3 Lesser-Known Reasons to Invest in an RRSP

The RRSP has so many more benefits that investors might be unaware of, and can be used for your benefit right away! Especially with these two stocks.

| More on:
Senior housing

Image source: Getty Images

The Registered Retirement Savings Plan (RRSP) is a strong investment strategy Canadians can use for their retirement goals. But if you’re a younger investor, it can be difficult to make it a priority. After all, retirement is so far away, and you don’t even have a house yet!

But that being said, there are certainly some strong reasons to invest in an RRSP right now. So let’s get into them, and how you can make an investment that would work for you right away.

Spousal benefits

A strong benefit from the RRSP is that you can use it in tandem with your spouse. First off, you could consider a spousal RRSP. This method allows higher-earning spouses to contribute to an RRSP in the name of their lower-earning spouse. Upon retirement, withdrawals are taxed in the hands of the lower-income spouse, potentially resulting in overall tax savings.

Furthermore, during retirement, RRSP withdrawals can be strategically planned to minimize taxes by spreading income over multiple years or taking advantage of lower tax brackets, especially if one spouse has a significantly lower income than the other.

All together, by working with your spouse you can lower your taxes each year, saving you money! And that will help you in retirement as well.

Higher limits

While the Tax-Free Savings Account (TFSA) is, of course, tax-free, the TFSA has limits. Although there are still limits with the RRSP, there are far higher limits. This higher contribution limit allows investors to shelter a larger portion of their income from taxes, thereby maximizing their retirement savings potential. 

The maximum RRSP contribution limit for a tax year is subject to change and is influenced by factors such as changes in the annual inflation rate. Furthermore, RRSP contribution room accumulates over time, and any unused contribution room can be carried forward indefinitely. 

This means that if you don’t contribute the maximum allowable amount to your RRSP in a given tax year, the unused portion can be carried forward to future years. This feature allows individuals to catch up on their retirement savings in years when they have more financial capacity to do so.

Wide-ranging investment options

Not only are there tax benefits and contribution room that carries forward, but there are also a wide range of investment options. RRSPs offer a broad array of investment options, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), guaranteed investment certificates (GIC), and more. This flexibility allows investors to tailor their RRSP portfolio to their risk tolerance, investment goals, and time horizon.

In fact, I would recommend several different investment options to create a diversified retirement portfolio. You could set up a GIC that comes to term in the next 20 years for instance! On top of that, an ETF can provide you with long-term growth as well.

But there are other options in case you decide you want to retire early, or need to take out RRSP contributions early. That would include things like parental leave, or buying a home. In this case, coming up with some higher growth options that include dividends can be a big benefit.

Two options

Options I like right now are Canadian National Railway (TSX:CNR) and the BMO Canadian Dividend ETF (TSX:ZDV). CN Rail is one of Canada’s Class I railways, providing transportation services for various commodities across North America. CNR has a solid track record of dividend growth and benefits from the economic moat created by its extensive rail network. It offers a 1.95% dividend yield, with shares up 11% in the last year.

Meanwhile, ZDV aims to replicate the performance of the Dow Jones Canada Select Dividend Index, which includes Canadian stocks that have a history of consistently paying dividends. The ETF provides exposure to dividend-paying companies across different sectors. It offers a 4.36% dividend with shares up 7.4% year to date! Together, these cash-gushing investments can be reinvested back into your future and near-term goals.

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.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Canadian National Railway. The Motley Fool has a disclosure policy.

More on Retirement

Retirees sip their morning coffee outside.

Here’s the Average RRSP Balance at Age 65 and 71 in Canada

Canadian investors can consider holding dividend stocks and supplement their CPP and RRSP payouts in retirement.

Read more »

Piggy bank and Canadian coins

Dividend Fortunes: 2 Canadian Stocks Leading the Way to Retirement Wealth

Here are a couple of dividend stocks to help investors get started on retiring wealthy.

Read more »

A close up image of Canadian $20 Dollar bills

Passive Income: How to Make $415 Per Month Tax-Free

This tax-free investing strategy can reduce risk and boost returns.

Read more »


Retirees: Here’s How to Boost Your CPP Pension

Here's how Canadian retirees can boost their CPP payouts by investing in blue-chip dividend stocks in 2024.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

TFSA Investors: 2 Dividend Stocks I’d Buy and Hold Forever

These two stocks could provide long-term investors multi-year returns of more or less 10% per year

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog

How to Build a Tax-Free Retirement Income Using Your TFSA and RRSP

If you're worried about retirement income, worry no more. Use your TFSA and RRSP to create retirement income for life!

Read more »

Person holds banknotes of Canadian dollars

TFSA: How to Earn $4,750 in Tax-Free Passive Income Per Year

This strategy can help boost passive income and reduce portfolio risk.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

Avoid These TFSA Pitfalls to Keep More of Your Money

Investors continue to make many mistakes in a TFSA, so let's look at how to overcome them with these tips,…

Read more »