RRSP Gross-up Strategy – Easily Contribute 40-70% More to Your RRSP (Updated)

Wouldn’t it be great if you could save a lot more for your future without affecting your day-to-day cash flow?

One of the main things you learn from your retirement plan is that you need a lot more to retire comfortably than you may have thought. But with all the day-to-day expenses, it can be difficult to find the money to contribute as much as you would like to your RRSP.

The RRSP gross-up strategy is a simple strategy that can be a game-changer for you. It can enable you to easily contribute 40-70% more to your RRSP – every year.

The strategy works if you already expect a tax refund. If you contribute monthly to your RRSP or have various tax deductions or credits, you probably expect a tax refund.

The RRSP Gross-up Strategy can be a life-changer if you have lots of RRSP room. Canadians have nearly $1 trillion available contribution room.

It is smart to gross-up every RRSP contribution you make.

What you will learn:

• Why contribute to your RRSP?
• What is the optimal amount for you to contribute?
• How contributing 40-70% more can be life changing.
• What is the RRSP Gross-up Strategy?
• Real life examples.
• RRSP Gross-up formula.
• How to estimate your tax refund accurately.
• What is the RRSP Catch-up Strategy.
• How to combine the RRSP Gross-up + RRSP Catch-up Strategies.

RRSP Gross-up Strategy

You have 3 options with your tax refund:

1. Spend it.
2. Invest it.
3. RRSP Gross-up Strategy.

Here is how the RRSP gross-up strategy works. Instead of investing your tax refund when you receive it in March, you contribute a gross-up amount in February that will be refunded by your tax refund.

For example, if you have been contributing $1,000/month to your RRSP and are in a 40% tax bracket, you should already get a tax refund of about $5,000. Instead of investing the $5,000 refund when you receive it in March, you can invest $8,333 in February during RRSP season. Use cash or a credit line temporarily. Contribute $8,333 in February. In addition to your $1,000/month, you have contributed $20,833, which gives a tax refund of $8,333 to pay you back for your contribution. This strategy magically means you have contributed $3,333 more to your RRSP.

This did not affect your cash flow. You can make the February contribution from cash or a credit line. You get it back a month or 2 later.

The formula is:

Expected tax refund / (1-Marginal tax rate) = Gross-up

$5,000 / (1-40%) = $8,333

With the RRSP gross-up strategy, you contribute $8,333 in February during RRSP season, instead of just your $5,000 tax refund in March. This is a 67% larger contribution.

We have just created an extra $3,333 in your RRSP and have not used any money from your day-to-day cash flow!

Benefits

This may be a simple strategy, but the benefits are huge, especially if you do this every year.

Over 30 years, this one little strategy can add over $1 million to your retirement nest egg compared to spending your tax refund, and over $400,000 more compared to contributing the tax refund. That’s huge!

If your figures are larger, it can be a far larger bonus for you.

Your tax refund:

Do you have plans for spending your tax refund? If not, then the RRSP gross-up strategy is perfect for you.

For many people, though, they want to use it for a trip, a home improvement, or to pay off a debt. The main reason they contribute to an RRSP is to get a tax refund.

Your tax refund may feel like free money, but it is not. It is a loan from the government. Remember, you have to pay the tax back when you withdraw from your RRSP.

Most importantly, if you spend the refund, will you have enough to retire with the lifestyle you want?

People that have a retirement plan are much more likely to do an RRSP gross-up. One of the biggest benefits of having a retirement plan is that it changes your focus to thinking long term. You know how much you need to save to become financially independent, so you focus on how best to find the money to contribute.

It is much easier to use your tax refund effectively than to find an additional $8,333 ($700/month) from your monthly cash flow somehow – right?

“Never put dry pasta into your RRSP.”

Talbot Stevens advises to gross-up all your RRSP contributions in his book “The Smart Debt Coach”. He compares the smaller dry pasta to your after-tax cash, and the larger cooked pasta to your before-tax dollars.

When you gross-up your contribution, you are putting your before-tax dollars into your RRSP.

“Never put dry pasta into your RRSP.” In other words, it is smart to gross-up all of your RRSP contributions every year.

Estimating your refund accurately

The RRSP Gross-up is purely a tax strategy, so the only risk is estimating incorrectly. If you estimate a gross-up of $8,333, but then your tax refund is only $6,000, you are short the difference.

A good estimate includes looking at your total income, including taxable benefits, and all your tax deductions. Contributions to a group RRSP or pension do not give you a tax refund. Looking at the expected changes from your last year’s tax return can be very helpful.

You should also know how your income relates to the tax bracket. For example, you contribute $8,333, but only half is in the 40% tax bracket and the other half pushes you down to the 30% tax bracket. Your tax rate on the $8,333 is lower, so you should estimate a lower gross-up.

We add a lot of value for our Full Service clients here. We know all about our clients’ finances. We know what their optimal RRSP contribution is. We can quite accurately estimate their tax refund. In RRSP season, we do Financial Plan reviews and often recommend an RRSP Gross-up. We can take their tax return for last year from our software, change all the figures to this year’s figures, so we can accurately calculate the RRSP Gross-up that should work for them.

