Canadians are turning their attention to investing as the deadline looms for making an RRSP contribution. When you contribute to your RRSP (Registered Retirement Savings Plan) you can lower your income taxes owed, the funds then grow tax free. It’s more than a good deal. You might contribute enough to your RRSP to generate a tax refund. Who doesn’t want a cheque from the government? With respect to your investments, you want to keep more of that money in your portfolio pocket. You want to invest in a low-fee manner. Today, we’ll have a look at how to invest this RRSP season.
The deadline for making an RRSP contribution (that can be applied to your 2023 tax return) is February 29, 2024. From MoneySense, here is a very good post that covers the RRSP basics for Canadians.
And here’s another good post from a go-to site for those looking to advance their investment knowledge. The RRSP from Get Smarter About Money.
Some important RRSP details
You can contribute up to 18% of your annual earnings. You can also carry forward any unused RRSP space from previous years.
How does the tax break work?
Let’s say you have $70,000 of earned income in 2023. You make a $20,000 RRSP contribution. You will only have to pay income tax on $50,000. The RRSP contribution reduces your taxable income for the year. In that scenario you will generate a tax refund. That would mean that you paid too much in taxes during the year in 2023, so the government will cut you a cheque.
You might then direct that tax return to your RRSP. You might invest the refund in a Tax Free Savings Account.
The maximum someone can contribute
For 2024, the RRSP contribution limit is $31,560. For 2023, it is $3o,780. It does increase each year.
Earned income of $171,000 or more in 2023 will earn the full $30,780 RRSP allowance. $100,000 of earned income would generate $18,000 of contribution room.
Unused/carry forward contribution
RRSP contribution room accumulated after 1990 can be carried forward to another year. If you aren’t able to top up your RRSP contribution this year, you are allowed to make up the difference in a later year.
On the Tangerine Forward Thinking blog I demonstrated how you might be able to play RRSP catch up.
That said, it is certainly much more beneficial to begin as early as possible and invest on a regular schedule. You want to “set it and forget it”. “Wind it up and let it go”.
Put your portfolio on auto pilot. Build wealth over time.
Get rich slow.
– smart investors
And there’s no need to be on the sidelines. Here’s a must-read post on dollar cost averaging. There’s no need to be spooked by the markets.
Tangerine Investments is a good place to set up that automatic investment plan. The money goes directly into your investment portfolio on a regular basis.
Check with your discount brokerage to see if any regular direct deposit is possible. You can certainly set up a (PAD) Pre-Authorized Deposit at Questrade.
Buy ETFs for free at Questrade
While it’s a good habit to pay yourself first (it’s a form of forced savings), you will then have to go into your Questrade account on a regular basis to place your trades. Set a reminder on your phone or laptop. It’s a wonderful habit.
Don’t ignore the RRSP, it’s a wonderful gift
The RRSP often gets a bad (and undeserved rap in Canada). The reason for the bad press is that when you take money out of your RRSP in retirement the money is taxable. But we have to balance that against two very meaningful benefits of the RRSP:
- Tax Free Growth
- Reducing Taxes Up Front
In fact, those two financial forces are so powerful that for many, the RRSP can be more useful than the TFSA. And the TFSA is incredible and true to its name. Your money grows tax free and when you take money out of your TFSA it is not taxable. It is tax-free income.
Here’s an example of the RRSP benefit in Canada by way of the wonderful RRSP vs TFSA tool at Steadyhand. An RRSP can be superior due to the fact that we usually contribute to RRSPs in a time of higher income, but retire in a period of lower income. So many costs have decreased or disappeared.
In the following scenario, $90,000 of income was invested while earning $100,000 per year (Ontario). The money (portfolio) was then used to generate $60,000 in annual income in retirement. Keep in mind that the TFSA is funded with after-tax dollars.
In the above scenario, the tax refund dollars were invested in the RRSP.
Play around with that tool and you might discover what is the right choice for you.
Invest for growth
“Investing” in a savings account will make building wealth (and any retirement) very difficult. There’s simply no growth. If you factor in inflation you are usually losing real spending power. Your money is actually going backwards.
That said, having an emergency fund in cash is important. We use EQ Bank. It is easy to use, and it was easy to set up. In fact, EQ Bank offers RRSP accounts if you’re looking to park some funds as you figure things out.
Build wealth by way of stocks and equity ETFs
You want to invest in stocks. When you invest in stocks you are owning companies that generate considerable profits. While there is no guarantee of future returns, stocks and stock markets generate about 9% t0 10% annual returns. That’s an average over long periods.
