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:
- Contributions to the TFSA are not tax deductible but account withdrawals are tax-free,
- Investments held inside the TFSA 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, invest in them where you can!
Just be very mindful of managing the RRSP-generated tax refund.
RRSPs really only make great “cents” if you manage the refund 🙂
Last year I wrote this:
Managing the RRSP refund is the linchpin in the battle of the retirement savings accounts RRSP vs. TFSA.
Managing the refund well is the linchpin in the RRSP vs. TFSA debate
You don’t have to take my word for it.
In a recent article David Chilton, The Wealthy Barber himself, mentioned this:
“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.”
Perfectly and bluntly put!
Using RRSPs as part of your retirement plan can make great “cents” for almost every investor but it’s the RRSP-generated tax refund that you need to save and/or ideally reinvest.
What do you usually do with your RRSP-generated tax refund?
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.
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?
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.
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.
So what defines a “gold plated pension”? 😛
Gold plated pension = average of your best five years of salary x 2.0% x years of service.
Federal government employees have this model.
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)
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.
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.
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.
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..
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.
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.
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.
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 🙂
I have a good DB pension, just not gold plated. Oh well. If you have it, it’s gold!
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 🙂
Indeed. Any tax refund coming for you Richard and if so, where will you invest? RRSP? TFSA? Debt? Other?
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.
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.
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.
I plan on putting my tax return from my RRSP into my TFSA. May as well let one account help build the other 🙂
I like that call Cassie. I have a post about RRSP-generated tax refunds coming up this week, the TFSA is one option for sure.
Do you do any investing with your TFSA and what kind of investment(s) do you have. The bank told me if I was going to take monies out of my TFSA not to bother with investments within it, but it’s been 2 years and I haven’t spent a cent and could have been making money!
Absolutely I use the TFSA Cara. Here are some links to some articles:
Let me know if you have more questions after reading those articles.
The TFSA can be a great money-making tax-free machine.
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.
RRSPs are great for almost every investor. TFSAs are great for every investor 🙂 Yes, let’s see how our government will fair in the future…