30

RRSPs make great “cents” if you manage the refund

I’ve been a big fan of the Tax Free Savings Account (TFSA) or what I’d like to rename the account as the Tax Free Retirement Account (TFRA) ever since the account was launched a few years ago.

It’s easy to explain why:

  • To date, individuals could contribute up to $31,000 into this account,
  • Contributions into the account are not tax deductible but account withdrawals are tax-free,
  • Investments held inside the account grow tax-free,
  • There is no upper age limit for TFSAs.

This doesn’t mean Registered Retirement Savings Plans (RRSPs) should be avoided, on the contrary (personal note: we contribute to our accounts every month).  Last year I wrote on my site managing the RRSP refund is the linchpin in the battle of the retirement savings accounts; RRSP vs. TFSA.   In a recent Globe and Mail article seems David Chilton, respected financial guru and widely successful author of The Wealthy Barber Returns is backing me up:

“If you’re going to put money in a registered retirement savings plan and “blow the refund on something stupid,” then a major advantage of the RRSP – the immediate tax benefit – is lost, he says.”

On the stupid note David, my wife and I used to spend up to half of our tax refund.  That wasn’t very smart of us.  We don’t do that anymore.

Using RRSPs as part of a retirement plan make “cents” for almost every investor.  The exceptions to this rule might be 1) you have a sizeable gold-plated defined benefit pension plan in your future and/or 2) you know for sure your tax rate will be equal to or higher in retirement than your working years.  I will go out on a limb and state those instances would be rare amongst most Canadians, which means we should be using the RRSP account as part of our retirement planning.  After you do contribute to your RRSP account, I’m just recommending you avoid the mistakes we made in the past – manage the entire refund it provides wisely.

What do you usually do with your RRSP-generated tax refund?  What are you doing with any refund this year?

Filed in: RRSP, Taxes, Uncategorized

30 Responses to "RRSPs make great “cents” if you manage the refund"

  1. Gary says:

    i agree with you 100%. tfsa are the best thing to have come along in my lifetime. i wish they had been around years ago. i was already retired when they came on the scene. lets hope our government doesn’t change the rules in the future when they realize how much tax they are going to miss out on.

  2. Cassie says:

    I plan on putting my tax return from my RRSP into my TFSA. May as well let one account help build the other :)

  3. gmf says:

    Prior to TFSAs we would always use our RRSP assisted tax refund to pay down the mortgage. Now that we’re debt free and we have the flexibility of maxing out the TFSA early in the year, the refund goes into other investment accounts.

  4. Richard says:

    Anyone who doesn’t invest the full amount of their tax savings from RRSP contributions is getting a loan along with their investment account. And the lender is a real shark :)

    • Mark says:

      Indeed. Any tax refund coming for you Richard and if so, where will you invest? RRSP? TFSA? Debt? Other?

      • Richard says:

        I use my corporation in a way similar to an RRSP, so I don’t have the usual refund (just less tax to pay). The TFSA comes first every year though.

        • Mark says:

          Just less tax is also a very good thing, especially with a corporation. You get other benefits as well, can hold stocks and investments from within corporation.

  5. I’ve been putting my money in the RRSP and the TFSA since working in Canada 6 years ago. I’m hoping that if all goes well in the next couple of years I’ll have my gold plated defined benefits package as my new current role (second job) goes full-time :)

  6. Great article on TFSA and RRSP. I’m going to do an article soon myself that covers more on the active trading of them. i tend to be more aggressive with them than i probably should be but that’s a choice i decided to make. Made enough mistakes over the last several years to pretty much figure out what works for me.

    The TFSA is pretty much the best thing going, i still can’t believe virtually all my friends either 1) don’t have one 2) just leave it sitting in the bank earning 1-1.5%……

    I read an article recently on some competition, maybe it was globe and mail? I forget.. about who had the largest amount in their TFSA..given that contributions are capped to 31k or so, the guys near the top had about 60-70k because they actively traded it up and one guy hit a home run and took it to 300k..
    That said, he did allegedly put all of the 45k he had in it, into some penny mining stock with the expectation that it could all disappear over night. He had a huge amount in his RRSP so he said was prepared to let it go…? :/ insane if you ask me..

    However i do think there is a case for accelerating income when opportunity arises and using options to your advantage..and then feeding those profits back into dividend stocks..which is basically the crux of my strategy these days..

    • Mark says:

      Thanks!

      You trade within your TFSA and RRSP?

      I certainly don’t, I’m a buy and hold and hold kinda guy.

      I recall the article about the $300k TFSA investor was in MoneySense. Pretty amazing, but you have to get very, very lucky on those calls!

      What you trading right now?

      • Hey Mark, i’m kinda split on the trading with them, i do a lot less in my RRSP than the TFSA. i have most of my stocks like you for buy and hold but i take say 10-20% of my fund and trade with that.
        one of my reasons for taking this risk is that i was behind the curve massively on my contributions so i wanted to catch up more quickly which i have done.

