This scenario came from regular reader Sam.  He is a new graduate making a decent living, but has questions about his RRSPs.  What makes his scenario unique is that he plans on using his RRSP to fund his MBA ambitions in a few years time.

I graduated a year ago and got a job.   I’m working in Calgary Alberta, and my pre-tax income is 75K ($53k after tax). I’m single, with both my parents living in Asia, no house.

I have no debt (no student loans, no credit card debt). I plan my monthly spending and save $2K monthly. I am renting a place and do not plan to buy in near future because I am planning to do my MBA around 2012/13.

I currently have a company group RRSP account with $5K contribution for 2009.   My employer will match 6% of my rrsp and give 1% bonus, and including my own 6%.  I have a total of 13% pouring into my company group rrsp every year.

I have another $12K saved in my ING saving account reserved for RRSP purpose. My 2009 rrsp contribution limit was ~$12K.

I have used my tuition credits to prevent getting a RRSP before, but now that it’s all gone I need to start looking.

I’m planning to max out my RRSP contribution room for next couple years, and then withdraw all of my RRSP during my two years of unemployed MBA study terms.  I expect my MBA tuition to be around 100K and the program will last 2-2.5 years. My parents can lend me some money, and I can also apply for gov’t loans, but these will be my final resources.

So, after my long story, my questions are:

1. Who would you recommend to get my RRSP with? I heard a few recommendations like Sunlife, CIBC, Scotia, Tradefreedom. Who do you find most convenient?

2. How should I pie my RRSP investments for my MBA goal?

3. I am planning to save in tax returns into my Tradefeedom TFSA for investment; I don’t do Options or Margins. I’m thinking to hold riskier stocks in my TFSA. Your thoughts?

4. Would you have any other recommendations?  I have a 05 SUV (paid off) which I estimate resale value in 2012 to be around 4K.  I have company insurance coverage and my parents also purchased private insurance on me so I don’t look much in insurance investment.

To answer the questions,

1. It depends.  If you want to stick with index mutual funds, then the TD e-Series has the lowest fees around.  If ETFs or stocks are the investment choice, then a discount brokerage account would need to be opened.  For me personally, when I’m looking to open a new account, I like to keep my costs low which is why I have accounts with Questrade and Interactive Brokers.

2. As the MBA goal is only a few years away, I would recommend staying away from equities as capital preservation is the main goal.  Perhaps look at fixed income and GICs (GIC ladder) with maturity dates coinciding with the time that you’ll need the funds.  Even consider high interest savings accounts.

3. See answer 2.

4. Here is where is gets good.  What stands out is Sam’s immediate cash need of $100k for your MBA in a couple years time.  It may be a stretch to save $100k by 2012, but he should be able to punch a good dent in it.

First, Sam is doing a great job saving and contributing to his company RRSP.  I would suggest maxing out his company matching RRSP, then contributing the rest to a self directed RRSP.  Assuming that I’m following the email correctly, his work RRSP balance should increase by about $10k per year due to contributions (assuming very little growth with fixed income).  The work RRSP, combined with existing savings, and monthly savings should work out to be about $60,000 by the time Sam starts school (more if he saves his tax refunds).  As a side note, a TFSA may be a good choice for savings in excess of the RRSP contributions.

Now onto the withdrawals.  As Sam mentioned, once he’s in school, he’ll have very little income thus the ability to withdraw from his RRSP while paying lower tax.  One strategy he can consider as well is using the RRSP life long learning plan (LLP).  That will enable Sam to withdraw up to $20k from his RRSP ($10k / year tax free) while in school.

Another tax he’ll need to account for is the RRSP withdrawal withholding tax which is up to 30% on withdrawals greater than $15,000.  He’ll however get most of it back when he files his income tax (providing he has no other income).  Since he has to get a student/personal loan to make up for the shortfall, to reduce the potential tax hit, I would tap into the LLP first, then TFSA/other savings, student/personal loans then use the RRSP for any shortfall when school bills are due.

That’s my two cents, do you have any suggestions for Sam?


  1. DogsFan on April 21, 2010 at 10:52 am

    Your advice is good FT, I just thought I’d throw this out there. The opportunity cost that you are giving up to go back to school and pursue an MBA might be worth more than the perceived benefits of having that MBA. You’ve started off with a good salary, which I can imagine by 2012/2013 will be closer to $100k if there is any upside with your current position.

