After what felt like the longest January in history, the calendar finally says February. In the Canadian money world, that also means it is RRSP season. What does that mean? Why does it matter? And is it something you should be worrying about? Today we’re talking about all of that and how to maximize your RRSP contribution this year.
RRSP Season is a Myth
So why is February considered RRSP season anyways? Instead of working by a simple calendar year, you actually have the first 60 days of the new year to make an RRSP contribution for the previous year. That makes February the last chance to make a contribution and get that tax refund.
The problem with that thinking is that you’re leaving investing to the last possible second. It’s much more efficient (and easier!) to invest in your RRSP throughout the year instead of waiting until the last possible second. Instead of waiting until February to make your RRSP contribution, break it down and set-up automated monthly contributions that align with your paycheques.
Checking in with your money on an annual basis is essential, but do that, stick to your own plan, and don’t get swayed by the big banks saying you better make an RRSP contribution stat.
Do RRSP Contributions Even Make Sense For You?
Time for a quick lesson on RRSPs! When you make an RRSP contribution, you don’t have to pay tax on it. Usually, you contribute with money that has already been taxed (like your paycheque). That’s why you get a refund when you claim that contribution on your taxes. Your money then gets to grow tax-free within the RRSP until you pull it out. When you do make a withdrawal, you have to pay tax. However, at that time, you should be in retirement and be in a lower tax bracket than when you made the contribution. That drop in tax bracket is the real advantage of an RRSP
That means you get the most bang for your buck when you make RRSP contributions in a high tax bracket and withdraw the funds in a low tax bracket.
If you’re currently in a low tax bracket but hope to jump up brackets in the future, then a TFSA is probably a good option for you right now.
Three Steps to Maximize Your RRSP Contribution
I touched on this already, but it’s important. Don’t leave your RRSP contribution to the last minute. And this doesn’t just apply to your RRSP contributions. Automating every possible part of your finances is a good call. Let technology be your friend and take the stress out of managing your money.
If you get paid monthly, contribute monthly; if you get paid bi-weekly, contribute bi-weekly; if you get paid weekly, contribute weekly. When you align saving with your pay schedule, you won’t even notice the money is gone.
Contributing to your RRSP is only half the battle. To really make the most of it, you need to put that money to work by investing it.
RRSPs are for long-term investing. That means you can take a certain amount of risk. Of course, you need to be aware of your tolerance for risk. If seeing your investments go up and down stresses you the eff out, then take a step back. It is possible to strike a balance between risk and growth, and finding that balance will make it easier to stick with the plan.
I recommend Wealthsimple for your investing because it’s simple, managed, and cost-effective. I do not like managing my investments. I find it uber boring. If you love that stuff, then go for it! Set-up an account with a discount brokerage (like Questrade or QTrade) and do your thing.
Use Your Refund for Good
Mathematically the tax refund might not be the best part of an RRSP, but it sure feels the best when you get it. Free money! Ok, not exactly, but you know what I mean. It might feel like a windfall you can stop, drop, and shop, but there are better options.
I’m not against using your refund to buy a thing. But if that’s what you’re doing, then make sure it’s a thing you really, truly want. My best advice on this is to put it towards something you are already saving for. Maybe you desperately need a new couch because your cat has torn your current one to shreds. If you have a specific couch you’ve been eyeing up and have been setting aside every spare penny towards your ‘couch fund’ then that is a very good use of your refund. Spend away with zero guilt.
Another good option is paying off debt. If you have high-interest debt, then tackle that first. The faster you can pay off those credit cards, the better. If you don’t have high-interest debt, then what about low-interest debt? Use your refund to put a lump-sum payment towards your mortgage.
Finally, reinvest the money. Get a jump on next year’s RRSP contribution by making a lump sum contribution to your RRSP. Not only will that money be sheltered from growth for years to come, but you’ll also get an even bigger refund next year. RRSP rolling for the win. If you don’t have the RRSP room to keep your contributions increasing year over year, then use it to top up your TFSA annually.
Whether you’re spending, paying off debt, or reinvesting, using your refund wisely is a critical step to maximize your RRSP contribution.
This post was proofread by Grammarly.