        I tend to look for extremes and basically buy calls or puts, nothing more i.e. apple when it sold off hard last summer or buy a lot of puts on the SPY when i think the market is due for a turn down. It’s simple and probably the most risky as directional trading can be tough but when i do make a profit, i take a good chunk of it and roll it back into long-term dividends and then put the rest back into the trading kitty. i have a friend who simply writes calls against his stock to boost his dividend income which is ‘safer’ and i assume what most people would do..

        As for right now, i’ve just been trading around ibm,apple, aig,spy because they are just stocks i’ve watched for aeons.

        It’s certainly not for everyone but i’ve done it long enough to be comfortable with the risk.

        cheers
        T

        • Mark says:

          Hey Tales,

          I can see the TFSA being used for trading, even though I don’t to it myself.

          Nothing wrong with a bit of speculation, I recall Andrew Hallam said in his Millionaire Teacher book, if you really want to trade stocks, fine if that’s how you are wired but don’t trade anymore than 10% of your overall portfolio. Otherwise, it could be a waste when you don’t know what you are doing.

          Trading to play catch up is tough. I don’t think I could do that. I’m not smart enough either.

          Thanks for the great comment.

          • Hey Mark, yeah i know, you just gotta find what works for you, trust me i made a hell of a lot of mistakes learning it – i ‘paid’ for the education as it were. Everyone is different. In hindsight i wish i had done dividend investing in my twenties but i’m just happy i found myself before it was too late.
            Catchup is pretty tough, i nearly blew it when i started out, had the wrong attitude but turned it around, to be honest, reading your website, dividendmantra’s etc all helped me put things into perspective anyway so now i diversify across all types of trading and investing rather than focusing on just one thing which has helped tremendously.

            cheers
            T

          • Mark says:

            Hey again Tales,

            I think that’s the key, have a plan you can stick to, that is working. Indexing, dividend investing, investing with ETFs, investing with mutual funds, investing with GICs and bonds, whatever the plan is that matches your risk profile, investing window, circle of competence, etc. – develop the plan then work the plan and try not to deviate.

            I think most investors have made a ton of mistakes and you don’t know sometimes until you try and experience things yourself, despite other people telling you.

            Glad to hear this site has put some things into perspective!

            Happy investing and stay in touch.

  7. I don’t think I’ll get a refund this year, but if I do it will go straight into either my TFSA or RRSP. I haven’t decided which yet. I do have a defined benefit pension at work but I don’t know how long I’ll be working for the company so who knows if I will get that much value from it.

    • Mark says:

      I think our refund will mostly go to the RRSP. Maybe some to the TFSA. Maybe a $100 or so, to spend. Yes, I can’t always follow my own advice 100%. You gotta live as well.

  8. I agree with renaming the TFSA – good idea. We use the 10% rule for any ‘extra’ money received. It basically means we spend no more than 10% on any money received on fun stuff. The rest goes towards either the TFSA, RRSP or mortgage. This includes refunds, investment income, etc. As David said if someone is planning on wasting the refund, then the benefit of contributing in the first place is decreased (if not totally wasted)

    • Mark says:

      I think our plan Dan, is reinvest most RRSP-generated refund back into RRSP and then take some money from refund and put into TFSA.

      We have some reno plans for 2014, and a trip tentatively planned for 2015 so we need to start saving up for that. I don’t want to use TFSA money for any travel.

      I like the idea of 10% rule for any ‘extra’ money received. You have to live afterall so we might do the same this spring with refund.

  9. Chris says:

    So what defines a “gold plated pension”? :P

    • Mark says:

      Good question…typically:

      Gold plated pension = average of your best five years of salary x 2.0% x years of service.

      Federal government employees have this model.

  10. Juan Refrito says:

    I would only add that the “gross up” strategy is the best way to get the most out of your refund (assuming you have excess RRSP contribution room available). Here’s a recent article on this approach. Great way to maximize the value of your refund.

    http://www.thestar.com/business/personal_finance/2014/02/19/how_to_supercharge_your_rrsp.html

    • Mark says:

      Thanks Juan.

      I like Robb’s work, but I question how many people are disciplined enough to save 100% of the tax refund to pay off the loan. If folks are that disciplined, they wouldn’t need an RRSP loan in the first place. Thoughts?

      • Juan Refrito says:

        I actually don’t think it does require that much discipline. Using the gross up strategy, I take a loan from my line of credit just before the RRSP deadline, make my contribution, file, receive the refund and then pay off my LOC. I carry a balance on the LOC for maybe two months, that’s it, and in exchange get the maximum tax benefit possible out my refund. I’m not sure discipline is the issue as much as a failure to understand both the benefit of using the gross up strategy on the one hand, and the significant harm done to the size of your nest egg by spending the refund on the other.

        • Mark says:

          Fair, I guess I know too many folks that don’t pay a credit card balance but still invest in their RRSP…. The process is relatively straightforward but I suspect many would struggle with it. Certainly not you Juan!

          Thanks for your comment.

Leave a Reply

Submit Comment
*

Top of Page

Copyright © 2009 to 8086 by My Own Advisor. All Rights Reserved. Admin
Powered by Theme Junkie  •  Designed by Dividend Ninja