If you are Canadian, you know that the RRSP season is about to start. To be honest, it has already started for some good financial advisors ;-). Since half of my readers here are Canadians, I thought of publishing some RRSP contribution information along with 5 of the best RRSP investment strategies to boost your retirement savings.
2012 RRSP Contribution Limits
The RRSP contribution limit for the taxable year of 2012 is $22,970. This does not include unused past contributions. In order to know your exact RRSP contribution limit for 2012, you must look at your 2011 Notice of Assessment (the document returned by the CRA once you filed your tax report).
The RRSP date limit is March 1st 2013. Contributions after that day will count for your 2013 tax report. Therefore, RRSP contributions after March 1st 2013, will not generate a tax return to be received this year but in 2014.
The RRSP contribution limit for the taxable year of 2013 is $23,820. Some people are ahead of others and make their contribution for the year of 2013 at the beginning of the year. They benefit from an additional year where their investment is tax sheltered but they only receive their tax return based on the RRSP contribution made for the year 2012.
The TFSA contribution limit jumps to $5,500. This has nothing to do with your RRSP contribution, but I think it’s important to know that if you have maxed your RRSP contributions, you can add an additional $5,500 (previously $5,000 for the years 2009 to 2012) to your Tax Free Savings Account.
RRSP Investing Strategy #1 – Keep Your US Stocks Tax Sheltered
There is a tax treaty between Canada and USA establishing that all stocks kept in a registered account will not be subject to withholding taxes. Therefore, the best place to keep your US stocks is definitely in your RRSP. Dividend payouts are not taxed in RRSPs but will be subject to withholding taxes in a TFSA. The withholding tax is set at 30% but you can drop it to 15% by filing the W8-BEN form (click here to download the PDF from IRS).
RRSP Investing Strategy #2 – Focus on Long Term Dividend Growth Stocks
The power of compounding interest has never been more powerful than within a RRSP account. If you can invest your RRSP contribution with a long term investment strategy, the dividend payouts will be quite impressive over the long haul.
For example, a stock like KO doubles its dividend every 6.5 years or so. Therefore, if you invest $10,000 in KO in your RRSP today and wait for your retirement in 30 years, your dividend yield on that $10,000 will be around 13%. Dividend growth stocks definitely come handy when it’s time to draw an income from your RRSPs!
if you are looking for stock picking ideas, here’s my list of the Best 2013 Canadian Dividend Stocks.
RRSP Investing Strategy #3 – Do Not Take an RRSP Loan – Invest Periodically Instead
What’s the difference between someone who takes a $30,000 RRSP loan amortized over 5 years to maximize their RRSP contribution and someone who invests $552 (the cost of a RRSP loan payment at 4% for 5 years) per month after 5 years? About a $1,000 in favor of the RRSP loan guy ($38,500 vs $37,539) if we consider an investment return of 5%.
If you factor the tax return in the equation and you invest that money as well, you will get a difference of $1,400 in favor of the RRSP loan guy ($53,901 vs $52,500). So why am I telling you that the RRSP loan is not a good strategy compared to the periodic investment? Because of the following considerations:
#1 You invest all your money in one shot instead of averaging the market over the next 5 years. This could play in your favor or your disadvantage (imagine if you would have put $30,000 on January 2008 vs investing $552 per month from Jan 2008 to Jan 2013…)
#2 If your borrowing cost if higher than 5%, the periodic investment will generate a better return than the RRSP loan.
#3 You are creating a serious habit of saving money with the second option. This habit will be a major advantage for your personal finance in the future.
Note: There are some exceptions where the RRSP loan is a good strategy to max out your RRSP contribution. For example, if you plan on buying a house this year, you may do a loan, pay it back under the HBP plan and use the tax return as cash down.
RRSP Investing Strategy #4 Max Your RRSP Contribution and Go on Vacation!
Budgeting will inevitably become one of the toughest sports for most Canadians as we keep spending money like we own the FED. A Financial advisor once told me during the RRSP campaign that he was competing against Future Shop; his clients were debating if they would invest $5,000 in their RRSPs or buy a brand new Plasma TV with surround sound… quite pathetic.
So here’s my advice; put as much as you can in your RRSP and collect the tax return to do something you like. If you invest $5,000 in your RRSP account, you will receive a nice tax return. It will probably be enough to pay for your next vacation. With this strategy, you finance both your retirement and your vacation at the same time. So you don’t have to wait until you retire to go at the beach!
RRSP Investing Strategy #5 Don’t Chase Dividend Yield, Chase Dividend Growth
have received several emails from my newsletter subscribers asking for stock reviews paying over 5% in dividend yield. If you follow this blog, you already know that I don’t cover such companies. The reason is simple; I’m chasing dividend growth and not dividend yield. The highest dividend yield stocks always hide something. And it’s usually pretty ugly.
Add more metrics to your stock screener and start your online stock research with a strong investing process in hand. By chasing dividend growth, you are chasing companies that will make more profit in the future and reward your patience as an investor. This is the whole point of dividend investing.
If you are looking for a good place to start investing money in dividend stocks, my book Dividend Growth – Freedom Through Passive Income is on sale at Amazon:
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