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Do You Truly Understand How to Maximize Your RRSP Benefit? Your TFSA? Combining Benefits?


It is RRSP season and time to discuss strategies that can help you build your RRSP much larger than you may have thought possible. Revenue Canada can help you all the way.

Many RRSP contributors blow their tax refund on the next high-tech gadget. Don't be that gal or guy! Your tax return from your contribution is simply the tax deferred portion of contributing to your RRSP. You should treat it as such, eventually this refund will need to be paid to Revenue Canada, the refund should be re-invested to your RRSP.

Take for example if you are in a 40% marginal tax bracket and you invest $5,000 annually in your RRSP and once received you invest the refund. In the first year, you would have $5,000 invested. In the second year you would have invested $12,000 calculated $5,000 X (1 + .40) = $7,000 + $5,000= $12,000. The third year you would have $21,800 calculated $7,000 X (1 + .40) = $9,800 + $12,000 = $21,800. This will take the effect of a snowball rolling down a hill, it will accumulate larger and larger contributions. I never included investment returns, as an attempt to make the example simple to understand.

Setting up a monthly contribution and committing to it for the long term, may be the best way to keep you on track. There are other benefits you can take advantage of as well, if you decide to invest in mutual funds or other market based investments. You can take advantage of Dollar Cost Averaging, which is defined, buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high. This may provide you with lowered risk, and more shares of an investment, over a long period of time.

You can also take advantage of a T1215 form to reduce tax at source (your employer). This form will allow your employer to reduce your income tax being withheld, based on a 40% marginal tax rate on a $500 per month RRSP contribution, the employer could lower monthly tax by $200. This would allow you to invest $700 per month to your RRSP, with the advantage of not having to wait for your income tax return to make the extra contribution. Here is the form from Canada Revenue Agency.

Don’t miss savings opportunities

An easy way to boost your RRSP savings is to take advantage of wealth accumulation programs at work. Employers often match at least part of your contribution, or they’ll offer RRSPs with lower management fees than you might get from most investment firms. Employee stock purchase plans can also be set up inside an RRSP or TFSA.

There are way too many people not taking advantage of employer/employee savings plans at work, many plans are Group RRSPs, where the employee will invest up to say 7% of their income in an RRSP and the employer will match it. I have seen way too many people not taking full advantage of these plans. I don't get it, the employer is paying half your RRSP for you people, take advantage!

If you can’t make sense of your employer’s RRSP benefits, talk to your company’s HR department, your financial adviser or your accountant.

TFSA or RRSP?

In the tug-of-war between RRSPs and TFSAs, the former is the reigning champion, since it’s where Canadians have most of their personal nest eggs. This year you have until February 29th to contribute for the 2019 tax year (first 60 days, this year is a leap year). But you should also consider the main contender for the savings crown, the TFSA, introduced in 2009. You can contribute up to $6,000 for 2020, or more if you have unused room from previous years (up to $69,500 in total TFSA Room including 2020).Both RRSPs and TFSAs shelter you from tax as long as the investments are held within the account. With an RRSP, you can deduct the contribution from your income, which earns you a tax refund, but the money becomes fully taxable when you take it out. The TFSA is the reverse: you don’t get a tax break on contributions, but you will never pay tax on withdrawals either. So if you’re deciding between the two options, the question boils down to whether you should pay the taxman now or later.

The answer depends on your tax rate. If you’re in a higher tax bracket when you put the money in than when you take it out, then it’s better to use an RRSP. It’s easy to understand why: your original RRSP contribution gives you a juicy tax rebate now, and the taxman takes a smaller bite on withdrawal. However, if you take the money out when you’re in a higher tax bracket than you’re in now, it’s better to go with a TFSA. If your tax rates are the same when the money goes in and out, then the choices are equivalent.

The last thing to consider when making the choice between the RRSP and the TFSA is your objective for the money, if it is for long term retirement goals, maximizing your RRSP may be the better choice, but if you are saving for a vacation or a new car, the TFSA would definitely be the better option.

Remember, your biggest risk of investing, is not investing for your future at all. If you have not met with a qualified financial adviser or other qualified retirement professional, you should consider doing so. A financial adviser can map a plan to help you achieve your financial goals.

Have a good day!