Do you wait until the deadline to contribute to your RRSP every year? 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. You'll reap the benefits of growth over a longer period, you won't have to make investment choices under a time crunch and, if you set up automatic deductions from your bank account or paycheque, you won't even have to think about it. No rush, no stress - no problem!
RRSPs - Why it pays to invest year-round
This is Allan. He's taken every spare cent he can find from his savings account, his piggy bank, and behind his sofa cushions. It's RRSP season, and he's rushing to make his annual contribution just before the deadline. He knows that an RRSP allows money to grow tax-free, and that millions of Canadians use them to save for retirement.
Allan's investment advisor, Sarah, is glad to see Allan make RRSP contributions, but doing so all in one single lump sum at the deadline, well, Sarah says many people do it that way, but there's a smarter way.
Sarah suggests making smaller contributions all through the year. If Allan contributed $500 each month instead of $6,000 at the deadline, he'd get the same tax benefit, but his savings should grow faster as they'd have a longer time to increase in value.
Allan says that he might find it hard to come up with $500 every month, but Sarah knows a way to make that a little easier. If you make regular contributions throughout the year via payroll deduction, you can apply to your employer to reduce the tax deducted from each paycheck. That would give Allan more money each month to afford a contribution.
Sarah says contributing a lump sum at the deadline may give Allan a big tax refund, but that just means he's been paying too much tax all year long. Instead of receiving one big refund at tax time, Allan can make regular monthly contributions via payroll deduction, and see the same tax reduction spread out over the whole year. Given Allan invests in mutual funds, investing smaller amounts regularly means he'll be able to automatically buy more fund units when prices are low, and less when prices are high.
By setting up regular monthly RRSP contributions, Allan can avoid the financial blunder of only contributing at the RRSP deadline. Plus, he can sit back and watch his RRSP grow faster.