Welcome to the third in a series of articles that will bust the myths and misunderstandings held by many Canadians – homeowners and financial professionals alike.
If you’re new here, the first thing to know is that The Smith Manoeuvre is a financial strategy which Canadian homeowners can implement in order to:
1) significantly reduce their tax bill,
2) pay out their expensive mortgage much faster, and
3) start investing for their future with money that otherwise wouldn’t exist.
And it doesn’t take any extra money from the homeowner’s pocket to generate these benefits. Let’s look at the third myth in this series:
Myth – it’s best to max out RRSP contribution room before starting The Smith Manoeuvre
I have spent my fair share of time flipping through the online forums regarding personal finance in Canada and what I frequently find are posts that, while offering some helpful guidance to others on how The Smith Manoeuvre functions and operates, frequently state that it doesn’t make sense to implement the strategy until you have maxed out your registered contributions. While I applaud their efforts to educate others on the benefits of The Smith Manoeuvre, this statement is false, misleading, and may prevent someone from implementing The Smith Manoeuvre now thus foregoing until later the benefits it provides.
Fact – registered contribution room has no bearing on the validity of implementing The Smith Manoeuvre
The Smith Manoeuvre frees up funds that were otherwise not available to invest for one’s future – when one is contributing to registered investments (RRSPs, TFSAs, etc.) they are doing so with after-tax cash, but when one is investing via The Smith Manoeuvre, it is necessarily done in a non-registered account with incremental dollars – not cash. So even if someone has thousands or tens of thousands of dollars of registered investment contribution room but has absolutely zero after-tax cash with which to do so, implementing The Smith Manoeuvre allows them to still invest for their future with new-found money.
What people may mean when they suggest this myth is that any excess cash-on-hand should be directed to registered contributions until maxed rather than making mortgage prepayments (Cash Flow Diversion accelerator). While that may be the case, it may also be the case that applying this excess cash as mortgage prepayments and then investing the new-found equity into non-registered investments does indeed produce better results than making registered contributions. Every situation will be different.
For more information, visit the What is The Smith Manoeuvre page.