Does this sound like you: it’s late February and once again, you’re caught off guard by the looming RRSP contribution deadline. You’re smart to save for your retirement – but there’s a smarter way to do it. Contribute to your RRSP regularly throughout the year. Why? Because this way:
- You'll reap the benefits of growth over a longer period
- you won't have to make hasty investment choices, and
- with automatic deductions from your bank account or paycheque, you won't even have to think about it.
What is the deadline to contribute to an RRSP?
March 1, 2022 is the deadline to contribute to your RRSP for the 2021 tax year. But you don’t need to wait until that day to contribute. In fact, it’s best if you don’t wait until the last minute. Here’s why.
Why avoid last-minute RRSP contributions?
With RRSPs, it pays to invest year-round. How?
Let’s see how investing year-round can help you grow your retirement savings and avoid last-minute panic. Here’s Allan’s story.
This is Allan. He's taken every spare dollar he can find from his savings account, his piggy bank, and behind his sofa cushions.
The RRSP contribution deadline is right around the corner. He's rushing to get his hard-earned dollars to his advisor Sarah. Allan knows that an RRSP allows his money to grow tax-free until he needs it.
Sarah, Allan’s advisor, is glad to see Allan make RRSP contributions. An RRSP is a great investment in his future. But she knows there’s a smarter way than making a single contribution at the deadline.
Why you shouldn’t wait until the deadline to make your RRSP contribution
Sarah suggests making smaller contributions all through the year. Why? Because Allan’s savings can grow faster if they have a longer time to increase in value.
Whether Allan contributes $500 each month or $6,000 at the deadline, the amount and tax benefit are the same. But there might be other advantages. Allan says that he might find it hard to come up with $500 every month. Sarah knows a way to make that a little easier.
She suggests Allan make regular contributions throughout the year through payroll deduction. This way, the money comes out of his paycheque, automatically. No more scrambling to find money in late February.
What is the tax benefit of making payroll deductions?
Sure, contributing a lump sum at the deadline may mean a big tax refund. But that just means paying too much tax all year long.
Sarah recommends Allan make regular monthly contributions through payroll deduction. He can ask his employer’s HR department about setting this up.
How does a payroll deduction work? RRSP contributions will come directly out of Allan’s gross income. He can ask his employer to be taxed at his adjusted income*. That way, Allan can access his yearly tax refund on every paycheque. That would give Allan more money each month to afford a contribution.
*Adjusted income in this example means Allan’s gross income less the amount he contributes to his RRSP.
What is price averaging and how can it be a winning strategy?
There is another interesting advantage to investing in a RRSP on a regular basis, Sarah explains. It’s called dollar-cost averaging*.
*Dollar-cost averaging means investing regularly and presuming the markets will fluctuate. The average here refers to the cost of investment funds the same dollar amount can buy from one investment to the other.
Allan contributes to his RRSP by investing in mutual funds. Investing a small amount on every paycheque means there will be times he invests when the market goes up and when the market goes down. So, he’ll be buying more fund units when prices are low, and less when prices are high.
In short, regular monthly RRSP contributions can help avoid the stress of RRSP deadline contributions. And it can potentially make it easier for Allan to see his RRSP grow faster.
This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.