Did you know that there are 5.9 million RRSPs in Canada? It’s true. The way we know it’s true is the data comes from Statistics Canada, the agency responsible for aggregating and presenting Canada’s most important statistics. In a country with 5.9 million RRSP holders, you’d have to imagine that a few of them hold significant sums of money in their RRSPs. Indeed, many Canadians do hold large sums of money in their RRSPs. It has been rumoured that businessman Seymour Schulich has a $250 million RRSP. Politician Michael Decter has a $10 million RRSP – unlike Schulich’s, this one is confirmed by the holder.
If you acquire a million dollar RRSP balance, you can safely assume that you will have some income coming in in retirement. However, getting a $1 million RRSP balance in the first place isn’t so easy. It takes 24 years of compounding at 10% to achieve a $1 million RRSP balance if you start with $100,000. It’s a long road to a million dollar RRSP, but you can do it if you try. In this article, I will explore three secrets of RRSP millionaires that you can use on your own path to RRSP riches.
Secret #1: Diversify abroad
One great thing to do with your RRSP is to diversify abroad. Unlike the tax-free savings account (TFSA), the RRSP can spare you the withholding tax on foreign dividends. Many foreign countries, including the United States, charge taxes on foreign shareholders. America’s withholding tax is 15%. You can’t avoid these taxes in a taxable account or in a TFSA You can, however, avoid them in an RRSP. So, if you’re going to be holding foreign stocks, consider holding them in the RRSP. Such stocks get the best tax treatment when held in an RRSP.
Secret #2: Don’t make early withdrawals
A second key to maximizing your RRSP wealth is to avoid making early withdrawals. When you withdraw from your RRSP early, you typically pay high taxes on the amounts. The reasons for this are twofold: one, withdrawals have automatic withholding taxes taken from them; two, you’re likely still working if you’re making early RRSP withdrawals. When you are employed, your income gets taxed in “stages” known as brackets. The higher your tax bracket, the more tax you’ll have to pay on RRSP withdrawals. So, it is best to wait until you are fully retired and not receiving any employment income before you withdraw your RRSP money.
Secret #3: Pick good investments
Last but not least, it pays to make good RRSP investments. The RRSP has essentially no benefits if you don’t invest. The whole benefit of the RRSP is the years of tax-free compounding you enjoy. In order to compound, you have to invest. Some good assets to invest in include index funds, GICs, and dividend stocks.
Consider Alimentation Couche-Tard (TSX:CSU), for example. It’s Canada’s biggest gas station company, operating hundreds of Circle K locations nation-wide. It also owns different gas station/convenience store chains in the U.S. and abroad. Recently, the stock price dipped after its earnings missed estimates, leading to the price falling to an attractive level.
“Maturing” stocks like Alimentation Couche-Tard tend to be good for retirement portfolios because they are stable and dependable. ATD’s management team re-invests most of its money into running ATD, which results in a situation where the company can grow without huge amounts of borrowing. Over the years it has done just that, growing rapidly while maintaining a low debt-to-equity ratio. On the whole, ATD is a good RRSP stock.
