Don’t wait for the RRSP deadline to save

JUNE 30, 2022
By Andrée-Anne Guénette

Does this sound like you? February rolls around and 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, 2023 is the deadline to contribute to your RRSP for the 2022 tax year. That might still sound far off. But it's best if you don't wait until that day to contribute. 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. Let’s imagine Alex is a typical Canadian saving for his retirement. And Sarah is his Sun Life advisor. She has some ideas to make contributing to an RRSP easier and potentially create greater returns. Here’s their story. 

Imagine a typical February day. Alex knows  the RRSP contribution deadline is right around the corner. He's rushing to get his hard-earned dollars to his advisor, Sarah. Alex knows that an RRSP allows his money to grow tax-free until he needs it.

Sarah, Alex’s advisor, is glad to see him make  RRSP contributions. An RRSP is a great investment in his future. Sarah also 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 Alex’s savings can grow faster if they have a longer time to increase in value.

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Whether Alex contributes $500 each month or $6,000 at the deadline, the amount and tax benefit are the same. But there might be other advantages. What if Alex finds it hard to come up with $500 every month? Sarah suggests a way to make that a little easier.

She suggests Alex 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 Alex 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 Alex’s gross income. He can ask his employer to be taxed at his adjusted income*. That way, Alex can access his yearly tax refund on every paycheque. That would give Alex more money each month to afford a contribution. 

*Adjusted income in this example means Alex’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.  

Alex contributes to his RRSP by investing in mutual funds. Investing the same amount on every paycheque means buying at different stages in the market. 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

Read more: Volatile markets? 4 questions to ask your financial advisor

In short, regular monthly RRSP contributions can help avoid the stress of RRSP deadline contributions. And it can potentially make it easier for Alex to see his RRSP grow faster.