Category Archives: rrsp

The Loonie Bin: RRSP Challenge

The Loonie Bin: RRSP Challenge

RRSP Challenge

It’s that time of year again and one thing is for sure; If I read one more RRSP blog post I think I’m going to be sick. Just kidding! Although there are thousands of them out there, my post is a little different.

Ever since I can remember, I have been told to save money for retirement in an RRSP. Any money I contribute will be deducted from my income and I’ll get some of the money I paid in taxes back from the government. Like most people, I was always excited to see that government check in my mailbox and It felt like I was getting free money. In reality it was MY money to begin with and the government was collecting interest on it and I was not.

It seems a lot of people think that way when it comes to tax time. I’ve even heard of people telling their employer to increase the amount of taxes they take off their pay cheque each month just so they have a huge refund at the end of the year. It is fair to assume that these people are not financial wizards and the only way they could amass a large sum of money is having it hidden from them. If I can just help one of these “over payers” to stop this silly strategy and see the “light”, then maybe there is hope for this blog after all.

I have devised a strategy that allows me to pay less taxes throughout the year, and then end up owing the government money and not paying it back. My employer matches my RRSP contributions all year long and reduces the amount of taxes I pay each month. Basically my refund is distributed equally across twelve months which means my hard earned money is available to me every paycheck. No more free interest for the government to collect on my hard earned money and only pay me back the principle amount. I use the extra money every month to pay down debt so that the principle is reduced over the whole year, minimizing the amount of interest I pay overall.

So when February rolls around, I purchase Quicktax (I know it’s called turbotax now, but that name is stupid 😉 and I enter all my tax forms and I figure out what it’s going to take to get me owing $1.99 in taxes. Why $1.99 you ask? Well the Canadian government has a policy for money transactions that if the amount is less the $2.00, then no money is owed or paid out. I first learned about this when my refund of .75 cents was not paid to me a few years ago, and ever since that day I’ve made it my goal at tax time to end up owing the government money and not having to pay it. Even though it might seem futile, it’s the only legal way of getting back at them. Plus it makes me feel better.

I challenge all my readers to owe the government money without having to legally pay this tax season and enjoy the feeling of screwing over the government, no matter how insignificant it might be.

Do you want to know what investments make it into my RRSP account and why?

An example of an item from a cognitive abiliti...Image via WikipediaThe human behavior often look at setting up rules around our actions as it makes it easy for us to process it in the future. When it comes to investing, many people setup rules around investments and where they should go. Preferential tax treatment often guide those rules. I prefer to look at those as guidelines because rules can leave money on the table. My rule is to profit, or more importantly, optimize my profits utilizing my dividend investing strategy.

Why am I discussing what’s in my RRSP? I wanted to share my philosophy because it can break rules for some but it’s usually for a higher profit. Don’t mistake higher profit with higher risk in such case. Here are some rules, or more precisely guidelines, that you will hear:

  • You should have a percentage of bond holdings equivalent to your age.
  • Dividend paying investments should be outside registered accounts for the better tax treatment.
  • Hold REITs in a registered account as the distribution creates a higher capital gain over time, not to mention the pain of tracking your adjusted cost over time.
Have you been following those rules? I know I haven’t! It’s not because they are bad guidelines, it’s because the circumstances just don’t make it so. Most of my money is in my RRSP, RESP and my TFSA. I have very little outside. It’s not that I don’t want more money outside of these accounts, it’s just that my circumstances favor registered accounts for now.
  • My employer matches my RRSP contribution with the minimum of 50% match.
  • The Tax Free Saving Account is just amazing for tax free growth and I maximize it every year when I can.
  • My kids RESP account is also important at the moment for medium term investments.
  • My non-registered investments mostly consist of dividend paying companies I buy through Computershare and CIBC Mellon.

With that said, I hold many dividend investments inside my RRSP along with balanced and fixed income mutual funds through my employer’s plan. It used to all be mutual funds but I was able to transfer some mutual funds to RRSP and add more fund to my RRSP for dividend investments. I pick dividend investments in my RRSP because they simply are good investments with compound growth. My TFSA only holds dividend paying investments and my non-registered investments are also pretty much just dividend paying investments.

Whether or not the tax treatment is better in one account or another, if I have the opportunity to improve an investment, I will do so while keeping in mind the tax implication on the return on investment. For example, which would you choose, a dividend investment paying 7% or a GIC at 4% for your RRSP? Note that the dividend investment has better tax treatment outside since anything you withdraw is taxed at your marginal tax rate but at the end of the day; one pays 7% and the other 4%. For the purpose of making my money work for me, the dividend investment is superior. This is where the rules fall apart for me. Once the money is committed to a RRSP, I invest based on the scenario that presents itself while considering sector diversification and risk.

At the end of the day, my rule is to have solid investments in any of my accounts with a good balance between the sectors and the risks with the purpose of building wealth to generate income for retirement.

Readers: What rules do you have that you follow? Are they rules or guidelines?

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