Aug 12 2008

Do you have an RRSP Optimization Strategy?

Do you have an RRSP Optimization Strategy?

It’s hard to argue with the merits of Registered Retirement Savings Plans. They’re one of the best tax breaks available to the average Canadian, and a great way to build retirement wealth. So why do most of us not contribute as much as we can each year to our RRSP? For many Canadians, the reason is simple. We don’t have the money on hand to make that maximum contribution. So we contribute what we can, or ignore our RRSP all together.

While the easiest and most enjoyable strategy is the “spend the refund”, the following are disciplined ways to improve your RRSP growth and ultimately your retirement plan.

1.Reinvest Refund strategy:

Use this year’s refund to make next year’s RRSP contribution.


2.Gross-up refund strategy:

While getting a tax refund may feel good, what you’ve actually done is loaned the government your money over the past year, and now they are giving you back what was owed to you. The “gross-up” strategy involves grossing up RRSP contributions by your marginal tax rate and invest all of your intended cashflow to “pay yourself first”. Every month invest the appropriate grossed-up amount using pre-authorized withdrawals from your chequing account. Then have your employer adjust your withholding taxes to get your tax refund working for you immediately instead of being spent. Lastly, file a “Request to reduce tax deductions at source” form. Email me if you need a form or assistance.

3.Top-up loan strategy

This is a short-term strategy whereby an “RRSP loan” (typically under two years in length) is used to “top-up” the RRSP contribution. The RRSP refund and the monthly loan payments are sufficient to pay off the loan over the period.

4.Catch-up loan strategy

When you have substantial RRSP room that could not be handled by a short-term loan (one or two years) a long-term “catch-up” loan for up to 10 years could be considered. This method lowers your monthly payment substantially thereby reducing the strain on monthly cash flow.

With low interest rates, RRSP loans may make sense. Please note that interest is not tax-deductible for RRSP loans, as this is not considered an investment loan.

Planning an effective RRSP strategy is just one of the many value-added benefits your financial advisor should be assisting you with. Having an “RRSP Optimization Strategy” just makes sense to me. What do you think?


“Using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and interest by its term remains the same even if the value of the securities purchased declines. Please read any disclosure statements outlining these risks before purchasing.”

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