    So at that point you’re going to put on hold your salary and the potential benefits of continuing to grow within your current company for 2.5 years to get your MBA. Let’s call that an opportunity cost loss of $350k (salary and cost of schooling…not even mentioning the growth opportunities lost for your RRSP and Savings when you withdraw them).

    Unless you plan on coming out of school and commanding a $200k/year salary, I just don’t really see the point of the MBA. It will just take you so long to catch up to where you’ve already been. Plus, your real world job experience over the 2.5 years will go a heck of a lot further than your time in the classroom (IMO).

    Does your current employer have some type of program in place to help with your MBA and place you afterwards?

  2. Mike 4P on April 21, 2010 at 10:57 am

    I’m not sure how the LLP is beneficial. You borrow money from the RRSP at a time when you wouldn’t pay any/much income tax anyway and then you have to pay it back when you are making good money (and could use the tax deduction).

    The only good thing about the LLP is the fact that you don’t lose any contribution room which isn’t relevant for most Canadians since most of us don’t use it all anyway.

    As for the withdrawals – keep them to $5k so that only 10% is withheld.

  3. GTPO on April 21, 2010 at 11:00 am

    I’ve been debating the same thing and am actually writing the GMAT in a little over a week. I’ve been working for two years now and plan on starting my MBA in Calgary in Sept ’11 or Sept ’12. However, after a short debate (since that’s all it took), I have to fully agree with DogsFan. The potential gains from leaving work to pursue an MBA just aren’t there. So I plan on taking my MBA part time in Calgary, and I might even be able to get my employer to pay for 75% of the tuition. In this way, I continue to build my career, earn the $100k+/year and get an MBA within 3 years.

    Have you considered a part time MBA or do you plan on doing it somewhere that doesn’t offer one ?

  4. Andrew on April 21, 2010 at 11:03 am

    The advice is bang on in terms of order of attack.

    On the lending front I’m personally going through this now (heading to school in fall). The Canadian government loans depending on school and location range from ~200 to ~400 dollars per in school week (roughly 20-30 weeks a year) so isn’t enough to cover it all. The big banks all offer professional student (i.e., MBA, doctor etc.) lines of credit. They do however vary on their offers (e.g, CIBC is prime + 2% up to 40K, whereas RBC is prime + 1% up to 70K). So shop around heavily. They also base their calculations on a post MBA income of 70-75K so if you are already making that or above there is room for negotiation.

    As to comment above I wanted to briefly respond. Wrestled with this same dilemma but realized I wasn’t taking the whole picture into account. (I actually am not expecting a pay bump after my MBA). Looking at just payback is too black and white though.

    There’s a lifetime value viewpoint: I believe the MBA will afford me a faster and higher career trajectory. There’s a stability / differentiation factor: the MBA should help me to stand out in an increasingly educated marketplace. Also career access: right or wrong it opens access to jobs I otherwise wouldn’t. Finally, network: yes it’s an expensive way to do it, but that network is supposed to be the real value.

  5. J on April 21, 2010 at 11:48 am

    I agree with DogsFan.

    Other than the prestige factor of a MBA, which I don’t buy into by the way, I don’t think an MBA is worth your time.

    Combining your current education with a heck of a lot of hard work should provide you with the same opportunities as an MBA will in a few years time.

  6. Jeff on April 21, 2010 at 1:25 pm

    Depending on your industry most employers do have a program for at least contributing to ongoing education. I know a lot of employers will pay 100% if its job related, though most have a cap of $30K-ish, or at least mine does.

    Most MBA programs offer part time studies, which gives you the best of both worlds. I certainly agree that have the paper behind your name can help, but real world experience beats it hands down.

    Just my $.02

  7. Richard Murphy on April 21, 2010 at 1:36 pm

    Personally I would try to keep the RRSP’s invested in several diversified EFTs worldwide in equities and use student loans instead .
    I think the MBA will prove to be your best investment at the end of the day .
    Only in a desperate situation would I draw on the RRSP’s
    Iam not certain if the interest would be deductible on the student loans once you return to work , this is something to look into.
    Also keep in mind that having nil in your credit history is not always wise .
    A well established credit rating will serve you well once you get out of
    university .
    For example I am retired and have several credit sources . I am currently enjoying a nil – o% 6month freebie from the Royal Bank on a rarely used credit card . Needless to say the like my credit rating .
    Best of luck to you .


