The Registered Retirement Savings Plan (RRSP) is the one savings account I continue to put cash towards, no matter what — even if it means I only have around $50 to spend on myself for the month, I want to consistently contribute.
There are many reasons, but, of course, the main goal is to create a large amount of wealth for when I retire. But the problem is that putting money into it doesn’t necessarily mean that I’m going to reach millionaire status.
So, let’s look at some tips from investors who have reached millionaire status. With that, here are the top five secrets that you may not know about becoming an RRSP millionaire.
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1. Plan with your spouse
If you have a partner, consider utilizing your spouse’s RRSP as well. This is a strategy employed by couples where you can split retirement income and potentially reduce taxes in retirement. Spousal RRSPs are those where the spouse can contribute to their partner’s RRSP. So, the contributor gets the tax deduction for the contribution, but the owner will eventually be able to withdraw the funds. This helps create a balanced retirement income between spouses, especially if one is in a higher tax bracket.
2. Maximize unused contribution room
As mentioned, I put aside whatever I can. However, if you have the means, it’s ideal for you to maximize your unused contribution room. Those with millionaire status already will do this and make up for previous years. This can create a tax deferral on investment growth. Investors could even consider borrowing got contribute and maximize RRSP contributions, especially when anticipating higher future income or tax rates.
3. Contributing “in-kind”
Another strategy used is contributing “in-kind,” which is when individuals can trade investments held outside of a registered account, such as an RRSP, and put it directly into the RRSP. This can be tax efficient, sheltering investments from immediate taxation, especially if they’ve appreciated significantly in value. It also avoids transaction costs, such as brokerage fees or bid-ask spreads.
4. Planning withdrawals
Millionaire investors are also likely to optimize their withdrawals. This would involve strategically planning when they will withdraw RRSP amounts to avoid taxes in retirement. And that allows them to spread out withdrawals over multiple years, coinciding potentially with lower income years.
5. Tax-efficient investing
Finally, millionaires will likely choose investments strategically, optimizing their asset allocation to align with their overall investment goals. This will include investments that allow tax advantages. Think dividend stocks or growth-oriented investments that will include long-term capital gains.
This means instead of paying capital gains on dividend income and growth, you can safely stow it away. This means you can safely invest long-term in a company such as Royal Bank of Canada (TSX:RY), which offers plenty of long-term value.
RBC stock currently offers a dividend yield of 4.1% and has performed the best even during this downturn — and that’s par for the course when looking at past downturns as well. What’s more, there is a lot more growth coming with its acquisition of HSBC Canada. So, even with shares near 52-week highs, I would consider this a strong long-term purchase, especially when investing early and often in your RRSP.
