5 RRSP Investing Tips You Must Know - Casual Money Talk (2024)

Remember 2015? It was certainly an eventful year.

Adele released “Hello”
All-day breakfast at McDonald’s became a reality
Picture of a dress went viral (it was actually black and blue)
A chicken had started tweeting
Adult coloring books finally caught on

What else?

Oh, I almost forgot: 5,989,810 Canadians made RRSP contributions in 2015, with the median annual contribution being CA$3,000.

As much as I enjoy Sausage ‘n Egg McMuffin, impromptu color blindness tests, cute chicken, belting out pop ballads, and coloring outside the lines, that last piece of info interests me the most.

So let’s continue talking about RRSPs, shall we?

RRSPs are pretty damn awesome.

Let me count the ways:

You could save for a comfortable retirement by investing in a wide range of financial products inside your RRSP
The Home Buyers’ Plan lets first-time homebuyers withdraw up to CA$25,000 to be used as a down payment
The Lifelong Learning Plan allows students to withdraw up to CA$20,000 to finance their full-time education
RRSP contributions are tax-deductible
Investment gains inside an RRSP are tax-deferred
You can carry forward unused contribution room indefinitely

Real talk: you probably don’t need someone to hype up RRSP for you. You’re here to find out one thing and one thing only: how can you optimize your RRSP to make it work harder for you?

Here are my top RRSP tips for you:

1. Diversify, Diversify, Diversify

If you’ve ever been to the casino, you know not to bet all your chips on a single number in roulette. Instead, you spread your chips around, giving yourself more chances to win and mitigating the risk of losing everything at once.

The same diversification technique applies to investing as well – you wouldn’t want to hold a single stock in your RRSP and nothing else. Even the most awesome wide-moat stocks aren’t shielded from the impacts of rising inflation, political instability, and force majeure.

So how do you keep your RRSP account well-diversified?

2. Keep Your Fees Low

Fees eat into your RRSP’s gross returns, so minimizing fees maximizes long-term investment performance.

While you usually can’t get around paying trade commissions, other fees can be avoided.

If you hold mutual funds, you’re paying for Management Expense Ratio (MER), which could easily carve off 2% of each year’s gains. Considering that mutual funds underperform the S&P 500 over the long haul, 2% is a hefty price to pay for mediocre performance.

3. Contribute Early

In my mid-20s, I made the silly mistake of believing that the main benefit of RRSP lies in the tax deduction. As long as I contribute the maximum amount by the deadline, it would be all good. Back then, I would contribute CA$250 each month, and then make a huge contribution during the “RRSP season.”

In hindsight, it wasn’t ideal to wait until the last minute. I missed out on a full year of compounding gains, not to mention that it was tough to come up with all the cash at once.

Don’t make the same mistake I did.

If you could, make your contributions as soon as possible and let the power of the compound effect kick in earlier. This is a simple way to helpyour investment dollars go further over the long run.

4. Dollar-Cost Averaging

You might be thinking: I wish I could make early RRSP contributions every year, but I just couldn’t swing it given my budget.

No problem, try the dollar-cost averaging method instead.

Using the dollar-cost averaging technique, you contribute a fixed amount into your RRSP each month, and buy the same amounts of investments each month, regardless of prices.

Here’s how it works in practice:

Let’s say your contribution limit for 2018 is CA$5,000, which means you could contribute CA$416 per month over 12 months (I’m assuming that contributions made in the first 60 days of the year are always claimed in the previous tax year).

You decide to only hold 2 ETFs: XIC and VYMI.

Using the dollar-cost averaging method, you purchase CA$208 worth of XIC and CA$208 worth of VYMI every single month.

The results? More shares of XIC and VYMI would be purchased when prices are low, and vice versa.

The best part: You never ever need to speculate or stress over whether the market is bullish or bearish. You could just relax and watch your money grow over time. That, to me, is priceless.

Bonus tip: automate your monthly RRSP contributions.

5. Borrow to Maximize Your Contribution

If all else fails and you are a high-income earner, it wouldn’t be the worst thing in the world to borrow money to maximize your annual RRSP contributions ― in some cases.

As a high-income earner in a high tax bracket, having a tax minimization strategy is more important to you.

Whatever amount you decide to contribute to your RRSP will be deducted from your taxable income, thus lowering the tax you have to pay. Therefore, you have extra incentives to maximize your RRSP contributions.

Let me clarify that this is not a suitable strategy for all high earners, because it largely depends on:

The interest rate on your loan
Your ability to repay the loan and interest swiftly
If your RRSP is earning a good rate of return
Your tax deductions
Your investment horizon

If you’re investing for the long haul, able to secure a loan with an interest rate lower than your RRSP’s rate of return, can confidently pay it back quickly, and the extra tax deduction justifies the borrowing, then MAYBE you should consider it.

Be conservative. Please consult a financial advisor before proceeding with this strategy.

Final Thoughts

For most Canadians, RRSP might be the single most important element of their retirement planning strategy.

As such, if we could get the most out of our hard-earned money by applying a few simple RRSP investing tips, wouldn’t it be great?

To summarize, keep your RRSP holdings diversified, contribute early or regularly, keep your fees low, and only when it’s necessary, borrow to invest.

Good luck!