RRSP Season

It’s RRSP season and many Canadians are scrambling to make their RRSP contributions.

RRSP season begins January 1 of each year and lasts for 60 days. During this period, Canadians are able to make RRSP contributions to retroactively reduce the previous year’s income, reducing their tax bill and hopefully producing a tax refund. This year’s deadline for making a tax-deductible contribution to a Registered Retirement Savings Plan (RRSP) for the 2014 tax year is 11:59 p.m. on March 2, 2015.

As we creep closer towards the contribution deadline and are bombarded with reminders about the importance of maxing out our yearly contribution allowance, it’s time to ask whether pushing cash into retirement savings every winter is the best investment approach.

 

RRSP Season

 

Some financial advisers say the tradition of RRSP season leading up to tax returns only encourages procrastinators to wait until the RRSP deadline before they contribute to their plan. Because many Canadians don’t make regular monthly contributions to their RRSP throughout the year, they are left scrambling in the first 60 days of the next year to make a large lump-sum RRSP contribution. For the average Canadian, it may be difficult to come up with a large payment right after the holidays. This often leads to RRSP loans, borrowing off lines of credit to invest, or no RRSP contribution made at all.

According to financial advisers, it’s smarter to set aside money on a regular basis through a pre-authorized withdrawal from their bank account. “People are likely to save more by investing in their RRSP monthly and treating themselves like a periodic bill,” said Jason Abbott, an adviser at WealthDesigns.ca, a financial planning firm based in Toronto.

Benefits to regular monthly contributions include:

  • Investment returns are tax sheltered for longer.
  • Savings becomes a priority throughout the year since contributions are taken right off of paycheques.
  • Your money starts working for you sooner, resulting in more interest.
  • Dollar Cost Averaging reduces the risk of bad timing. By investing on a monthly basis, you will be taking away the highs and lows of investing and lowering your average buying cost.

 

In short, RRSP season is a great tool to have, but it shouldn’t be the only way RRSP contributions (or even the bulk of your RRSP contributions) are made.

 

References:

http://www.theglobeandmail.com/globe-investor/personal-finance/retirement-rrsps/is-rrsp-season-counter-productive-to-proper-saving/article22459759/

http://globalnews.ca/news/1076144/rrsp-season-plan-ahead/

 

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