  8. Kevin on April 21, 2010 at 1:54 pm

    Seventy five thousand for a bachelor’s degree? I wonder what kind of job it is. Sometimes it helps to find out if there are any service charges when holding RRSPs with certain companies. When I bought CIBC mutual funds last year I put it into an RRSP account. They never disclosed this to me at the time of purchase but I found out later that there is a $12+tax annual fee to maintain a registered account. So I immediately took the money out and put it into my TD RRSP account instead, which doesn’t have that annual fee. Also, as far as I know, just to throw it out there, government student loans are interest free during the full time studying period.

  9. Nemo on April 21, 2010 at 2:23 pm

    I would not tap your RRSP. Instead, go for student loans. Interest will work as a tax deduction for future years, as will tuition credits. Student loans are generally tax free for 6 months after the end of your education, and you may be able to get an extension beyond that.

  10. Jayn on April 21, 2010 at 4:03 pm

    As I read this, the thought I kept having was “WHY does he want an MBA?” I was glad to read the comments by J and DogsFan to see that I was not alone in my concern. To spend the time and 100K, there has to be a pretty spectacular and solidly predictable return on investment for you, so I’m curious what your motivation is…

    If you are interested in earning more money as an employee? I would speculate that an MBA won’t make a big difference – it’s the value you bring to an employer that counts, so if you work hard and go above and beyond where-ever you can, you’ll likely move up quickly in your organization or get headhunted or otherwise snapped up when you start putting yourself out there to other employers. Some companies even reward their top employees by funding their higher education for them, while they are on the job (this happened to my husband), there’s a possible win all around.

    Are you looking to get qualified to start your own business or have the background knowledge to buy a successful business? If that is the case, I would start networking with other business owners, read books on your own time on the subject and/or start a small business on the side to learn the ropes experientially. Most of the successful businesspeople I know (six figures into the multi-millions) do NOT have MBA’s, and the ones that do have told me they really didn’t gain much from it. As a businesswoman myself running a private corporation (with an Arts degree as my formal educational background), I have seriously weighed out the pros and cons of whether an MBA would serve me or my clients, and honestly can’t see the value.

    I also think its worth everyone’s time and energy to look at the differences between employment and RRSP/RRIF income (taxed at the highest level) versus working in a business owner or investor paradigm, where income is not tied to being employed or trading time for dollars. Investing through businesses, and/or with business income can have incredible tax advantages – but again, no-one needs an MBA to learn this stuff. If you haven’t read personal finance book “Rich Dad, Poor Dad” and “CashFlow Quadrant” by Robert Kiyosaki, I would highly recommend them before making any decisions to lock money away in an RRSP, much less pull it out for an MBA unless you’ve got a very clear vision of the results you want to create.

    Just my two cents ;-) I honestly wish you the best!

  11. Simon on April 21, 2010 at 4:05 pm

    I’m gonna guess you’re either a pharmacist or software engineer.

  12. martyfitz on April 21, 2010 at 4:23 pm

    I am not sure what your standard of living is but obtaining an MBA for 100k seems excessive in Canada. Have you considered doing your MBA at a university in Quebec like McGill or Concordia, the tuition if dirt cheap like $1600 per year.. That leaves you a lot of money to either save or live comfortably.

    MBA does not equal pay equity or a significant increase. I work with people who have MBA’s and my salary is higher than theirs..
    No degree and proud of it…..

  13. Ms Save Money on April 21, 2010 at 4:33 pm

    Great post! Thanks for sharing this with us. I’m looking to continue my education for my MBA as well and this provides a fresh perspective on how to fund my education.

  14. FrugalTrader on April 21, 2010 at 5:41 pm

    I think the $100k price tag for the MBA is quite high as well. I believe at MUN, you can get an MBA for under $10k.

  15. DividendMan on April 21, 2010 at 7:15 pm

    I have been struggling with the question of doing an MBA or not as well. I’m now a Manager at my company. I think I make a fair amount of money and I’m not sure the cost of the MBA will be covered by increasing my chances of earning more or progressing in my career.

