London, ON: "As Canadians do their taxes this year, many who made RRSP contributions will fall into a behavioural trap that significantly impacts their retirement funds," says Talbot Stevens, author of the new book, The Smart Debt Coach.

"The hidden behavioural risk of RRSPs is what happens to the refund. If you spend your RRSP refund, as most do, you unknowingly end up investing less than you started with, and less than most think," states Stevens.

Many people mistakenly think that if they put $3,000 in their RRSP and spend their refund, they've added $3,000 to their retirement fund. But if you're in a 40% tax bracket and spend the $1,200 refund, you've only invested $1,800 of the $3,000 you started with.

"The critical concept that RRSP investors need to understand," Stevens emphasizes, "is the difference between after-tax dollars -- those that we get to spend or save -- and before-tax dollars in an RRSP."

If you spend your RRSP refund, you are converting dollars that have already been taxed, into RRSP dollars that will be taxed again later when you withdraw the funds. "Spending the refund is the one of the 5 RRSP Refund Strategies, each producing a different contribution to your retirement fund. If the initial $3,000 was intended for retirement," The Smart Debt Coach explains, "then as a minimum, the refund should be invested, back into RRSPs if there is contribution room still available. In our simple example, reinvesting the $1,200 refund results in a $4,200 total contribution, which is 40% more than the typical approach where the refund is spent."

Stevens warns that if, like the majority of Canadians, you spend your RRSP refunds, you could actually be better off saving for retirement using TFSAs or perhaps even a taxable account, instead of RRSPs. That way, there's no behavioural risk of spending the refund, and ending up with less fuel added to your retirement vehicle than intended.

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Talbot Stevens is a speaker and author of The Smart Debt Coach. His first books Financial Freedom Without Sacrifice and Dispelling the Myths of Borrowing to Invest have sold almost a quarter of a million copies. For more information, contact Talbot Stevens, by calling (519) 663-2252, or emailing talbot@TalbotStevens.com.

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