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RRSP Strategies You Can Take To the Bank

23 February 2012

In my previous post on BankNerd, I asked the question, should you contribute to your TFSA or RRSP? While I prefer the TFSA, let’s assume you’ve gone ahead and decided the RRSP makes sense for you. So what strategies can you use to power up the contributions and maximize your RRSP? With less than two weeks to go, it’s more important than ever to consider the options. And you don’t need to forgo the Coffee at Starbucks or eat Kraft Dinner for a week to make it happen!

Know Your Contribution Room

The first question to ask yourself is how much room do you have to contribute to your RRSP? The 2011 maximum RRSP contribution limit: $22,450. Your actual contribution room may be higher depending on your earned income, minus your pension adjustment (if you have an employer pension plan), plus any unused contributions carried forward. It’s not exactly the easiest number to calculate. Fortunately, your Tax Assessment from Revenue Canada will tell you exactly the maximum amount you can contribute. For most Canadians, they will be nowhere near being able to maximize their RRSP contributions.

maximum 2011 RRSP contribution limit: $22,450

This year I purchased the el-cheapo version of TurboTax for under $20. I plugged in the numbers from my last pay stub in December, and worked out the amount of my tax refund. I even played around with various RRSP contributions to see how it affected my eventual tax refund. It was $20 well spent!

Forget the Lump Sum! Save Regularly

As most people find out before Valentine’s Day, scraping an extra few thousand (or few hundred) dollars for your RRSP contribution, is about as likely as winning lotto 649. Unless you are taking out an RRSP loan, making smaller regular monthly contributions is the way to go. It’s easier on your pocket book, and forces you to save and invest on a regular basis. It’s not only a great way to invest by dollar-cost-averaging over a period of time, but it’s also rewarding to see the nest-egg grow! Even if you didn’t get started until now, there is no better time to start than the present. Which is easier to invest, $200 per month or a one-time $2400 per year?

iStock 000002858975Small 300x225 RRSP Strategies You Can Take To the Bank

Don’t Borrow Until February

Many people also take out a RRSP loan during the year, and then use the tax refund in the spring to pay off the balance. It’s not the worst case scenario, but it’s not the best either. The reason is simple – you pay interest on the loan, over a longer period of time. Even though a 4% rate is not so bad, it’s still a 4% loss on your overall return.

Small regular contributions is the way to go

A much better option is to make regular monthly contributions, as mentioned above. You then top-up the RRSP in February if you need to with a smaller loan. This way, you only have to pay interest for two or three months on a smaller amount, until your refund arrives. Then you use the refund to pay off the loan. As they say, every little bit counts!

Reinvest the Refund Immediately

The worst thing you can do with your tax-refund is spend it, and the best thing you can do is invest it. Once you receive your tax-refund, avoid all temptation to buy a new flat-screen TV or cell phone – do not go shopping! Invest the refund immediately back into your TFSA or RRSP. Not only will you grow your investment portfolio, but if it’s contributed to the RRSP you will also be adding an additional amount onto your next tax refund. If you are in the 40% tax bracket for example, and your income is relatively the same year to year, each $1000 will give you $400 back on the next tax refund. It’s quite a hefty dividend that beats the new TV hands down!

Have fun with your RRSP (and don’t forget the TFSA)!

Disclaimer: Please keep in mind I am not an accountant or professional advisor. Everyone likely has an individual circumstance that is very different from mine or someone else’s. Regardless of your TFSA or RRSP strategy, I hope you will work out the details with a tax expert, financial planner, or your accountant, and see what is the best strategy is for you!

About the Author

Dividend Ninja

The Dividend Ninja is a DIY (Do It Yourself) investor, who started blogging in 2010 about his journey into dividend stocks. After investing in mutual funds for years, and working with a second advisor in 2009, he realized it all came down to fees and commissions. Like most people, the market crash of 2008 and 2009 changed his views about investing and the financial industry. Dividend stock investing was the strategy that made sense for him! You can learn more about his rants on dividend stocks and index investing at the Dividend Ninja.

Comments (5 )

Another quality post!

I prefer to optimize my RRSP, that is, I only contribute enough for the year to off-set any additional income taxes owed. For my wife and I, that amounts to just over $2,000 each per year.

Since the RRSP is optimized, I work on maximing the TFSA. I’ve got mine maxed- out for 2012, but not my wife’s. Shhhh, don’t tell her that! :)

In closing, folks really need to think about how these accounts, RRSPs, TFSAs, unregistered, can work for them. It’s not all or nothing when it comes to investing.

Keep up the great work Ninja!

MOA, thanx and I promise I won’t tell your wife ;) But yes your right “its not an all or nothing deal”… The RRSP has a place for many investors – but I know you and I prefer the TFSA.


Samatha Wrote:

Whta do you mean by “$1000 will give you $400 back on the next tax refund”?

Does ot mean ea 1000$ inevested in the RRSP will reduce my annual income by 400? or will give me a 400 $ pay cheque :S

Samantha, when you make an RRSP contribution that amount is deducted from your income. That effectively lowers your amount of taxable income.

If you are in the 40% tax bracket, and you have no tax owing, then contributing $1000 to an RRSP means you will lower your taxable income by 40% of $1000 or $400 (plus or minus). That would essentially give you an extra $400 on your refund. If you are in a lower tax bracket then that amoount would be less.

Does that help? Cheers!

John Lever Wrote:

There’s another option: Setup regular Pre-Authorized contributions to your RSP and once the first payment has been make submit a form to the Government for source income tax deduction. Within a few months your paychecks will be larger and you can invest this extra income. This way you get your tax refund immediately each paycheck instead of waiting until the end of the year :)

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