    I haven’t decided for sure either way yet, but for now I’m not going to pursue and MBA…

    A law degree on the other hand… :)

  16. Houska on April 22, 2010 at 12:19 am

    As someone who works with a lot of MBA’s (but doesn’t have one), let me provide a bit of a dissenting opinion. Depending on your industry, your achievement, and your ambitions, it is possible to parlay a top-prestige MBA into a job with starting salary in excess of $125k (today’s dollars) and a reasonable shot at $300-500k after about 5 years. Again, depending on the field, this may be hard to achieve if you stay on your current trajectory without one (based on your undergrad and current career path, you may also hit a soft glass ceiling on moving to the more commercial/business vs technical side).

    $100k for an MBA at the likes of Stanford, Wharton, U of Chicago, Harvard, INSEAD does not sound insane. Could debate whether the quality of education at a less expensive Canadian university would be equivalent or not, but the jobs you might want after might recruit there a lot less, if at all.

    By all means consider the feedback given above, but the denizens of this blog are a naturally frugal bunch – and this may not match what you are after.

    If your future scenario does involve the $100k MBA, with the expectation of salaries like I mentioned above afterwards, I would carefully run the numbers on any funding strategy which would involve withdrawing from your RRSP without the ability (like LLP) to pay it back in. I’m not sure, but the opportunity cost of the lost contribution room, in particular the future investment gains afterwards on it during a time when your marginal tax rate will be near 50% – might well offset the cost of borrowing the money and leaving your RRSP intact. But then again, after a top-prestige international MBA you may not intend to return back to Canada so this may matter less.

    It’s an MBA-in-Finance-level optimization problem with no clear answer. If I were interviewing your a job after your degree I might well ask you to ballpark calculate it in the interview…

  17. F A on April 22, 2010 at 5:25 am

    As a recent MBA grad from one of the top Canadian schools, I can safely tell you that don’t expect an automatic jump in salary just cuz you have the letters MBA after your name.

    I agree with one of the other commentators who said that the dividends of a top quality MBA are lifelong and one of the biggest takeaways are the ability to see the “big picture” and a ready set of influential network to tap into.

    MBAs are all about brand name….therefore in Canada, you best bet is to go to either Rotman or Ivey IMO!! They have fantastic alumni network. Ivey is more well-known amongst the Management Consulting crowd (due to their affinity to using case-studies!!) and Rotman is known to be a Finance school….however, please keep in mind that both schools have all the major top-tier Consulting firms and banks recruiting from them.

    Most people tend to do MBA for one of 2 reasons:
    1. To advance in their existing careers or to fast track into management/leadership positions.
    2. To make a total career switch.

    Now if you were to go for option #2, for example, make the switch into investment banking, equity research or management consulting…..then you can justify the high price tag of MBA. Salaries for these positions easily start of from $100k with Tier 1 firms.

    Networking is the name of the game. Don’t expect the Career Services to find you a job, they can at best point you to the right direction. That’s where an influential network of alumni comes into play.

    As for financing your MBA, my program had an arrangement with one of the major banks whereby you could borrow the full tuition amount, as well as a lump sum amount towards the purchase of a laptop. And the b-school would foot the interest bill for the duration of the program.

    my 2 cents for all its worth!

    Best wishes,

  18. goforit on April 22, 2010 at 9:42 pm

    I used the LLP when I went back to school and it was pretty handy. I didn’t have much in my RRSP so I borrowed $10k (the limit to withdraw in one year) deposited it in my RRSP, withdrew it through the LLP, payed back the loan and got a tax credit. That was fine for the first year when I had income 9 months but while in school you would be better off to just withdraw the money directly and pay the tax on it.

    Then when you get back to work and make the big bucks you have that contribution room again. In your last year of school you could borrow $20k to repay the LLP then withdraw it from the RRSP and pay back the loan. This time you would have a bit of a tax hit but a small one since you wouldn’t have much income. That leaves some more room for RRSP when your back to work the next year.

    I didn’t do the borrow repay withdraw and take the tax hit in my last year (didn’t think of it until I was out of school) and have regretted it ever since.

  19. James on April 23, 2010 at 1:32 pm

    my questions is this how long will it take sam to repay his $100k loan? how much will sam’s income increase over the next 5 years? and what/when is the break even point on this investment?

    does anyone know this?

  20. Financial Cents on April 23, 2010 at 11:34 pm

    I agree with Frugal. Unless the MBA is from an ivy-league school in the states, $100 K is way too much to pay for this degree.

