Contact: Talbot Stevens

January 17, 2012

Phone: (519) 663-2252

Refund Strategy Key to RRSPs' Effectiveness

London, ON: "What do you do with your RRSP refunds? The answer has a huge impact on how much income your RRSP savings will produce in retirement," says Talbot Stevens, a financial speaker and author of 'Financial Freedom Without Sacrifice'.

"If you spend your RRSP refunds, as most Canadians do, you are undermining the effectiveness of RRSPs, probably without realizing it," claims Stevens.

While most of us have a good general understanding of RRSPs, many don't fully understand the different refund strategies and how they impact your retirement income. Consider being in a 40% tax bracket.

"If you put $3,000 into your RRSP, get a $1,200 refund and spend it, you've really only put $1,800 in your RRSP," Stevens explains. "We need to understand how RRSPs are before-tax dollars, and we generally only get to spend or invest after-tax dollars. If we cashed in the $3,000 RRSP in the same 40% tax bracket, we would only have $1,800 after taxes."

Sadly, spending the RRSP refund is the most common and least effective refund strategy. More effective is to reinvest the refund back into RRSPs. If the $1,200 refund was reinvested on top of the $3,000, you would have $4,200 growing -- 40% more. This is better, but not good enough.

Canadians need to be using the third refund strategy, where the equivalent before-tax dollars are contributed, Stevens emphasizes.

In a 40% tax bracket, $5,000 in an RRSP equates to $3,000 after taxes. Thus, 3,000 after-tax dollars to invest equates to a $5,000 RRSP contribution. This is easily done by temporarily borrowing $2,000 in late RRSP season to add to your $3,000 for a total contribution of $5,000. After filing taxes, you should get back a refund of 40% of $5,000 or $2,000, which completely and almost immediately repays the temporary loan.

"By simply contributing the full equivalent, before-tax amount into RRSPs, Canadians would increase their RRSP retirement income by 25-85%," Stevens calculates.

Talbot's two key points for RRSP investors this year are:

  1. Your dollars available to invest equate to much more in an RRSP, and
  2. If you don't contribute the full equivalent before-tax amount, you could be better off not using RRSPs to save for retirement.

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Talbot Stevens is a financial speaker and author of "Financial Freedom Without Sacrifice" and "Dispelling the Myths of Borrowing to Invest". For other story ideas, visit the Free Resources at For more information, contact Talbot Stevens, by calling (519) 663-2252, or emailing