Financial writers get really excited in January. Like, really excited.
Why? Because it’s RRSP season!
For two beautiful months in summer, Canadians from coast to coast drag their jet skis out of the garage, dust them off and ride them like it’s no tomorrow. Similarly, on the other end of the calendar, for two beautiful months at the beginning of each year, they dust off their RRSPs.
All the while, people like me sharpen our pencils and write articles and listicles and infographics and tweets on every imaginable subject to do with RRSPs. Even I am guilty of contributing to the trend with articles like last year’s sleeper hit, 3 Things to Know About Your RRSP Contribution.
But I have a secret for you: RRSP season is not real.
Why is there an RRSP season?
The RRSP, or registered retirement savings plan, is a massively popular tax shelter. More than one-third of Canadians contribute at least some money to their RRSP, according to census data.
There’s no secret as to why. Every dollar you contribute to your RRSP is taken off of your income for tax purposes. If you live in BC and make $50,000 per year, a $1,000 RRSP contribution will result in a tax savings of $282 – hopefully in the form of a refund. You can invest your RRSP almost any way you choose, and then pay a much lower tax rate when you withdraw the money in retirement. Saving money in an RRSP gets you money now, and money later.
But there are rules about how much you can contribute to your RRSP and when. You have 60 days after the tax year comes to an end to make your contributions, and you can contribute up to 18% of your income, or $26,930 in 2018 (whichever is smaller) plus any amount carried over from previous years. Contribute too much and you’ll pay steep penalties. Contribute too little and you’ll miss out on tax savings.
This is where RRSP season comes from. Once the year is over, you have two months to crunch the numbers on how much you made, how much contribution room you have, and the exact best amount to contribute to your RRSP to maximize your tax savings within your highest marginal tax bracket(s). If you miss the deadline, you’ll have to wait another year to get your tax refund.
Why it’s not real
If you’re like me, you’re like most Canadians: you won’t be maxing out your RRSP contributions anytime soon. Despite the fact that millions of us make RRSP contributions every year, we collectively use only a fraction of the contribution room made available to us.
All of these people donning their transparent green accountant visors and typing furiously away at their adding machines are in a very special segment of society. They’re particularly wealthy and have the luxury of having to worry about whether they’ve maxed out their RRSP contributions.
They need to know how much they made with certainty so they don’t go over their contribution room. And they want to optimize their contribution to get the maximum tax savings over the long-term. That’s why there’s a grace period at the beginning of the year.
Unless you’re in a position to max out your RRSP, or your contribution room is so tight that you don’t want to waste any of it on a lower marginal tax rate, you don’t need to worry about RRSP season. You just need to worry about your RRSP.
The real RRSP season is year-round
Let’s say you’re on pace to earn $50,000 this year. Assuming you have no contribution room carried over from previous years, you’ll be able to contribute up to $9,000 to your RRSP.
If you hold on to that cash during the year and wait until RRSP season to make a deposit, you’re actually doing yourself a disservice. If you were to make an annual lump sum contribution of $9,000 every year for 25 years, your RRSP would grow to be worth $493,781. If you were to increase your payment frequency to $750 monthly, it would grow to be worth $507,217 after 25 years. That’s $13,436 in free money – more than an entire extra year’s worth of contributions – just for making regular deposits instead of waiting until RRSP season.
Monthly deposits are easier, too. I don’t know about you, but personally, there’s no chance my RRSP would ever see a dime if I didn’t make regular deposits every time I got paid. If your income is consistent and you’re not likely to reach your contribution limit, it’s easier and a more financially sound decision to put money in your RRSP on a monthly basis.
Start making monthly contributions today
The reason you earn so much more interest by making monthly contributions to your RRSP is because the money spends more time in the account, and the difference adds up over the long haul.
For the same reason, it’s important to start saving money in your RRSP as soon as possible. Even if you can only contribute a little bit at first, giving your money time to grow is the best way to ensure your retirement will be well funded. With a 6% rate of return and 25 years to grow, even $10 a week will more than double in value by the time you’re ready to withdraw. And it’s easier than trying to come up with $520 in February.
If you’re an average Canadian, RRSP season doesn’t apply to you. The best thing to do is save as much as you can and make regular contributions to your RRSP all year round.