The Registered Retirement Savings Plan (RRSP) was introduced in 1957 to help Canadians prepare for the sunset years by growing retirement savings. While you can make contributions whenever you like, the sooner you put money into your RRSP, the better.
RRSP users can go into overdrive in utilizing this powerful investment account. Three strategies can help achieve long-term financial goals and even unlock future wealth.
Maximize yearly contributions
The Canada Revenue Agency (CRA) sets RRSP dollar limits yearly or 18% of earned income in the previous year, whichever is lower. Because the RRSP is tax-assisted, the contributions translate into tax savings. Those who contributed before the February 29th deadline realized lower tax bills for income year 2023.
Remember the RRSP’s salient. You can deduct contributions against income. The dollar limit for 2023 is $30,780, but if you did not contribute the maximum, the unused contribution room carries forward into 2024.
Earn tax-free passive income
Besides shrinking your tax payables, savings grow faster because money growth is tax-free. For example, investing in Enbridge (TSX:ENB) and holding the stock in an RRSP is wise. The top-tier energy stock trades at $48.05 per share and pays a 7.73% dividend.
The $102 billion energy maintains a low-risk profile because of its utility-like business model. According to management, sustainable dividend growth is integral to Enbridge’s investor proposition. Given the 27 consecutive years of dividend increases, you have a dividend growth engine in Enbridge.
“The visibility, duration, and low-risk profile of our growth, which underpins our growing dividend, is stronger than ever,” said Greg Ebel, president and chief executive officer (CEO) of Enbridge. If you own $32,490 worth of shares (the 2024 maximum limit), you will generate $627.27 tax-free quarterly dividend income. However, you only pay taxes on money withdrawn for the RRSP.
Invest for income and stability
Building retirement wealth takes time so investing for income and stability is one of the best RRSP strategies. Canadian Imperial Bank of Commerce (TSX:CM), Canada’s fifth-largest bank, is a rock-solid investment and an ideal anchor holding. This $62.4 billion bank has a 156-year dividend track record.
At $66.56 per share, current investors enjoy a 4.33% year-to-date gain in addition to the lucrative 5.43% dividend yield. Like Enbridge, CIBC’s payout frequency is quarterly. A $32,490 investment transforms into $441.05 in quarterly income. If you reinvest the dividends every time, the money will compound to $93,500, more or less, in 20 years.
In the first quarter (Q1) fiscal 2024, revenue and net income rose 5% and 16.4% to $6.22 billion and $1.72 billion versus Q1 fiscal 2024 despite higher provision for credit losses (PCL). The PCL increased 98.3% year over year to $585 million. CIBC president and CEO Victor G. Dodig said the quarterly results reflect the success of the bank’s client-focused strategy.
“We have clear momentum in attracting and deepening client relationships, underpinned by continued expense discipline, a robust capital position, and strong credit quality,” added Dodig. He believes CIBC has a strong foundation in fiscal 2024.
Live the good life
The three RRSP strategies can unlock wealth and make millionaires out of account users. If you implement them soon, expect a worry-free and good life in the sunset years.
