Options Strategies for Your RRSP and TFSA

Montréal Exchange
February 25, 2021
5 minutes read
Options Strategies for Your RRSP and TFSA

One of the biggest misconceptions about the Registered Retirement Savings Plan (RRSP) and Tax Free Savings Account (TFSA) is that they can only include cash, stocks, bonds, and other simple assets. But in reality, these savings accounts can hold a wide variety of asset classes, including options.

Options Strategy in an RRSP for Young Investors

An RRSP is a retirement savings account designed to motivate Canadians to save for their future by offering them a tax rebate today. Young investors with a very long-term timeframe (i.e. several decades) are likely to avoid using options as a strategy for hedging against near-term volatility.

The simple reason is that a 30 year old might not be as concerned about short-term movements in their stocks. The reality is that they will not be retiring for another 30 years or so, so they have plenty of time to save.

Instead, a young investor might want to explore more advanced options strategies that offer the potential for high returns, but with reasonable risks. Writing covered call options in one’s RRSP is a permissible strategy that some experts are not opposed to.

Options Strategy in an RRSP for Investors Closer to Retirement

Older investors might have more of an incentive to hedge their investments in their RRSP account in the months leading up to their retirement.

Consider, for example, a 64 year old investor who is retiring in eight months and wants to retire with their RRSP balance at $1 million. Suppose that a perfect storm of negative events is forming, and suddenly the experts are projecting that the markets will erase recent gains and enter into bear territory.

For the first time in many years, the investor has concerns that a harsh bear market can erase years’ worth of profits in a few short months. A mere 10% correction is the difference between retiring with $1 million in assets or $900,000.

In response, this investor can buy put options on every stock in the portfolio to limit the downside risk. Remember that a put option gives the investor the right to sell a stock at a given price on or before a given date.

If the market does drop 10%, this investor just escaped considerable losses and eliminated some sleepless nights, knowing that his or her balance will be much closer to $1 million than $900,000.

Options Strategies in a TFSA

First, a warning about using options strategies in a TFSA: despite what the name implies, some investors can find themselves on the receiving end of a tax bill for gains made in what is advertised as a tax-free account.

The CRA has confirmed that some of the factors for determining if an account is or is not subject to taxes include the frequency of transactions, the duration of the holding period, and the nature and quantity of the securities held.

In other words, investors making use of advanced options strategies in a TFSA account with the intention of generating large returns will be subject to tax.

Investors can still buy and sell options in a TFSA account, but their strategies should be mostly limited to hedging their positions.

It goes without saying that investors should consult a tax expert before trading options in a TFSA account in order to avoid any potential surprises, such as an audit or an unsuspected tax bill.

In short, it is recommended to consult with your tax or financial advisors before implementing strategies in a TFSA.



The strategies presented in this blog are for information and training purposes only, and should not be interpreted as recommendations to buy or sell any security. As always, you should ensure that you are comfortable with the proposed scenarios and ready to assume all the risks before implementing an option strategy.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Scroll Up