Here are the tax brackets for Ontario for 2023:

It’s simpler to think in major tax brackets:

Why contribute to your RRSP?

Does it make sense to focus on larger RRSP contributions? You have only so much money. Shouldn’t you do some TFSA & some RRSP?

There is a factual method to figure this out. Figuring out mathematically what is best is better than just doing some of each.

RRSP or TFSA? TFSA is no tax, but RRSP may be more tax or less tax over your life. It depends on your marginal tax bracket when you contribute compared to when you withdraw.

If your marginal tax bracket is higher today than you expect it to be after you retire, then RRSP contributions have a tax advantage over TFSAs. If you have a Financial Plan, you will know your expected marginal tax bracket after you retire.

For example, contribute and get a refund of 40%, let it grow for many years and then withdraw paying 20% tax on it. You saved 20% of the full balance of your RRSP.

Most people will be in a lower tax bracket after they retire. You can plan to be in a lower tax bracket. Therefore, for most people, this is the most effective place to save for your retirement.

Optimal RRSP Contribution

Your optimal RRSP contribution takes into account 6 factors. Knowing this figure is critical for you to get the best use of every dollar.

1/ RRSP contribution necessary to achieve your retirement goal.

If you have a Financial Plan, you will know this amount.

2/ Contributions necessary to maximize your lifetime RRSP room.

Lifetime RRSP room is today’s room + expected new room until you retire.

3/ How much you can contribute in your current marginal tax bracket.

For example, the 40% marginal tax bracket starts at $102,000/year so contribute enough to reduce your taxable income to $102,000.

If you have a lot of RRSP contribution room, you may need to include the next lower tax bracket.

4/ Your current RRSP room.

5/ Your available cash (or how much you could borrow). With the RRSP Gross-up Strategy, it’s your cash plus the gross-up.

6/ Target RRSP refund. With the RRSP Gross-up Strategy, plan to get the refund you want.

RRSP Catch-up Strategy:

If you have a lot of RRSP room, the RRSP Catch-up Strategy can be a game-changer for you. Contribute it all at once. Get a huge jump in your retirement lifestyle.

You don’t have to deduct it all in one year. You can carry forward as much as you want, if it gives you a significantly larger refund next year or the year after.

Every case is unique. It takes creativity to work out how large of a catch-up to do, how much to deduct each year & how much to carry forward, the best use of your large refund(s), and how to fit this into your retirement plan.

Here is an example that works. Note all the pieces involved. Don’t worry if you don’t understand every detail. Note the concept of catching up your RRSP room with minimal use of your cash flow.

Example:

• You have $200,000 RRSP room.
• Earn $150,000.
• Optimal contribution in current 40% tax bracket is $50,000/year.
• You get $30,000/year of new RRSP room.
• You have $30,000/year cash available.

Note: Just contributing the $30,000/year won’t even reduce your RRSP room.

Principles behind this example:

1. Your goal is to maximize your RRSP contribution room and keep it maximized. Your $30,000/year cash flow can keep it maximized for future years, so you only need $200,000 for this year.
2. You can use your tax refunds to make your higher mortgage payments.

RRSP Catch-up Strategy Steps:

1/ Refinance your mortgage to contribute $200,000. Your RRSP room is maximized.

2/ Deduct $50,000 to get a refund of $20,000 (40%). Carry forward $150,000 of the contribution.

3/ Contribute your $30,000 cash flow to keep your RRSP room maximized every year.

4/ Next 7 years, deduct $50,000 RRSP. This is your $30,000 contribution + $20,000 of your RRSP carryforward. Get a refund of $20,000.

5/ Use your $20,000 tax refund to make your higher mortgage payment. Pay off the extra $200,000 on your mortgage in 12-13 years by increasing your payment by $20,000/year ($1,700/month).

6/ In 8 years, your $150,000 income should rise by more than enough to maintain the higher mortgage payment for 5 more years.

Your RRSP carryforward deductions last 7 years. After that, your tax refund should only be $12,000/year ($30,000 RRSP contribution from cash flow), instead of $20,000/year.

Result: You have maximized your RRSP room and kept it maximized. It does not affect your cash flow for the next 7 years. You can easily manage the last 5 years. You retire more comfortably.

RRSP Catch-up + RRSP Gross-up:

You can combine the RRSP Catch-up + RRSP Gross-up Strategies to be even more effective. Again, every situation is unique. You need creativity to work out the optimal strategy for you.

The last example was not the best example, since we would likely not carry forward $150,000 RRSP deductions and deduct them over 7 ½ years.

It is often worthwhile carrying forward RRSP deductions for a larger refund next year, but not too many years. Deducting more now and investing the larger refund might be better than the larger refund next year.

Combining the RRSP Catch-up + RRSP Gross-up Strategies is more efficient, as long as you do the gross-up every year.

Here is another example that works. Note all the pieces involved. Don’t worry if you don’t understand every detail. Note the concept of combining RRSP Catch-up + RRSP Gross-up is more effective.

