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February 10, 2010, 7:31 am

Back to RRSP Strategies and RRSP basics

by: The Financial Blogger    Category: RRSP

I had recently written a post about common RRSP Facts and FAQs. Since we are entering the biggest RRSP month of the year (deadline to contribute for tax year 2009 is March 1st 2010), I thought of taking a look at some RRSP strategies and RRSP basics.

The Reason why RRSPs exist

No, this wasn’t an evil invention by mutual funds’ companies or Canadian banks ;-). The Government created the RRSP to give everyone the chance to build a comfortable retirement. An RRSP account allows investments to grow tax free while reducing your tax exposure according to the RRSP contribution of the individual. At retirement, when your marginal tax rate could be at its lowest, RRSP withdrawals become taxable.

RRSP and risk

Some say that you should put all your fixed income into your RRSP for tax optimization. Some other say that since you have several years before your first withdrawals, you should invest in an aggressive portfolio and let the stock markets work its magic. I’d say that you should always consider your investor profile and invest according the asset allocation you have chosen.


If you are looking into a retirement perspective, investing in your RRSP or your TFSA will create about the same results. While the RRSP gives you’re the opportunity to get your tax return right away, you won’t be taxed on your TFSA withdrawals at retirement. Personally, I would stick with the RRSP’s for retirement and use my TFSA for other projects.

Some interesting RRSP strategies:

Depending on your financial situations, you may find some interesting RRSP investment strategies that can help you save a lot of money:

#1 The Double Dip

A long time ago, I wrote about the double dip strategy. This RRSP strategy consists of reinvesting your tax return into your RRSP every year. Therefore, if your marginal tax rate is 40% and you contribute $10,000 to your RRSP, you should save $4,000 in taxes. Use this very same amount to contribute again to your RRSP and you will get an additional $1,600. So with a 10K contribution, you generate a tax return of 5,6K which is 56% taxes saved. Not bad, huh?

#2 The RRSP Loan

Several financial advisors will recommend that you take an RRSP loan if you don’t have the money to contribute to your RRSP. While this technique will allow you to receive a bigger tax return right away, you should think twice before taking an RRSP loan. Why? Simply because if you can’t pay this loan back within 12 to 24 months, you are paying too much in interest and you would be better off with a systematic investment. You won’t get a huge tax return if you invest $400 per month into your RRSP but you will end-up with a better return over 5 years than taking a RRSP loan with similar payments.

#3 HBP RRSP Loan

This is a very interesting strategy as it is used to boost your cash down for first home buyers. If you have a marginal tax rate of 40% and you have 20K RRSP unused contributions, you can take a 20K RRSP loan before buying the house. Under the HBP, you are allowed to withdraw your RRSP investments to buy a property tax free (as long as the money had stayed in your RRSP account at least 90 days). So you withdraw your 20K and payback the loan. Why do this? Because the 20K contribution will generate a 8K tax return the very same year. Therefor, you will have 17 years (15 years + 2 years of grace period) to put back the 20K in your RRSP account and you will benefit from an additional 8K right away to purchase your property. More info can be found in Million Dollar Journey’s post about HBP plan.

#4 RRSP and investing with tax optimization

This investing strategies is relevant only for investors who have a significant amount of money invested in both registered and non-registered accounts. The strategy is fairly simple but it is too often forgotten. Using your track investment apps, you should be able to determine your global asset allocation. Then, you simply have to maximize the amount or fixed income in your RRSP and increase your equity portion in your non registered account. For example, if you have a overall balanced portfolio (50% fixed income / 50% equity), you should show a conservative portfolio in your RRSP (75% fixed / 25% equity) and an aggressive investment strategy in your non-registered account (25% fixed / 75% equity)(assuming that both accounts represent 50% of your total investment). If you are not sure about how to do it, you can use bank investment services.

#5 RRSP and systematic investment

For young (and not so young) investors, the bi-weekly RRSP contribution is definitely the best investment strategy you can put in place. While you won’t even notice that your RRSP contributions are made, you will build a strong portfolio and absorb market fluctuations. So if I have one advice for 2010; this would be it!

