Many of us will haphazardly deposit a chunk of change into our RRSP account before this year’s March 1 contribution deadline. Here’s why you should take a different approach next year.
Every year, the Canada Revenue Agency sets a deadline for Registered Retirement Savings Plan (RRSP) contributions. And every year, many Canadians decide to make a lump-sum investment in their RRSP just before that deadline arrives, to receive a deduction on the previous year’s taxes.
Although any contribution is better than no contribution, making a large deposit at, or just before, the RRSP deadline – as opposed to regular monthly investments throughout the year – isn’t the best way to invest in your RRSP. Todd Sigurdson, Director, Tax & Estate Planning with Investors Group, explains how to maximize your RRSP investment.
Investing regularly versus a lump-sum investment – which is better?
By investing regularly and early in your RRSP, such as monthly or bi-weekly, there is more time for your investments to grow throughout the year. Additionally, with regular investments, you have the advantage of dollar cost averaging, which allows you to buy throughout market fluctuations. With lump-sum investments, these advantages don’t apply.
Is there ever a point when a lump-sum investment makes sense?
Any time is a good time to invest and some individuals prefer lump-sum investments. For example, some people get a year-end bonus, and if they’re disciplined and they use that bonus to make a lump-sum investment, then they’ve put that money to good use – even if they’ve lost out on a compounding benefit. In a case like this, using the tax refund you might get from a lump-sum contribution and investing it right away in your RRSP or Tax-Free Savings Account (TFSA), can multiply the benefits.
How does compounding earnings work, and why is it important to invest in RRSPs?
The power of compounding occurs when you reinvest your earnings from an investment, as these reinvested earnings are being used to generate additional earnings. A significant amount of the growth in your investment over a period of time may be attributable to compounding. In the case of regular monthly RRSP investments, you’re earning money on the earnings from the previous month. For example, if you make a lump-sum investment on the day before the RRSP deadline – as opposed to splitting that money monthly over the previous 14 months – you’re losing out on 14 months’ worth of compounded earnings.
What can Canadians do to change that “invest at the deadline” attitude?
Regular investing is simply sound financial planning. For example, coming up with $5,000 as a lump-sum investment isn’t always easy. So, if you establish a strategy of regular monthly investments, it becomes much easier to meet your investment goal. One way to help find extra money to invest on a regular basis is to ask your employer to reduce your withholding tax on your RRSP contributions. This in effect is like getting your tax refund early – giving you the opportunity to invest it and have it work for you.
If you have any questions about starting a plan for regular savings contributions throughout the year, contact the Andrew Pereira Financial Planning Team today!
Andrew Pereira – Consultant
519-358-1115 ext 226
Cassie Fryscok – Associate Consultant
519-358-1115 ext. 222
