Is RRSP season counter-productive to proper saving?

By Special to MoneySense on January 15, 2015
Estimated reading time: 4 minutes

RRSPs contributions should be made on an ongoing basis

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TORONTO – As the hype around RRSP season ramps up, it’s time to ask whether pushing a big chunk of cash into your retirement savings every winter is the best investment approach. Some financial advisers say the tradition of RRSP season leading up to tax returns only encourages procrastinators to wait until the RRSP deadline—March 2 this year—before they contribute to their plan. For everyone else, it’s smarter to set aside money on a regular basis through a pre-authorized withdrawal from their bank account. “People are likely to save more by investing in their RRSP monthly and treating themselves like a periodic bill,” said Jason Abbott, an adviser at WealthDesigns.ca, a financial planning firm based in Toronto. Depositing money on a regular schedule also allows investors to take advantage of a practice called “dollar-cost averaging,” considered by many as a better way to boost investment value and avoid market volatility. Since stocks and commodities generally grow over time, the thinking goes that by saving each month investors will increase their odds of buying into the stock market when values are lower. While the concept isn’t new, the practice is catching on. A new study from the Bank of Montreal released Thursday suggests that more Canadians have set aside money early for their RRSPs this year. About 42 per cent of Canadians surveyed told they bank they had already contributed to their RRSP by mid-November 2014. That’s an increase of seven per cent from the prior tax year when the average amount contributed to an RRSP was $3,518, the bank said. With all of that money being set aside, it’s important to keep tabs on how it’s growing, financial advisers say. Just because the process is automated doesn’t mean you should let your investment do all the work for you. Ensure your monthly withdrawals keep pace with what you’re bringing home. Advisers suggest contributions amounting to about 10 per cent of annual income. Also, consider your goals with the help of a financial adviser, rather than just throwing money into the savings vehicle. A lot of Canadians simply put their money into an RRSP and don’t ask enough questions, said Chris Buttigieg, senior manager of wealth planning at BMO Financial Group. “What I’ve encountered is people say they’ve contributed to their RRSP and the funds are just sitting there in a savings account,” he said. Buttigieg suggests investors spend more time understanding their retirement savings plan and which investment vehicles they’re using, such as stocks, bonds or mutual funds. Another common financial blunder is taking money out of an RRSP to pay debts or make big purchases. In most cases, there are better ways to access money without tapping into your retirement savings, which can result in a big tax impact, Buttigieg said. For shorter-term goals, consider platforms like a Tax-Free Savings Account, which is flexible and doesn’t have the same financial penalties. “You really need to make sure you’re allocating your funds appropriately between those two,” Buttigieg said. Aside from the obvious retirement savings, an RRSP also gives Canadians a certain degree of flexibility in their financial futures. Tapping into an RRSP for the Home Buyers’ Plan gives first-time home buyers the opportunity to withdraw up to $25,000 for their down payment. Another program is the Lifelong Learning Plan, a government resource designed to help Canadians finance their education. The program allows withdrawals up to $10,000 per year from an RRSP, to a limit of $20,000, for either yourself, a spouse or common-law partner who’s going back to school. “It’s not just about long-term retirement,” said Lee Helkie, an adviser and one of the founders of Helkie Financial & Insurances Services Inc. “You’re also providing yourself with options.”

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