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February 9, 2010, 5:29 am

2010 RRSP Contribution Limits, RRSP Contribution Deadline and other RRSP FAQs

by: The Financial Blogger    Category: RRSP

I’ve been pretty busy with the RRSP campaign where I work. Since the beginning of January, I have been meeting with my clients to deposit their RRSP contributions.

Therefore, I guess you will probably meet with your financial advisor for your 2010 RRSP contribution in the upcoming weeks. So I thought of gathering a few RRSP facts and FAQs:

How much can I contribute to my RRSP for 2009?

–         The general rule is 18% of your declared income in 2008.

–         However, if you have pension plan, you must take a look at your Federal Notice of Assessment (the document sent to you by the government after you filed your taxes. It will show you maximum contribution available for your RRSP.

What is the maximum RRSP contribution for 2009?

–         The maximum is 18% of your declared income up to $21,000.

–         If you are contributing for 2010, the RRSP contribution limit is $22,000.

–         You can exceed this amount by $2,000 but you will not get a tax return from this amount. Any RRSP contribution beyond the $2,000 overcontibution allowed will be penalized by a 1% tax monthly.

How can I contribute by using my unused RRSP contributions from past years?

–         The total amount of your unused RRSP contributions is shown on your Federal Notice of Assessment.

–         You are allowed to contribute this amount in total and get the full tax return (but make sure to read the following point before doing so).

Should I use all my RRSP contributions in one year?

–         You should be careful about your tax brackets and contribute as much to your RRSP in order to get the highest tax returns possible.

–         To take a look at your tax bracket, you can use Ernst and Young Tax Table and RRSP tax saving calculator (it’s free!). I suggest you play around with different RRSP contributions to see how much you will receive in tax returns.

Should I take an RRSP loan to maximize my RRSP contribution?

–         RRSP loans are effective if you plan to pay it back within 24 months. If you are to take a 5 year RRSP loan, you are better off starting a systematic investment in you RRRSP and forget about your tax return this year.

–         The interest paid on an RRSP loan is not tax deductible.

–         Some strategies include an RRSP loan to maximize your tax return while it serves to pay back the loan. This is interesting when you think about your retirement (long term strategy).

–         An RRSP loan can also be used for the Home Buyer Plan (HBP). You take a big RRSP loan, get the tax return and withdraw your RRSP under the HBP rules (so you don’t get taxed) to pay back the RRSP loan. Therefore, you receive the RRSP contribution tax return right away and this could help to increase your cash down or pay for other expenses (moving, lawyer fees, painting, etc.).

What is best: RRSP or TFSA?

–         If you think about your retirement and you wish to get a tax return, the RRSP contribution is the best option.

–         However, if there is a possibility of withdrawing the money within the next 3-5 years for a specific project, you are better off with the TFSA.

–         When you calculate the comparison between RRSP contribution vs TFSA contribution for retirement, it all comes back to the same thing.

–         For more info, you can read this great article about TFSA Vs RRSP

Which kind of investments can go into an RRSP account?

–         Almost all kinds of investments (certificate of deposits, bonds, mutual funds, stocks) are allowed.

–         You are not limited to the Canadian market anymore (there used to be a 30% maximum rule for international equities).

Got an RRSP question?

If you have other questions, please fee to post a comment and I will add your questions and my answers into this post.

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January 13, 2010, 5:00 am

2010 RRSP Investment Ideas, First: Prepare Your Meeting

by: The Financial Blogger    Category: RRSP

The RRSP Season has already started and while most financial advisors are still thinking about their Holidays, some others are calling their clients to book appointments. So you might (or might not!) get a call this week to make your RRSP contribution in the days ahead. Regardless if you are dealing with a good financial advisor or not, you should definitely start investing for your retirement as soon as possible.

Since you don’t have access to track investment apps or high quality investment services, you need to do your own research before you meet with a financial advisor.  This is why it is so important to prepare for your meeting beforehand so you can have an idea how you want to invest your RRSP contribution. In this article, I have listed a few 2010 RRSP investment ideas that you can discuss with your financial advisor. Please note that those are not recommendations but simply investment ideas to help start the discussion.

