Last month a reader asked for my take on RRSPs (401K plan equivalent.) This topic is long so I’ve broken it up.
The truth is, I like the RRSP, but probably not for the same reasons as other people. The basics of how RRSPs work is they defer our taxable income to another year when we’ll hopefully be in a lower tax bracket. I suppose this why it’s called the Registered Retirement Ravings Plan. So it must be used as a retirement vehicle right? Nope. Please don’t let yourself be fooled by this misleading naming convention <(｀^´)> We must never trap our minds into thinking that way. It’s like if we believe the Tax Free Savings Account is meant to be used as a “savings account,“ then we’ll never realize the TFSA’s full potential. To become successful investors, we have to look at the bigger picture. We must convince our minds that the RRSP, despite its name, is not about retirement. Instead it should be thought of as a wealth creation tool to mitigate taxes and maximize prosperity. Retirement planning is just one aspect of the RRSP, but it can be used for so much more. Here’s why. All capital is fungible. Remember those words. It’s probably the best advice I’ve given on this freedom 35 blog in awhile. Because as soon as we earmark certain money for retirement, savings, vacations, emergencies, or anything else, we put limitations on what our money can do for us. We must think outside the box, be flexible, let money flow in the path of least resistance, and remember that even RRSPs are fungible and liquid sources of capital.
image source: savethebills.com
One use for an RRSP is to put a mortgage into it. (This is not related to the HBP)
RRSP holders can lend money in the form of a mortgage to property investment companies. This is basically a secured loan where the RRSP holder earns interest on a mortgage. It’s like a debt instrument that should give us better returns than current bond yields today. The lender and the property owner set the terms together through a trustee (such as a bank) and the loan is secured by the real estate. If that’s not quite clear ಠ_ರೃ , here’s a simple way to think about it: You know how you can get a mortgage from a bank to buy a home? Will now imagine YOU are the bank, and someone else wants a mortgage from you. So you give them the mortgage, eg: $100,000. and they pay you back over time with interest. Interesting huh? Some investors are unaware they can do this. There are start-up and ongoing costs to hold a mortgage inside an RRSP so I haven’t done this yet myself because I need more money first to make the investment feasible (・へ・) So I can’t speak from experience, but one day I might use this strategy.
There are many other reasons why I like the RRSP, and most of them have nothing to do with retirement either.
Next time, I’ll explain how I use my RRSP as an emergency fund \(^_^)/
fungible: Interchangeable. Can be replaced and moved around easily.
trustee: A 3rd party company that has the legal obligations to deal with matters without any conflicting interest.
At the end of the day, I am still not a big fan of RRSPs. There seem to be so many restrictions on using your own money.
They’re often too complicated and not very ideal. I much prefer the TFSA which I always max out first every year.