How Do You Max Your RRSP?

Posted by Canadian Dream on February 16, 2011

So are you sick of RRSP season yet?  Well if so, might I propose a different point of view on it. Why is it no one talks about how exactly do you max out your contribution every year?  We all know the limit is 18% of your previous years income, but that is a lot of money to have to save for most people.   Heck until recently I didn’t even max out each year, so how do you do it?

Well to be honest it does get easier as you earn more.  After all your basic expenses don’t change that much regardless of what income you make, we all have to eat, pay taxes and your power bill.  So when you are earning more than $60K a year, saving for your RRSP is easier.  Yet beyond earning more, what can a person do?  Well here is my list of other ideas:

1. Make it Easy.  Make your contributions automatic so you don’t have to come up with any lump sums at the end of the year.  You are more likely to get to your goal in little steps rather than trying for big leaps.
2. Get the Free Money. If you have a defined contribution plan or group RRSP that gives you a matching amount on your contribution from your employer, make sure you are collecting every dime.  Free money doesn’t happen often so fill out those forms now and get it.
3. Pay Less Tax Today.  Saving can be hard with your tax bill on each cheque, so if you sign up for an automatic RRSP contribution plan outside of your pension, make sure to fill out a T1213 form (deduction from source).  This allows your employer to give your tax refund on every cheque rather than in one lump some at the end of the year. Depending on how tight your cash flow is that makes the savings a lot easier to do.

Ok, but how do these work to really get you to that 18% limit?  Well it goes something like this.  First get that free money from an employer match, so if you put in 5% and then put in 5% that brings you up to 10% in total.  Then if use that T1213 form you can sign up contributing that last 8% yourself, but here is the kicker.  If you are getting a 30% tax refund on that money, for example, you then only have to come up with the remaining 5.6% of your salary each month (or 0.70 * 8%).  Why?  Well because the remainder will come out of the money you use to be paying taxes with.  So that way with only putting in 10.6% of your own salary you end up hitting your maximum RRSP contribution every year. Now isn’t that a lot easier than trying to save up 18% of your salary yourself?

So do you max out your RRSP each year?  If so, any other tips for people?  If not, why don’t you max out?

An Investment Puzzle

Posted by Canadian Dream on February 3, 2011

I finally got my account summaries for three of our accounts last week and I was a little surprised by the investment returns.  You see my wife’s RRSP, my RRSP and my LIRA accounts were all setup with the same set of index mutual funds and same asset allocation.  As such they should in theory produce the same return.  Yet the fact was in 2010, that didn’t happen.

The variation wasn’t huge, in fact the accounts got 8.24%, 8.5% and 9.18% returns which is to be expected since both the RRSP accounts continue to get contributions while the LIRA account does not. So my RRSP gets even contributions all year long while my wife’s RRSP tends to be topped up in the last quarter.  Yet here is the interesting part.  Guess which account had the highest return?  Come on now, give it a second and pick which account in your head.

Ok, are you ready? The account the got the highest return of 9.18% was the LIRA account with no contributions at all.  Huh?!  Didn’t Robert just have a post about funding flows and how the affects your returns?  Shouldn’t putting in money during the last year helped the returns rather than reduce them?  Well this is where things get interesting.

Since I can’t contribute to the LIRA account I tend to not look at it closely except during when I usually do my annual rebalancing.  Yet last year the funds hadn’t shift that far in that account so I decided to skip rebalancing the LIRA account and rebalance only the RRSP accounts.  This has resulted in a slightly overweighting in the Canadian index funds which was the second best performance out of the asset classes.  Thus giving in the end the slightly higher return at the end of 2010.

So obviously you don’t need to rebalance every year and in some cases that might even help you out.  While this wasn’t my intent, these results are making me consider if I should bother balancing every year or instead use a 5% shift rule where I have to see a drift of at least 5% off the original asset class prior to rebalancing (ie: if I’m trying for 25%, I would only rebalance when it hit either 20 or 30%).  So what method do you use to rebalance and how has it worked for you?