Your current year’s RRSP contribution limit is 18% of your previous year’s earned income, to a maximum of $31,560 (2024) plus any unused contribution room carried forward from previous years. There’s some confusion around the RRSP over contribution limit and RRSP carry forward rules. This post explains both of these rules.
RRSP Over Contribution Limit
You are allowed to over contribute a cumulative lifetime total of $2,000 to your RRSP without incurring a penalty tax. An RRSP over contribution is not deductible from your current year’s income, but the advantage is that you can add extra cash into your RRSP, where it can grow on a tax-deferred basis.
RRSP over contributions can be deducted in a subsequent year when your actual RRSP contribution is less than the maximum allowed.
A penalty tax of 1% per month applies to the amount of an RRSP over contribution exceeding $2,000. If you think you may have over contributed to your RRSP, contact an accountant to determine the steps you need to take.
The calculation of the penalty tax and filing of forms to withdraw the excess amount is not part of the normal personal tax return process.
An RRSP over contribution can be an effective tax strategy; however you are usually better off paying down non tax deductible debt first, like your credit card or mortgage. If you decide to over contribute to your RRSP, work with your accountant or financial advisor to ensure you stay within the allowable limit.
One of the reasons the government allows RRSP over-contributions is to provide you with a cushion against possible errors and unforeseen events, like a pension adjustment (PA).
Consider using your $2,000 RRSP over-contribution when you quit working. The earned income you have in your final year of employment will entitle you to an RRSP deduction in the following year.
RRSP Carry Forward Rules
For most Canadians, it’s not always possible to make a full RRSP contribution in any given year. If you don’t contribute the maximum allowable to your RRSP in any year, you can carry the unused portion forward indefinitely.
This means that if you were eligible to contribute $10,000 each year from 2013 to 2023, but you only contributed $5,000 each year, you will be able to contribute an additional $50,000 over and above your annual maximum limit.
If you are expecting a change in your income in the near future that will bump you into a higher tax bracket, it might make sense to delay your RRSP contributions until then. In this case, it’s important to consider the loss of tax-sheltered investment growth by putting off your contributions.
To accumulate RRSP contribution room, you must file an income tax return. If you have earned income for RRSP purposes, but you are not required to file an income tax return, you should consider filing anyway. While an RRSP may not be a significant consideration at this point, there will likely be a time when you have enough cash to make a contribution and can benefit from the deduction.
If you had low taxable income in 2023, but enough cash to make an RRSP contribution, consider making the contribution before the RRSP deadline but don’t claim the deduction for 2023.
As long as the amount isn’t claimed as a deduction, your unused contribution room remains intact. You can still claim the deduction in a future year, preferably when your taxable income is higher. In the meantime, the investments inside your RRSP will grow on a tax-deferred basis.
Stock markets rebounded in a big way last year after a taking it on the chin in 2022. It was technology stocks once again leading the way – with the NASDAQ gaining 52.28% (XQQ) in 2023. The vaunted S&P 500 also posted an impressive 24.39% gain in 2023 after falling nearly 20% in 2022 (XSP). Even Canadian equities had a solid year, gaining 11.67% in 2023 (XIC).
Across the pond, international stocks soared 14.35% (XEF), while emerging market stocks were up just 6.18% (VEE).
On the fixed income side, Canadian aggregate bonds (VAB) were up 6.58% in 2023 after getting walloped by nearly 12% in 2022, while short-term bonds (VSB) were up 4.95% in 2023 after losing nearly 4% in 2022.
Regular readers know that I’m a huge proponent of asset allocation ETFs as a sensible way for many Canadians to invest. For around 20 basis points (0.20%) in fees, you get a globally diversified and automatically rebalancing portfolio that you can set and forget.
Indeed, if investing has largely been solved with low cost index funds, then investing complexity has been solved with these asset allocation funds. A true one-stop shop for your investing needs.
Investing passively through index funds allows investors to capture the aforementioned returns, minus a very small fee. That’s a surefire way to beat 90% of investors who invest more actively, incur higher fees and are prone to behavioural issues like performance chasing.
With that in mind, here are the 2023 investment returns for various asset allocation ETFs offered by Vanguard and iShares:
Vanguard Asset Allocation ETFs
Vanguard offers a suite of asset allocation ETFs ranging from 100% global equities (VEQT) to 20% equities and 80% bonds (VCIP). I’m including the five-year returns of VEQT, VGRO, VBAL, and VCNS to show their most popular asset allocation ETFs:
| ETF | 2023 | 2022 | 2021 | 2020 | 2019 |
|---|---|---|---|---|---|
| VEQT (100/0) | 16.95% | -10.92% | 19.66% | 11.25% | n/a |
| VGRO (80/20) | 14.86% | -11.21% | 14.97% | 10.83% | 17.66% |
| VBAL (60/40) | 12.69% | -11.45% | 10.29% | 10.20% | 14.81% |
| VCNS (40/60) | 10.55% | -11.78% | 5.80% | 9.36% | 12.06% |
Interestingly, each step up the risk ladder earned you an extra return of 2% or so. Even the traditionally conservative 40/60 portfolio posted double-digit gains thanks to a strong stock AND bond performance in 2023.
iShares Asset Allocation ETFs
iShares offers a similar suite of asset allocation ETFs with ticker symbols of XEQT, XGRO, XBAL, and XCNS. The differences between iShares and Vanguard are slight – iShares’ ETFs cost just 0.20% MER compared to Vanguard’s 0.24% MER, and iShares’ asset allocation ETFs come with a bit more US and International equity, while Vanguard’s asset allocation ETFs have more Canadian and emerging market representation.