2010 RRSP Investment Ideas:

#1 Diversified Mutual Funds

If you are a beginner investor and you are looking for your first RRSP contribution, I suggest you go with a “packaged” investment product created by your financial institution. While the management fees (that are being taken off the top of your investment returns (profits or losses) are higher than other types of investment solutions, this is a great place to start in the investing world.

Diversified mutual funds will allow you to invest in several types of assets (money market, government and corporate bonds, Canadian, American and International stock markets) and will always remain invested according to your risk tolerance, investment horizon and specific goals.

#2 Build Your Own Mutual Funds Portfolio

If you know more about the stock market and you want to pick specific funds, you can build your own mutual funds portfolio. While I don’t think it is a great idea for most investors (many think that they can manage on their own but it is usually a big mistake), you can go on investing sites (see my articles about 9 free Canadian Investing websites for links) and pick the best performing mutual funds. Make sure to pick funds that have a long track record, relatively low management fees (MERs), that are part of the 1st or 2nd quartile over 5 years + and that the management team has been in place for a while (you can look at the reasons to sell a mutual funds in this article).

When building your own portfolio, you must be careful about front end and back end fees (fees when you buy or when you sell). You might want to build your portfolio with a financial advisor in order to make sure you make the right decisions. Another important thing is to rebalance your investment according to your original asset allocation. While the diversified mutual funds do it automatically every 6 months, you will have to transact by yourself in a homemade portfolio. So building your own portfolio might not be a bad investment idea but it surely requires more knowledge and more time. A humble person once said that the more they know about the markets is proof that he does know much.

#3 Want To Work With ETFs?

If you are a beginner in the world of ETFs and you have a decent amount to invest (more than $25,000), you should try to contact a broker. The problem is that you may have a hard time finding one if you are just starting to invest. They are usually go after bigger accounts (this is too bad, but it is the name of the game).

If you still want to trade ETFs nonetheless, I suggest you open a brokerage account (for example Quest Trade since they have one of the least expensive transaction fees) and start with market index ETFs (ETFs replicating the Canadian Stock Market or the US Stock Market). As a beginner investor, I would not go this route but if you have been investing for a few years, it might be the right time for you to look at this option.

#4 Looking for the Best Sectors for 2010

For this investment idea, we are entering the world of speculation. Nobody knows which sector will outperform the stock market index this year. From 2003 to early 2008, the financials, resources and emerging market were pushing investors to the highest yields they might have ever seen. Yet, these went down dramatically during the credit crunch. This is why it is very risky to predict the future.

Nonetheless, you can find specialized mutual funds and ETFs concentrated by industries. The easiest way to find them is by using sites such as Morningstar or GlobeInvestor (then again, I suggest you take a look at my article about free investing websites for more options).

Trading ETFs will reduce your investing fees to the minimum but you will follow the major trend of a specific industry. On the other side, specialized mutual funds are pretty expensive in term of MERs but you can benefit from the experience of professionals. In niche sectors, I think it is easier to beat the market since the number of companies to follow is smaller.

#5 Forget about CD’s and Beware of Bonds

Certificates of Deposit will barely cover for the upcoming increase in inflation and you won’t do much with your investment with a return of 1 to 2%.

On the other hand, bonds could be a better investment idea but prepare yourself to experience a drop in the value of your bond portfolio in 2010-2011. Bonds values go down when interest rates go up, therefore, you will see a temporary drop in your investment values if you hold bonds. However, this will come back to normal at maturity (you still get your money back at the end 😉 ).

#6 Linked Notes and Variable CDs

If you are looking for more investment returns but you are not willing to see your investment yield goes negative, linked notes and variable certificates of deposit might be a great investment idea. As I mentioned before, I don’t really like linked notes because you pay a high price for your capital security. However, sometimes the peace of mind is more important that making money. And this is why banks offer the possibility of guaranteeing your investments while expecting higher yield since your investment is linked to the stock market. This would not be my first choice but it is definitely the best alternative to classic certificates of deposit.

Whoa! I usually don’t write posts this long but I thought it was important to provide some RRSP investment ideas before the madness starts in February!

What about you?

What will be your investment choice for this RRSP season? Will you stick to your plan? Change your investment picks?

