Contact: Judy Culford

January, 1999

Phone: (519) 663-2252

"Gross Up" RRSP Strategy
Can Double Retirement Fund

Choosing the right refund strategy for your RRSP contribution could more than double the amount added to your retirement fund.

Everyone likes to defer taxes by sheltering investments inside RRSPs, but how you use RRSPs, particularly the RRSP refund strategy used, makes a huge difference in how much of a retirement fund you will produce later.

This is one of the findings of new research done by Talbot Stevens, a London, Ontario-based financial educator, speaker and author of Financial Freedom Without Sacrifice.

"In my study of strategies that produce the most After-Tax Income, I have identified five RRSP refund strategies, each of which produce different amounts of retirement income," says Stevens."These are just the pure RRSP strategies, and do not include hybrid approaches where you use the refund to pay down a mortgage or invest outside of your RRSP. The overlooked human nature parameter of what you do with your tax refund is one of the most important factors in how much income you will have in retirement."

When the typical Canadian contributes $1,000 to an RRSP, what do they normally do with the refund? Unfortunately, the most common refund strategy is to spend the refund. A refund that is spent increases your current standard of living at the expense of your future and doesn't increase your retirement income at all.

If you have $1,000 in your pocket, you have already paid tax on that money, so you generally only own after-tax dollars. If you put that $1,000 into an RRSP and spend the refund, you immediately convert after-tax dollars into before-tax dollars, that will be taxed again later when taken out of the RRSP or RRIF. To get the real benefits of RRSPs and invest before-taxdollars, you need to use one of the better refund strategies.

The second RRSP refund strategy is to reinvest the refund back into the RRSP. For someone in the 50% tax bracket who puts $1,000 into their RRSP, reinvesting the $500 refund means an addition of $1,500 to your RRSP instead of just $1,000. If your financial priority is retirement, simply reinvesting your RRSP refund is an easy way that most people can increase their retirement fund by 25 to 50%. But you could do even better.

Consider someone in the 50% bracket who has $1,000 to invest in their RRSP. They could go out and borrow an extra $1,000. By putting the $2,000 in an RRSP, you get a $1,000 tax refund which can immediately and completely pay off the loan. If you did this late in RRSP season, which many of us like to do, and filed your tax return quickly, the interest expense would be negligible. This short-term RRSP loan allows you to "gross up" your RRSP contribution from the original $1,000 to $2,000 in this case. This doubles your RRSP contribution, and consequently doubles the amount that is later added to your retirement fund. Notice that the "gross up" refund strategy is where you borrow an amount that allows the entire RRSP loan to be repaid immediately when the refund comes in.

The fourth RRSP refund strategy is using an RRSP loan to "top up" your annual contribution. These loans are small and normally paid off within a year. In the last few years, the concept has been extended where you use a larger RRSP loan to "catch up" unused contribution room from the past. This fifth refund strategy results in a much larger loan, which might take five to ten years to repay.

Each refund strategy essentially equates to different levels of commitment to your retirement goal. Financial success is dependent on choosing efficient strategies combined with the level of commitment to those strategies.

Importance of RRSP Refund Strategy
$1,000 to invest, 50% tax, earn 8% over 20 years
RRSP Refund Strategy Initial RRSP Value Initial After-Tax Commitment RRSP Value After 20 yrs
R1: spend $1,000 $500 $4,660
R2: reinvest $1,500 $750 $6,990
R3: gross up $2,000 $1,000 $9,330

To objectively and comprehensively discuss RRSPs as one possible strategy to generate retirement income, we need to introduce and evaluate each refund strategy separately. The following table shows the after-tax commitment level and future retirement fund value for the first three RRSP refund strategies. The "top up" and "catch up" refund strategies involve repaying a loan and must be evaluated separately.

If your investment priority is retirement, the RRSP refund should be put towards that goal.Reinvesting the refund or using an RRSP loan is a simple way to increase your RRSP retirement income 25 to 50% or more.

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Talbot Stevens is a financial educator, industry consultant, and author of "Financial Freedom Without Sacrifice" and "Dispelling the Myths of Borrowing to Invest". For other story ideas, visit the Free Resources menu of For more information, contact Judy Culford, Communications Director for Talbot Stevens, by calling (519) 663-2252, or emailing