Michael Zagari

Is your RRSP a love-hate relationship?

“RRSP’s help me save taxes.”

“I need to invest in RRSP’s so that I have no surprises when it comes to tax time.”

“RRSP’s are the best way to save for retirement.”

Do any of these comments sound familiar?

Many Canadians may not fully understand the true mechanics of their RRSP even though they make the conscious decision to contribute year over year. This week my focus is on Registered Retirement Savings Plans (RRSP) and how you can use the federal government sponsored plan to your personal advantage.

First, let’s talk tax implications. The more money you accumulate in your RRSP, the more taxes you or your estate will pay. Basically, the better your investments perform, the more taxes you will pay in the future upon withdrawals which sounds unfair since the investor takes on all the risk.

So why bother with RRSP investing? This is where personalized financial planning can make all the difference.

When you contribute to an RRSP what you are effectively doing is lowering your taxable income for the calendar year. Most Canadians who make RRSP contributions receive a tax refund because the amount of payroll taxes withheld at source is higher compared to the taxes due on their revised taxable income. Essentially the money you get back is not “free money” but rather a portion of the taxes your employer withheld on each of your paychecks. In short, the taxpayer is receiving their own money back which is expressed as a tax refund.

So, what can we do today that will help us save for retirement, reclaim a portion of our annual income taxes, and possibly reduce our imminent taxes on our estates?

There are 3 effective methods that can help you achieve better results:

First, consider taking a portion of your annual RRSP budget and redirect these funds to your Tax-Free Savings Account. The amount invested will depend on your personal situation.

Secondly, hold your most promising growth investments inside your TFSA and use the RRSP as a basket to hold your more conservative investments such as bonds. Over time possibly decades, your TFSA should outgrow your RRSP providing tax-free growth without scarifying much on the portion you didn’t invest in your RRSP.

And finally, redirect your annual tax refunds to your mortgage balance since payments on a mortgage is not tax deductible. Yes, you will eventually pay taxes when you pull funds out of your RRSP however that tax bill could be far less if you include the offset on the interest savings generated by your additional mortgage payments. If you do not have a mortgage, consider using your tax refund as a top up on any unused TFSA contribution room.

What is this week’s takeaway?

RRSP investing does not have to be a love-hate relationship if you involve other factors of your financial situation into your decision making process.

Avoid following the crowd and always choose personalized planning versus fit the box models.

Have a great weekend everyone!

Talk soon,


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