Introducing the RRSP Snowball Technique

Hey everyone my name is Greg Tomkins from Simplemoneycanada.com. Today I’m going to show you a strategy that I like to call the RRSP Snowballing technique.

 

This technique works to increase the amount you can deposit into your RRSP year after year, without increasing the amount you personally need to save.

 

Usually what people do is they take their $1,000 a month, save it to their RRSP, then come tax time they spend the tax refund. This is not how an RRSP should be used.

 

What we are going to do instead, is invest that $1,000 a month, and also reinvest the tax refund back into the RRSP.

 

Right let’s take a look at how that looks for someone who makes $150,000 a year, saves $1,000 per month and invests their tax refund into the RRSP as well. I’ll assume a conservative 5% rate of return inside the RRSP.

In the first year, you only save $12,000 but get a $4,884 tax refund. In year two, you still save your $12,000 but also deposit that tax refund. This time, you get a $6,871 tax refund! Not only are you getting a refund on your savings, but you are actually getting a tax refund on your prior years tax refund that you have decided to save.

 

Over 5 years of using this strategy, you save $60,000 out of pocket and end up with $100,539 inside your RRSP and another $8,144 to reinvest for the following year.

 

Had you done what most people do and simply spent your tax refund each year? Well you’d have $69,622 in your RRSP.

 

There you have it. In 5 years this quick and easy RRSP strategy can increase your savings by more than 55%.

 

Thanks for watching, if you want to learn more, stop by Simplemoneycanada.com