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The Tax-Free Savings Account (TFSA) might have overtaken the Registered Retirement Savings Plan (RRSP) in terms of popularity, but the latter remains a worthy long-term investment vehicle. The RRSP dollar limit increases every year so Canadians can save for it and maximize their accounts for tax savings and tax shelter purposes.
Most RRSP investors prefer to hold dividend stocks for faster money growth. They reinvest the dividends to realize the power of compounding. However. it would be best to invest in buy-and-hold dividend stocks for minimal monitoring or none at all. An established pipeline operator and a super-regional bank should be a perfect combo in your RRSP.
Canadians maximize their RRSPs is because the contributions reduce tax payables. Moreover, the limit increases every year, which means tax savings could be considerable. For 2021, the maximum dollar limit is $27,830. Next year, it will increase to $29,210.
The RRSP limit in 1991 was $11,500. Thus, the 2022 limit is 154% higher than 30 years ago. As with the TFSA, the Canada Revenue Agency (CRA) reminds RRSP users not to over-contribute or risk paying penalties. Remember also that for 2022, the deduction limit is 18% of the taxpayer’s pre-taxed earned income for the year or $29,210, whichever is lower.
TC Energy (TSX:TRP)(NYSE:TRP) is suitable for RRSP investors because of its growing dividends. The $62.70 billion company owns a stable network of crude oil & natural gas pipelines, power-generation plants, and storage facilities. At $62.83 per share, the corresponding dividend yield is a fantastic 5.53% yield.
This energy stock has a dividend growth streak of 21 years. Management is confident that TC Energy can maintain the streak and not lose its Dividend Aristocrat status. The diversified high-quality assets are built for the long haul which ensures enduring business and income streams for RRSP users.
Assuming you contribute to your RRSP with stock investments in TC Energy worth $29,210, the money will grow to $85,713.72 or earnings of $59,503.72 in 20 years. The CRA will tax you only when you withdraw the funds. However, you must retire your RRSP at age 71. It means you must withdraw the fund’s lump sum or convert it to a Registered Retirement Income Fund (RRIF).
Champion in branch-raised deposits
Canadian Western Bank (TSX:CWB) flies under the radar only because the Big Six banks are more popular than this super-regional bank. Price-wise, the bank stock is relatively cheaper at $41 per share. The dividend yield is a decent but rock-solid 2.83% dividend. Note that the payout ratio is only 33.4%.
Regarding the stock’s performance, current investors are content with the 46.8% year-to-date gain. The $3.58 billion bank’s core strength is branch-raised deposits. In Q3 fiscal 2021, total deposits grew 17% to $18.7 billion versus Q3 fiscal 2020. Loan growth is also impeccable because the bank focuses on high-quality clients, performs disciplined underwriting, and has prudent lending structures.
CWB President and CEO Chris Fowler said, “We continued to drive strong growth of lower-cost branch-raised deposits and our quarterly loan growth remains at one of the strongest levels in our history.”
Follow the governing rules
There shouldn’t be a problem maintaining an RRSP if you follow the governing rules. You derive significant tax savings and benefit from the tax shelter until you withdraw the funds.