into an RRSP reduces your tax bill this year. But you’re taxed normally when you withdraw funds.
You don’t get the tax break with your TFSA, but you also don’t get taxed at all on withdrawals.
A good accountant will advise you on how to use both to your advantage.
What do I do with this information?
I want to reiterate a warning here: if the CRA thinks you are day trading or “carrying on a business” from a registered account, they will penalize you and charge you the full tax amount anyway. So be careful with option trading in a registered account.
However, with smart option trading, maybe you can add another 1%, 2% or even 4% ROI in your registered accounts. We did the math on how long it would take to reach $1,000,000 in a registered account. Option trading is one of the strategies we examined. Check out that article for all the glorious number crunching!
That’s all for now.
Your fellow Stock Hackers,
🍒Cherry & Erwin
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