For many years, I have not been a fan of the so-called Registered Retirement Savings Plan (RRSP) Season in the first two months of a new calendar year. To me, while it did encourage some people to contribute to the retirement savings, the urgency, rush and often unthought reason for the contribution was most often missed. I never was a strong promoter to clients of this approach to funding their RRSP. Well, it seems that the industry has caught up with this. It is nothing more than a glorified sales campaign.
Year-round investing
The shift away from one-time contributions toward regular, year-round investing can help investors avoid risks associated with market timing and maximize their time in the stock market.
RRSP season, usually defined as the 60 days leading up to the March 3 contribution deadline, is dwindling in popularity in favour of people making year-round contributions. Instead of clients scrambling to make a one-time, lump-sum payment during RRSP season, most of our clients contribute to their RRSPs throughout the year.
Demise of RRSP season
The emphasis on January and February being our RRSP season is in the past. The shift away from one-time contributions toward regular, year-round investing can help investors avoid risks associated with market timing and maximize their time in the stock market.
If RRSP season dies a slow death and becomes less of a thing, I don’t think that’s necessarily a bad outcome. I recall the early days working at a financial institution when January and February were marked by heavy marketing campaigns promoting RRSPs. But today, there’s less fanfare. There’s not as much buzz around RRSPs.
One reason is the decline in physical bank visits. With the rise of online banking and do-it-yourself investing, fewer people interact with bankers face-to-face, reducing the pressure to make last-minute contributions. Another factor is competition.
Advance of the TFSA
Before 2009, RRSPs were the only game in town for Canadians with many making a single annual deposit. But the introduction of the Tax-free Savings Account (TFSA) and, more recently, the First Home Savings Account (FHSA), has shifted how Canadians save. By 2014, the average contribution to TFSAs exceeded those for RRSPs.
There has also seen a rise in employers offering group RRSP plans, where people have RRSP contributions automatically withdrawn from their paycheques.
Financial Planners, such as us, see distinct advantages to making smaller, regular contributions throughout the year rather than a single, large payment.
Spreading out investment contributions means more time in the market, more compound growth, and it reduces exposure risk. Regular contributions can make saving more manageable by splitting it up into smaller parts while also lowering the temptation to spend the money elsewhere. Additionally, smaller, consistent contributions help investors avoid missing the RRSP deadline altogether.
Employer tax withholdings
If you do make regular RRSP contributions, you can reduce the tax deducted by your employer. To do this, you can submit form T1213 to the Canada Revenue Agency. If approved, the CRA authorizes your employer to reduce the tax withheld from your regular paycheque.
All this being said, while regular contributions work well for many, it’s not the best fit for everyone. For people with unpredictable or fluctuating incomes, consistent contributions may be challenging. Others, such as those who receive large annual bonuses close to the RRSP deadline, might top up their contributions with a larger lump-sum payment closer to the deadline.
The bottomline
We advise people who are interested in contributing to their RRSP throughout the year to set a reasonable monthly contribution amount that aligns with their budget and financial goals. Automating these payments can make the process easier.
But you should be cautious and not just blindly contribute to your RRSP without considering other options. In some cases, a TFSA or FHSA is a better option for people, especially if they are in a lower income bracket. You want to make sure you’re paying the least amount of lifetime tax, not just paying less tax this April. Its a macro view to Keeping Life Current.
