Using your RRSP and TFSA to play retirement portfolio catch up.

It’s not too late. Even if you’re in your 40’s or early 50’s you can play some serious portfolio catch up. You can put your retirement portfolio into overdrive. And you can use your RRSP account to drive your TFSA account. With a retirement portfolio catch up strategy your generous tax return monies go directly to your TFSA account.

Many Canadians are still confused about the RRSP (Registered Retirement Savings Plans) and TFSA (Tax Free) programs. Here’s the skinny. When you put monies into an RRSP it reduces your income taxes owed. You can get a refund cheque from the government. Heck you can get set up for a direct deposit into your chequing account. Your RRSP accounts also grow, tax deferred.

You then take that tax refund money and invest in a tax free environment. That’s where that TFSA goes to work. Here’s what to like (OK love) about the above scenario.

1. You’re getting money back, paying less tax.
2. You’re avoiding taxes on future gains.

Tax free accounts will not get you any additional tax break, but the money grows tax free. You do not pay a cent on any interest or any increase in the value of your tax free accounts. You do not pay a cent of tax when you take monies out of that account.

It’s tax free all the way, true to its name.

Your RRSP does not get away Scot free.

Scot free?

Scot is from an Old Norse word that meant a payment or contribution and which is linked to the modern French écot, a share of communal expenses, as in payer son écot, to pay one’s share.

Courtesy of worldwidewords.com

Yes, that phrase is not a slur against the Scots who are know to be uh, let’s say ‘good savers’.

When you take money out of your RRSP account it is taxable income. But that’s not a great concern for most. If you end up with too much money in your RRSP account, well congratulations. I wish more Canadians had that ‘problem’.

A quick 30% return.

Let’s get back to the wonderful tax refund. We need to factor in that 20%, 30%, 40% guaranteed initial return from your RRSP contribution. Your refund will be based on your personal tax rate. Where else can make a guaranteed 30%. Nowhere might be the answer.

And paying some tax from your RRSP accounts is not an issue if you plan wisely. Keep in mind that the current Liberal government has promised to increase the amount of income that you can earn tax free. It’s called the Basic Personal Amount and it will increase to $15,000 by 2023.

Net, net. You can build up your RRSP account and you will be able to remove $15,000 annually. For a couple that’s $30,000. When you turn 65 and move the RRSP monies to a RRIF account, you can earn another $2000 each, tax free. That’s called the pension income tax credit. Now we’re up to $34,000 for a couple. Check that link for ‘terms and conditions’.

If we look at that 4% rule for retirement funding, you might build your RRSP portfolio to $425,000 before it gets ‘too big’.

Robb Engen of Boomer and Echo also penned that RRSPs are not a scam; a guide for the anti-RRSP crowd.

RRSP and TFSA in tax free harmony.

And now that the real tax free account can go to work. Over a 20-year period you might be able to build your tax free account to $225,000 or so. That account can be used to create income, you guessed it, tax free.

We’ll give you another $9000 of annual income each from that tax free bucket. So much for ‘tax me I’m Canadian’.

Last February I wrote Playing Catch Up With Your Retirement Portfolio for the Tangerine Forward Thinking blog. In that post you’ll see some rough calculations that includes a very generous savings rate. When you’re playing catch up you will certainly need to to have some serious free cash flow. You’ll have to look at your spending patterns and find some monies to invest. That generous and important savings rate is a constant theme with Mark Seed on myownadvisor.

Oh look, I just found $888,000 in your coffee.

And back to that core strategy, your RRSP contribution is going to be double shifting. It’s going to fund your RRSP and your TFSA. Having generous amounts in your RRSP account can be a good problem to have. You have options once you consider the government monies that you will receive from the CPP and OAS programs.

Financial planner Graeme Hughes suggests that many do not get the timing right with respect to using RRSP, TFSA, taxable accounts and government amounts. You’ll find that in …

The 3 most common mistakes of Canadian investors.

Financial planning can play an important role, eventually. You want to build your account types (RRSP/TFSA/Taxable) to the optimal proportions. That will take into account any pension amounts and other sources of income. And then you’ll need a strategy for creating retirement income in the most tax efficient and durable manner.

That usually requires assistance. You might consider an advice-only planner.

Ya gotta invest and keep your fees low.

Your savings rate needs that boost. Instead of savings accounts you can invest in low fee Exchange Traded Funds. You might build your own portfolio. If you need some assistance and a helping hand you might choose a Canadian Robo Advisor.

I hope your main takeaway from this post is that it’s not too late. With a generous savings rate and sensible investments you can build wealth in a hurry.

I know it, I lived it.

Thanks for reading. Please offer your thoughts in the comment section. You can use that contact form if you need any help.

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Dale