March 1st. The day every year where Canadians rush to the bank to contribute to their Registered Retirement Savings Plans (RRSPs).
The benefit is real: contributions made before the deadline can be deducted from a Canadian’s taxable income in the 2017 tax year, which either reduces a tax hit or can generate a refund. Meanwhile, RRSP money grows on a “tax-free” basis (more on that later…), with the withdrawals getting tax deferred treatment in retirement at a lower rate (ideally, if you plan it right).
So of course Canadians are stressed out. They have to find hundreds, maybe thousands of dollars to chuck into their RRSPs in time. For Canadians who rely on tax refunds to fund their Tax Free Savings Accounts (TFSA), the pressure is even more intense.
But it doesn’t have to be. Below I’m going to outline some strategies that I personally employ that help me meet my RRSP goals without the stress:
The most important day isn’t March 1st.
It’s the day you get your tax return assessed.
I view March 1st like a homework deadline. Your teacher (i.e. the CRA) says: “Your assignment is due on this day. No later!”
You can do one of two things: do your homework the night before with a higher degree of stress, or instead, be a keener and do it right when it gets assigned and submit it early. While all your classmates are freaking out at the prospect of not completing in time, you sit back and watch Netflix.
I don’t consider RRSP contributions the few months before March 1st. Instead, I consider it once I get my Notice of Assessment from the CRA, which tells me what new room has been added to my RRSP limit. With that notice in hand, I immediately work to max out the available room.
RRSP Growth is Tax-Free. Withdrawals are Tax Deferred.
I’ve talked to several older colleagues who are approaching retirement. The common refrain is “I don’t know what to do with my RRSPs! I’m going to be taxed up the whazoo when I have to start withdrawing at 71!”
I step in and gently remind them that while yes, they are going to be taxed on the funds they withdraw at their marginal rate, they technically have enjoyed decades of tax-free growth from investment returns, etc. If anything, they used their RRSPs exactly as how the CRA intended: to grow their own retirement nest egg. In fact, if you have too much money in your RRSPs come 71, that’s a good problem to have because you probably did amazing with your investments and paid zero tax at the time of your meteoric gains.
So if RRSP investment returns grow tax free in the account and we all know that time in the market is better than timing the market, it stands to say that putting your money to work ASAP is better than waiting.
Anytime you wait until the 11:59AM before March 1st to contribute, you’ve effectively lost the opportunity cost of what that money could have done for you in the preceding year.
When it Comes to Money, Today is Always Better than Tomorrow.
Every dollar today is worth more than it will be tomorrow. That applies to debt, investments, or income earned. That same fundamental also applies to RRSPs. If you can’t wrangle the money together by March 1st – honestly, don’t worry! Slowly work to chip away in the latter half of 2018 and contribute where you can.
Your retirement will look a little more certain. You’ll feel good about yourself. And you’ll certainly be far less stressed.