The RRSP is a powerful account for Canadians looking to build a wealthy retirement. It allows you to defer tax on a portion of your income, invest and grow that amount tax free, and then pay tax at your marginal rate when you withdraw.
However, there are some common mistakes that Canadians make with their RRSPs that hurt their chances of a wealthy retirement. So, it’s important to understand the rules around the RRSP before you make any moves that could hinder your retirement savings.
Today, I’ll go over two helpful tips to maximize the power of the RRSP and build towards a wealthy retirement.
Don’t make frequent trades in an RRSP
Each person has clearly defined RRSP contribution room each year, based on their previous year’s income. If you try to make a short-term swing trade and incur a loss, that money is simply gone. That’s right; you never get that contribution room back. Plus, you can’t claim the loss as a capital loss.
So, instead of swing trading (which is very risky to begin with), RRSP investors should focus on slowly and consistently growing their portfolios over time. This means investing in quality blue-chip stocks that pay solid dividends and allowing the power of compounding to take over.
One such stock is Bank of Montreal (TSX:BMO)(NYSE:BMO). I recently wrote about BMO, advising investors to keep an eye on the stock as markets continue to plunge. The stock has continued to fall since then and is looking more and more like a bargain each day.
As a major bank in Canada, BMO has solid footing for the long term. Traditionally, the banks are among the best Canadian blue-chip stocks. Yet the stock appears to be oversold amid the market crash, so buying it for cheap could help build a wealthy retirement.
As of writing, BMO currently yields 6.79%. With that lucrative yield, and assuming relatively modest growth rates on the share price and dividend, an RRSP investor could turn $50,000 into over $300,000 in 20 years with the power of re-investment and compounding. Plus, this is even assuming no further contributions are made.
Don’t blow your contribution room trying to time the markets. Simply invest in some blue-chip powerhouses, like BMO, and watch your savings grow safely.
Buy U.S. dividend stocks in an RRSP
If you’re looking to invest in U.S.-listed stocks, doing so in the RRSP might be your best bet.
Often, those looking to build a wealthy retirement compare the benefits of the TFSA and RRSP. One of the commonly overlooked benefits of the RRSP is the dividend tax relief for U.S. stocks.
Since the TFSA is not recognized as a tax-deferred account by the U.S., any dividends you receive from U.S. holdings are subject to a 15% withholding tax. So, you lose a fraction of the dividend with no way to recover it.
However, the RRSP is recognized by the U.S. as a tax-deferred account, and as such, you are exempt to that withholding tax on U.S. dividends.
If you’re looking to buy U.S.-listed stocks, specifically high-dividend stocks, you can maximize your dividends by holding them in an RRSP.
Building a wealthy retirement
Choosing the right investments is a large part of building a wealthy retirement. However, minimizing tax obligations is also a very important part of the process. In order to take full advantage of the RRSP, it’s important to build for the long term. Plus, if you’re interested in U.S.-listed stocks, the RRSP is the place to put them. Keep these things in mind as you continue the journey to creating a wealthy retirement.
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Fool contributor Jared Seguin has no position in any of the stocks mentioned.