RRSP: How to Turn $12,000 Into $575,000 for Retirement

The 2021 RRSP deadline is just around the corner. Here’s a proven strategy for choosing top stocks to build a significant savings fund for retirement.

| More on:
Retirement plan

Image source: Getty Images

March 1 is the 2021 RRSP deadline to make contributions for the 2020 tax year. Investors are now taking a look at their retirement savings and wondering which stocks might be the best buys for a retirement fund this year.

RRSP vs TFSA

Canadian savers ideally max out their RRSP and TFSA contribution limits every year. Not everyone has the cash flow to do that, and choosing between the two options depends on your age and income.

For example, younger investors who will likely earn more money in future years might consider using the TFSA space first and keep the RRSP room for down the road when they are in a higher marginal tax bracket. RRSP contributions reduce taxable income, so you want to get the best tax impact possible. The goal is to pull the money out in retirement when we are potentially in a lower tax bracket than when we made the contributions.

Company pension contributions reduce the RRSP room available each year, so the top up might be a small amount and extra cash could then go into a TFSA. The RRSP limit is 18% of the previous year’s income up to a maximum level.

Best stocks for self-directed RRSP investors

The stock market crash in 2020 reminded investors that stocks carry risk. The subsequent rebound also showed that market corrections tend to provide great buying opportunities.

RRSP investments are typically buy-and-hold positions. Market dips offer a chance to add to the portfolio at cheap prices. The best stocks to own for the long haul are typically industry leaders with long track records of dividend growth supported by rising revenue and higher profits. Investors can boost their returns by using the dividends to buy additional shares.

Let’s take a look at Canadian National Railway (TSX:CNR) (NYSE:CNI) to see why it might be a good pick to start the RRSP portfolio in 2021.

Why CN stock deserves to be on your buy list

CN transports everything from lumber, cars, and finished goods, to crude oil, coal, fertilizer, and grain. These essential items are needed to keep the Canadian and U.S. economies operating efficiently. CN is the only rail carrier in North America with tracks that connect ports on three coasts. This gives the company an important competitive advantage.

CN still has to compete with trucking companies and other rail carriers on some routes. Management makes the capital investments needed to ensure the business has the capacity to meet rising demand. This includes new locomotives, additional rail cars, and track upgrades. The company also makes strategic acquisitions to drive growth.

CN generated $2 billion in free cash flow in the first three quarters of 2020. That’s impressive given the challenging economic environment. The dividend should continue to grow at a steady rate. CN raised the payout by a compound annual rate of 16% since it went public.

Investors have enjoyed great returns by holding the stock. A $12,000 RRSP investment in CN 24 years ago would be worth about $575,000 today with the dividends reinvested.

The bottom line on RRSP investing

CN should continue to be an anchor position for RRSP investors. A balanced portfolio is always recommended and the strategy of owning top dividend stocks and using the distributions to buy new shares is a proven one.

The TSX Index is home to many high-quality dividend stocks like CN and many still appear reasonably priced right now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of and recommends Canadian National Railway. Fool contributor Andrew Walker has no position in any stock mentioned.

More on Dividend Stocks

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »

sale discount best price
Dividend Stocks

1 Dividend Stock Down 11 Percent to Buy Right Now

Do you want a great dividend stock down 11% that can provide years of growth potential? Here's one heavily discounted…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Are you looking for dividend stocks to buy right now? Here are two top picks!

Read more »

edit Taxes CRA
Dividend Stocks

Tax Time: How to Keep More of Your Money

Nearly everyone hates paying taxes, although Canadians can lessen the financial pain with the right tax strategies.

Read more »