Did you know that Canadians believe they need $1.7 million to retire comfortably, yet actually average just $144,000 in their RRSPs? These figures come from a survey by Bank of Montreal, a major bank with professional statisticians on the payroll – meaning the numbers are likely reliable.
It’s quite the discrepancy. If Bank of Montreal’s study is to be believed, then most Canadians have less than a tenth of what they think they need to retire on.
And yet, there are many Canadians out there who have in fact achieved the coveted million-dollar RRSP. In some cases, many times over! Seymour Schulich is rumoured to have a $250 million RRSP, while former Ontario Health Minister Michael Decter says he has more than $10 million. It’s rare, but the seven-figure RRSP can be achieved! Here are four secrets to getting a million-dollar RRSP balance, gleaned from those who have gotten there.
RRSP secret #1: Hold dividend stocks in your RRSP
It helps to hold dividend stocks in your RRSP, because stocks that only earn capital gains may not need to be tax sheltered. If you plan on holding a non-dividend stock forever, you may never pay tax on it, even in a taxable account.
We can illustrate the ‘RRSP dividend advantage’ by imagining that you held $10,000 worth of Fortis Inc (TSX:FTS) stock. Fortis has a 4.4% dividend yield, which means you get $440 in dividends per year on the $10,000 position. That would be taxed no matter what if you hold the stock outside of a registered account. Inside an RRSP, you wouldn’t be taxed until retirement. So the RRSP saves you the dividend tax for as long as Fortis is inside the account. If you hold a stock that pays no dividend for your entire lifetime, you don’t pay any taxes. So, dividend stocks like Fortis should take priority for your RRSP.
Secret #2: Join your employer’s RRSP matching program
If your employer has an RRSP matching program, you should join it. These programs give you a certain amount of “free” RRSP money up to a certain level of contribution. In many cases, the RRSP will match your contribution without reducing your cash salary. So, it doesn’t make sense not to be in the program.
Secret #3: Use the Home Buyer’s Plan
The Home Buyer’s Plan (HBP) lets you withdraw up to $35,000 from your RRSP to buy your first home. Withdrawing $35,000 is not a positive in itself; it reduces your end savings. However, the HBP is notable for being one of the few ways to withdraw from an RRSP without a tax penalty. So, if you must withdraw from your RRSP, do so under the home buyers’ plan. For any purchase other than a first home purchase, borrowing money at 5% interest is preferable to an early RRSP withdrawal for most Canadians.
Secret #4: Reinvest your refund
Last but not least, if you get a juicy tax refund at the end of the year because of your RRSP contributions, you should reinvest the contribution back into your RRSP. While it’s nice to spend money you get from the Canada Revenue Agency (CRA), it’s much better to boost your tax savings in the long run. So, get a double dose of RRSP savings by reinvesting your refund. It’s a simple way to make your RRSP go the furthest it possibly can.