Here are the five-year returns for iShares’ asset allocation ETFs:
| ETF | 2023 | 2022 | 2021 | 2020 | 2019 |
|---|---|---|---|---|---|
| XEQT (100/0) | 17.05% | -10.93% | 19.57% | 11.71% | n/a |
| XGRO (80/20) | 14.92% | -11.00% | 15.17% | 11.42% | 17.96% |
| XBAL (60/40) | 12.78% | -11.08% | 11.06% | 10.58% | 15.19% |
| XCNS (40/60) | 10.56% | -11.19% | 6.57% | 10.33% | n/a |
You can the returns are nearly identical. iShares has a slight performance edge due to its tilt towards the higher performing US and international markets.
If you can’t decide between the two, hedge your bets by putting a Vanguard asset allocation ETF in one account type, and an iShares asset allocation ETF in another (or one spouse picks Vanguard and one spouse picks iShares). Whatever you do, don’t drive yourself crazy switching back and forth between the two chasing past performance.
My Investment Returns for 2023
I’ve been investing in Vanguard’s all-equity ETF (VEQT) since March 2019. It’s a perfect solution for someone like me who wants to buy the entire market for as cheap as possible and move on with my life.
I hold VEQT inside my RRSP, LIRA, and corporate investing account. I did not make a contribution to my RRSP (or LIRA, of course) in 2023, but I did actively contribute to the corporate investing account.
As you know, the timing (and amount) of your own contributions will affect your own personal rate of return. So, while I expect my RRSP and LIRA to have a nearly identical return to VEQT’s 2023 calendar year return of 16.95%, the returns on the corporate account may be different due to the timing of contributions. Let’s check it out:
- RRSP = 16.88%
- LIRA = 16.63%
- Corporate = 18.65%
The difference between the RRSP and LIRA returns could only be chalked up to the timing of reinvesting the annual dividend. I don’t believe I had automatic dividend reinvestment turns on in either account and may have not have reinvested the dividends on the same date.
I used TD’s e-Series funds in our kids’ RESP account. While I had maintained a 100% equity portfolio using the Canadian (1/3), US (1/3), and International (1/3) funds, last year I added the bond fund for the first time and did not contribute to the equity funds. Still, $6,000 worth of bond buying ($5,000 in contributions + $1,000 CESG) did not have a significant drag on investment returns:
- RESP = 16.22%
That said, a bigger change is on the horizon because I just transitioned their RESP portfolio to follow the Justin Bender RESP strategy to de-risk the portfolio and keep better track of their share:
Finally reorganized my kids’ family RESP to better track their share of the pie. Had to legally change their names to Vanguard and iShares (sorry!): pic.twitter.com/EkqJ6cTMQy
— Boomer and Echo (@BoomerandEcho) January 4, 2024
Final Thoughts on 2023 Investment Returns
Most Canadians still invest in actively managed mutual funds through their bank or another investment firm. These funds have a huge hurdle to overcome – their high fees – to match (let alone beat) a passively managed portfolio of index funds.
Your job this month is to pull up your investment statement and look at last year’s returns, along with the returns over the past five years, and see if your portfolio is keeping pace with the returns of an asset allocation ETF.
Make sure you’re comparing apples-to-apples, that is you’re matching up your portfolio’s asset allocation with the returns from a similar asset allocation ETF (i.e. 60/40 to 60/40) to get the full story. No sense comparing your 60/40 portfolio to the NASDAQ 100. It likely wouldn’t be appropriate to invest in 100% tech stocks.
If you’ve reviewed your investment statement and find your returns aren’t measuring up, it might be worth switching to a self-directed investing platform and buying a risk appropriate asset allocation ETF.
- I can help – DIY Investing Made Easy
I truly believe that pairing low cost index investing with on-demand financial planning advice at key life stages can lead to successful outcomes for many Canadians. Put that on your New Year’s resolution list for 2024.
This year turned out to be a great one, both financially and for our lifestyle. We got everything we wanted out of our new house. We love having a dedicated office space and a home gym. Our kids can easily walk to school. Our dog even has a huge field in which to run around and play.
We managed to upgrade our house without sacrificing much. Sure, our mortgage balance has tripled and we emptied our TFSAs. But our net worth continues to grow – we’re still pushing the needle forward and not going backwards.