    I have many friends who’ve completed MBAs, and the outcomes from this degree can be distilled down to four things:

    1) it buys you instant credibility in your current job, whatever that may be
    2) it allows you to create, and hopefully sustain and grow a network of working professionals in various vocations
    3) it provides you greater flexibility to change careers
    4) it provides you with a vehicle to move-up the organizational chart

    I’m not discounting MBAs, I think they provide value and long-term benefits but you can accomplish almost as much on your own with a sound personal professional development plan and a large dose of ambition.

  21. used tires on April 25, 2010 at 5:10 am

    A friend of mine recently went to pursue his MBA at a very expensive university. We studied hotel management together and he took up a job in Marketing for a couple of years at a leading hotel but has now left that to pursue his MBA. It’s such a gamble, whether he’ll even make up the money he spent on the fees by getting a better job later on.

    Till then,


  22. Ryan Martin on April 25, 2010 at 5:08 pm

    I agree with Dogsfan and others. The whole time I was reading this article I was asking myself “Why?” Dogsfan hit the nail on the head with the 350k number. You are giving up huge potential investment capital; while you’re still young. You can’t go to a bank and say “I have an MBA, can I use that as collateral?”

    Do you know what is more prestigious than an MBA? Compound interest, and time to take advantage of it. You never get this time back.

    Sam, you should continue you’re investigating; but this time write your options minus the MBA. If you can be creative, you will be surprised where you can be in 3 or 5 years.

  23. Sam on April 25, 2010 at 7:14 pm

    Thank you everyone for your suggestions!
    I have been asking myself the “why” question as Dogsfan and Jayn suggested; the thing that triggers me for MBA is half of my firm has MBA, either from canadian schools or ivy-league.

    My firm does have an education program but unfortunately I am not qualified.

    I do agree with FA that MBA is about brand name as I experienced, so I’ve been steering towards a full time MBA instead of part time.

    However I am questioning myself again with the opportunity costs and the question how long will it be for me to breakeven with this investment. I am also looking at other options such as CFA.

    The 100K is a ball park number that I pulled out from a friend that did her’s in the states, so i set it as my saving target.

  24. Sam on April 25, 2010 at 7:43 pm

    As for rrsp, i still have difficulties understanding the idea of gaining tax-free and subject to a lower tax rate when i retire around 55-65 (I hope I don’t need to work past 65) to take it out, vs taking it out during period of no income and pay off school loans etc

    As Houska suggested, some of my colleagues do end up in other foreign places.

    I do see the math effect of losing contribution room by withdrawing, but i see cost of locking money with investments in rrsp vs investment opportunities not available from rrsp.

    Just to clarify, when I withdraw money from my rrsp, the amount withdraw of past contribution room are lost?

    Can I “borrow” 20k from LLP and withdraw the rest during my 2.5 yrs of no income?

    I’ll dig into the education loans as Andrew suggested too

  25. AC on May 7, 2010 at 8:20 pm

    Great thread. I’m glad I found it. I’m in a VERY similar situation.

    To MBA or to not MBA
    To nuke your RSP’s or to not nuke your RSP’s

    Primary objective: To have a successful business
    The problem: I don’t have a good business idea right now

    Second objective: To achieve C level
    First step: 10 years of work (3 years of sale) – check
    Second step: Do a full time MBA next Sept (2011)
    Third step: Get back into job force and climb ladder / set up a business maybe?

    Why an MBA?
    – instant credibility as opposed to having to “prove” myself over and over again. I currently only have a BSc after my name.
    – contacts and relationships
    – knowledge about what the hell is REALLY going on with the world right now.

    – I think I will take this opportunity to withdraw as much money from my RSP’s as possible with the lowest tax hit.

    – So I am thinking I withdraw 40k from RSP’s with a 30% holdback. But since I’m at the lowest income bracket, I’ll only be taxed 15% and will get 15% back at tax time. Then withdraw 10k via LLP
    – Then do the same thing in the 2nd year.
    – At the same time, I’ll take out an education loan (with tax saving interest)
    – I’ll hold enough to pay for school and living expenses and use the rest to create a medium risk stock portfolio
    – Medium risk stock portfolio will garner about 8-15% return. Bottom line though is that its liquid.

    I have realized that RSP’s is a great mechanism to put money away in if you are planning on not having any income coming in when you retire. I’m still planning on having money coming in and hopefully I’ll still be at the highest tax bracket so RSP’s don’t benefit me in any way. I might as well spend my efforts to investigate tax shelter ideas to help me lower my income.

    What’s everyone think?

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