You can invest in funds or ETFs (Exchange Traded Funds) that make it easy. Those funds will hold big baskets of blue chip companies in Canada, the U.S. and around the world. In fact with ETFs it’s easy to hold one fund and own most of the big blue chip companies in the entire world. The fees are super low.
Too many Canadians are still in high-fee actively managed mutual funds with fees in the 2.0% range. Most everyone should move to index-based investing available by way of those ETFs. It’s a no brainer.
What is index investing? That post offers an explanation of ‘buying the market’ instead of paying someone to try and beat the market. Spoiler, they don’t beat, they underperform.
In a recent Globe & Mail post, Ian McGugan said that Canadian investors are bananas for not going the index-based route.
How to invest this RRSP season
You can buy and own a well-diversified global portfolio by way of a low-cost ETF – exchange traded fund. You enter one ticker symbol at your discount brokerage to purchase thousands of companies in North America and around the world. The total fees are in the 0.20% to 0.25% range. That’s about a 90% off sale compared to most Canadian mutual funds.
Check out the asset allocation ETF page. The portfolios are available at various risk levels. That post will offer some help on how to select the appropriate level of risk. If you have questions or need some guidance, feel free to contact me (Dale) via the contact form on this page.
These ETFs trade like stocks. You would open a discount brokerage account. It is a very simple process. You might open an account with Questrade where you can buy ETFs for free. Questrade is Canada’s top-rated discount brokerage (from many sources including MoneySense).
I have a Questrade account. It was a quick and simple process to get that set up. It is easy to use to build that ETF portfolio or buy one of the asset allocation ETFs.
Build it and retirement will come
You can build your own ETF portfolio. Those are simple but effective models that use these portfolio building blocks. You’d buy an ETF for each of these quadrants.
Others will choose to build a very simple and sensible Canadian stock portfolio. Here’s the Canadian Wide Moat Portfolio. You can then add in the much-needed U.S. and global diversification by way of ETFs.
Keep your fees super low
Canadians pay some of the highest investment fees in the world. Fees are wealth destroyers. ETFs allow you to invest in well-diversified global portfolios with fees in the range 0f 0.10% to 0.28%. The typical Canadian mutual fund carries total fees in the range of 2.0% to 2.5%.
Lower fees could help you generate double or triple the returns over decades. There is a negative compounding that occurs as time amplifies the effect of high fees. Even a 1% fee will decrease your returns by 30% over 30 years. Imagine what happens with 2% and more.
Have a look (and play around) with the investment fee calculator on the site of Larry Bates. Fees are wealth destroyers Larry offers.
Larry is the author of Beat the Bank: The Canadian Guide to Simply Successful Investing.
Low fee investing with advice and managed portfolios
I get it. You don’t care much about investing, but you want to build wealth over time. You want to end up here one day.
Instead of high fee mutual funds, you might consider a Canadian Robo Advisor.
A Robo Advisor will conduct a risk assessment to put you in the appropriate ETF portfolio(s). You’ll have access to investment advice.
Fees in the 0.40% to 0.80% Range
Those fees are all in. At some of the Robo Advisors, you also have access to financial planning. Don’t be spooked by the “Robo” name. You have access to humans. You are not on your own.
Many Cut The Crap Investing readers have moved to Justwealth, Canada’s best performing Robo Advisor.
In that post, you’ll see the returns for Canada’s leading Robo Advisors. You will also get a taste of how superior are the returns compared to higher fee mutual funds.
You can get it all – low-fee investments with advice and planning.
The greater financial plan
Most Canadians will benefit from a financial plan. You’ll need to make sure that you are protecting your wealth and your family. You will need to know how and where to build that wealth (RRSP vs TFSA vs non registered vs other income). And you’ll need a retirement funding plan, estate plan and more. There is a whole host of financial planning considerations.
Consult with a fee-for-service financial planner, where you’ll receive conflict-free advice. There are many options from a lower fee checkup to the full and detailed financial plan. Not everyone needs robust advice and financial planning. You can choose what is right for you.
Here’s a post that covers the financial planning basics and checklists.
Cashflows & Portfolios
The self-directed investor might also consider the service provided by Mark Seed from My Own Advisor. He runs Cashflows & Portfolios where they will provide options for that optimal retirement funding strategy. That service is provided for a very reasonable fee.
In the wealth building stage they can also have a look to make sure you’re on the right path. If you do head to Cashflow & Portfolios, be sure to tell them Cut The Crap Investing sent ya.
See you in the comment section
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How to invest this RRSP season? What’s your take, please share your thoughts.
And as always, feel free to reach out by way of the contact form.
RRSP season – oh, it’s the best time of the year!