More importantly, from a lifestyle perspective, we’re able to enjoy the same standard of living we’ve grown accustomed to over the past few years. That includes frequent and extensive travel whenever (and wherever) possible.
Our business had a record year for income, surpassing our wildest expectations. That allowed us to give ourselves a much deserved raise so we could meet our personal spending and savings goals, AND still invest significantly inside our corporate investment account.
We seriously have to pinch ourselves sometimes knowing this is our life now. We’re incredibly lucky and grateful.
This year also brought back the bull market and our globally diversified portfolios were up about 16% after a brutal 2022. We’ll need that to continue if we want a realistic shot at reaching our goal of a $2M net worth by the end of 2025. More likely, that won’t happen until the end of 2026 or sometime in 2027 – and that’s perfectly fine.
We’re looking forward to another good year in 2024. As I’ve previously written, we only have five financial goals next year:
- Give ourselves a 10% pay raise (dividends)
- Reorganize the kids’ RESP (including a catch-up contribution for our oldest child)
- Revenge travel part two (Mexico in February, Europe in July, and Scotland in the fall)
- Invest excess profits in corporate account (targeting $90k)
- Renew our mortgage in May (likely taking a variable considering the market is now pricing in 5 rate cuts in 2024)
With that out of the way, here’s how our net worth looks at the end of 2023:
| 2023 | 2022 | 2021 | % Change | |||
|---|---|---|---|---|---|---|
| Assets | ||||||
| Chequing account | $12,000 | $5,000 | $5,000 | 140% | ||
| Savings account | $75,000 | $56,100 | $65,000 | 33.69% | ||
| Corporate investment account | $305,617 | $216,053 | $207,003 | 41.45% | ||
| RRSP | $302,411 | $259,499 | $294,664 | 16.54% | ||
| LIRA | $204,231 | $175,908 | $198,365 | 16.10% | ||
| TFSA | $0 | $165,173 | $160,942 | -100% | ||
| RESP | $100,796 | $84,896 | $84,148 | 18.73% | ||
| Principal Residence | $976,000 | $555,000 | $459,000 | 75.86% | ||
| Total assets | $1,976,054 | $1,517,629 | $1,474,122 | 30.62% | ||
| — | ||||||
| Debt | ||||||
| Mortgage | $500,155 | $160,927 | $172,161 | 211% | ||
| Total debt | $500,155 | $160,927 | $172,161 | 211% | ||
| — | ||||||
| Net worth | $1,475,899 | $1,356,702 | $1,301,961 | 8.79% |
Now let’s answer a few questions about the way I calculate our net worth:
Credit Cards, Banking, and Investments
We funnel all of our purchases onto a few different rewards credit cards to earn points on our everyday spending.
Our go-to card is the American Express Cobalt Card, which we use for groceries, dining, and gas. We also look for the best credit card sign-up bonuses and time our large annual spending (car and house insurance) around these offers. One I’m using currently is the American Express Aeroplan Reserve Card.
Our joint chequing account is held at TD, along with our mortgage and kids’ RESPs. My wife has her own chequing and savings accounts at Tangerine.
My RRSP is held at the zero-commission trading platform Wealthsimple Trade. My LIRA is held at TD Direct, and the corporate investment account is held at Questrade. My wife’s investments are held at Wealthsimple. You know all of this from my post about how I invest my own money.
RRSP / LIRA / RESP
The right way to calculate net worth is to use the same formula consistently over time to help track and achieve your financial goals.
My preferred method is to list the current value of my RRSP, LIRA, and RESP plans rather than discounting their future value to account for taxes and distributions.
I consider a net worth statement to be a snapshot of your current financial picture, so when it comes time to draw from my RRSP/LIRA and distribute the RESP to my kids, my net worth will decrease accordingly.
Principal Residence
We bought our home this year for $976,000, so that’s the price I’m using for our net worth calculation. I typically adjust the purchase price by inflation each year but I’ll likely keep listing it at the purchase price for a few years.
Astute readers will notice that the price of our previous home went from $459,000 to $555,000 from 2021 to 2022. That ended up being the sale price, so you can see that I was pretty conservative with the house value over the years.
Final thoughts and a look to 2024
Again, I want to acknowledge the tremendous privilege of being able to work from home and prosper during such a tumultuous period (pandemic, economic uncertainty, geopolitical conflicts, high inflation, housing crisis). My wife and I are incredibly grateful for everything we have.
We’re also consciously planning our so-called “rich life”, wanting to maximize our life enjoyment rather than just counting numbers going up on a spreadsheet (and, yes, I see the irony of that comment on a net worth update post). Live for today while still planning for tomorrow.
The pandemic took two years of travel away from us. My wife’s relapse last year almost cost us another year. We don’t take anything for granted.
Thanks to all of you who take the time to read the blog, comment, and send me emails. I appreciate it more than you know.
How did your finances fare in 2023? Let me know in the comments below.