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February 19, 2009, 6:00 am

Government Bonds and investment opportunities

by: The Financial Blogger    Category: Investment, Market and Risk,RRSP

It is the RRSP season in Canada (Your last chance to contribute to your registered retirement saving plan for the year 2008 on March 2nd), and we see a lot of government bonds advertisements. They offer bonds at about 3% interest rate and they tell you that it’s 100% and suggest that you put them into your RRSP account.

The thing is that 3% seems a lot more than your balance portfolio that did -20%, right? Many investors have the bad habit of doing linear assumption. “At a rate of -20% per year, I’ll lose all my money within the next 5 years”. Even though this assumption is mathematically wrong (as you will lose 20% of the balance of your funds each year and not 20% of you original amount), it is even more wrong to think that we will make -20% for 5 years.

To these clients, I ask them the following question:

The price of gas was at $1.50 a litre back in July 2008, 6 months later, it now around $0.80. At this rate, don’t you think that next summer we will pay $0.25 a litre?

They all think I’m stupid, however, if their linear assumption is good for the stock market, it should be good everywhere, right?

Back to our dear Government. So they offer bonds with cheap yield (I can’t blame them on that since we are living in a world of very low interest rate) and they tell you it’s good to include this in your retirement account.

Let’s do the math for fun… $5,000 per year at 3% in… 25 years. That makes a total contribution of $125,000 (5K times 25 years). Your portfolio will worth $182K. How much do you think you will be able to withdraw from it for 20 years?…. not much!

If you do the same exercise with a yield of 5%, you will get 238K and with a 7% yield (if you are aggressive); 316K. This is what we call the power of compounding interest.

I’m not saying that government bonds are not a good investment options, but depending on your age and the number of years you have before retiring, you should consider other option.

How would you react when the market comes back with a +20% in a year? How would you feel with your 3% return? If you think that you will still be happy with it, then the government bonds are a good investment option… if you swear that you won’t go back into the market after it came back from the dead!

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February 18, 2009, 6:00 am

RRSP Loans; A Great Investing Strategy or An Evil Product Manufactured by Banks?

by: The Financial Blogger    Category: Financial Planning,RRSP

Dring… Dring…

– Hello, may I speak with M. TFB please.

– Yeah that’s me!

– Hello sir, my name is Evil Banker and I would like to book an appointment with you for your RRSP contribution.

– Nah… I don’t have money left for retirement this year (I just bought a brand new TV instead 😉 ).

– Well sir, we still have a solution for you. How about getting your RRSP contribution done and a retirement plan (i.e. excel spreadsheet with a graph) at the same time? We can arrange everything for a small amount per month and you would get a huge tax return in May. How does that sound?

How does that sound? That sounds like the regular banker sales pitch during a RRSP campaign 😉 I’m making fun of my colleague here but we need a bit of laughter in this strange world, don’t we?

Seriously, several Canadians contract a RRSP loan every year in order to catch up with their unused RRSP contribution. Is it a good idea? Should we use this leverage strategy? (yes, it is a leverage strategy as the Smith Manoeuvre).

The RRSP loan is a great investing strategy under the following guidelines:

– It must be at a very low rate of interest (prime rate or near prime rate)

– It must be reimbursed within a maximum of 24 months (2 years).

– It must fit in your budget 😉

– The tax return should be used to pay off a part of the RRSP loan and not to finance the next trip to Disney Land with your kids.

– Once paid off, you should keep your payment into a saving habit by setting up a systematic contribution into your RRSP account.

– Use the RRSP loan while participating to a HBP (Home Buyer Plan)

A RRSP loan is not a great investing strategy under if the following happens:

– You take a huge amount and you can’t pay it off within 24 months. In this situation, you rather simply use the payment as a systematic contribution into your RRSP account and you will save the interest (which is not tax deductible).

– You can barely make your payments and the RRSP loan jeopardize your financial situation.

– You have no intention to use your tax return in a financial planning strategy (you are then missing the whole point of taking a RRSP loan).

So if you are not 100% convinced that you should take a RRSP loan or not, ask your financial adviser questions in order to understand if there is a strategy behind the loan or simply your banker’s commission 😉

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