Principles behind this example:

1/ Your optimal RRSP contribution is $50,000/year.

This is all at the 40% tax bracket.

It is enough to maximize your RRSP room before you retire.

2/ It is worthwhile carrying forward RRSP deductions for 3 years, but not more.

You get a refund of $20,000 (40%) on the first $50,000/year you deduct and only $15,000 (30%) on the next $50,000. But you can deduct more, get your $15,000 refund now and invest it to grow it to more than $20,000 in 3-4 years.

3/ With the RRSP Gross-up Strategy, you can contribute $20,000/year in February every year to be repaid by your tax refund in March.

Example: Same situation. You have $200,000 RRSP room + $30,000/year new room. You earn $150,000. You have cash flow to contribute $30,000/year.

In the last example, we used your $20,000/year tax refund for your higher mortgage payments. Instead, we could use your tax refunds for your RRSP gross-up RRSP every year.

With the Gross-up, your RRSP catch-up is smaller. You will need only about $10,000/year for higher mortgage payments, so you can make the higher payments by reducing your RRSP contributions from cash flow from $30,000/year to $20,000/year.

With the RRSP Gross-up this year, you can borrow $20,000 from a credit line in February to be repaid by your tax refund in March, so you only need $30,000 to make your optimal $50,000 contribution for this year.

If you contribute $20,000/year from cash flow + $20,000/year from the RRSP Gross-up, you need $10,000/year more for your optimal RRSP contribution.

We want to plan to for this year and 3 more. You need $30,000 for this year + $10,000/year for 3 years. Total is $60,000. Not the full $200,000.

RRSP Catch-up + RRSP Gross-up Strategies Steps:

1/ Refinance your mortgage to contribute $60,000.

2/ Contribute $20,000 from a credit line in February for the Gross-up to be repaid by your refund.

3/ Deduct $50,000 to get a refund of $20,000 (40%). Carry forward $30,000 of your contributions.

4/ Use $10,000 of your cash flow for your higher mortgage payments to pay it off in about 7 years.

5/ Contribute the remaining $20,000 cash to your RRSP room every year.

6/ Contribute $20,000 to your RRSP from a credit line in February every year for the Gross-up tax to be repaid by your refunds. You should get 4 years of $20,000 tax refunds.

7/ Next 3 years, deduct $50,000 RRSP. This is your $20,000 contributions from cash flow + $20,000 from your RRSP Gross-up + $10,000 of your RRSP carryforward. Get a refund of $20,000.

8/ In 4 years, your RRSP contribution room should be down from $200,000 to $90,000.

You contributed $80,000 this year + $40,000/year ($10,000/year more than your new room).

9/ Repeat the entire strategy to maximize your RRSP room.

Result:

• You have reduced your RRSP room from $200,000 to $90,000.
• Doing it again in 3 years maximizes your RRSP room.
• You keep it maximized every year.
• It does not affect your cash flow for the next 3 years.
• You retire more comfortably.

Comparing RRSP Catch-up to RRSP Catch-up + RRSP Gross-up Strategies:

Combining RRSP Catch-up + RRSP Gross-up Strategies is more efficient, as long as you do the Gross-up every year:

1. You increase your mortgage by $60,000 twice, instead of $200,000, but still maximize your RRSP room.
2. The RRSP Gross-up Strategy is a contribution for one year earlier than contributing your tax refund. Therefore, this is a 6-year process vs. a 7-year process.

Summary

The RRSP gross-up strategy is a simple way to find 40% to 70% more to contribute to your RRSP without affecting your day-to-day cash flow.

With all your day-to-day expenses, it can be hard to find money to make a proper RRSP contribution. Using your tax refund in this highly effective way can give you a much more comfortable retirement.

There is important to estimate the gross-up accurately. Your financial planner may be able to help you.

We add a lot of value for our Full Service clients here. We know all about our clients’ finances. We know what their optimal RRSP contribution is. We can quite accurately estimate their tax refund. In RRSP season, we do Financial Plan reviews and often recommend an RRSP Gross-up.

One sharp client pointed out to me that the benefit from this one strategy is more than the entire cost of a financial planner over your lifetime.

People that have a retirement plan are much more likely to do an RRSP gross-up. A retirement plan changes your focus to thinking long term. You know how much you need to save to have the life that you want, so you focus on how to find it.

“Never put dry pasta into your RRSP.” It is smart to gross-up all of your RRSP contributions every year.

The RRSP gross-up strategy can make it much easier to achieve financial independence and live the life you want.

Combining the RRSP Gross-up Strategy with the RRSP Catch-up Strategy is even more effective and can be life-changing for you.

What you learned:

• Why contribute to your RRSP?
• What is the optimal amount for you to contribute?
• How contributing 40-70% more can be life changing.
• What is the RRSP Gross-up Strategy?
• Real life examples.
• RRSP Gross-up formula.
• How to estimate your tax refund accurately.
• What is the RRSP Catch-up Strategy.
• How to combine the RRSP Gross-up + RRSP Catch-up Strategies.

Ed