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Posted by Vincent Soucy, FCIA, FSA, February 1 2017
Pension Plan
RRSP Contribution: Is The Beginning Of the Year The Best time?

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At the beginning of each year, financial institutions keep advertising that we should contribute to our Registered Retirement Savings Plan (RRSP). This period is called the “RRSP season” for a good reason, as RRSP contributions made during the first 60 days of the year can be deducted from the previous year’s income, providing a speedier tax refund!

If you have cash on hand to make a RRSP contribution, this is definitely a good time to use it. Read this article to learn more about it!

Should you rush to the bank? No!

If your employer gives you the opportunity of contributing to a Group RRSP or a Voluntary Retirement Savings Plan (VRSP) in Quebec (or its equivalent elsewhere in Canada), you should seriously consider this alternative instead of contributing to an individual RRSP at the bank or credit union. Why? Among many reasons, the simple fact that you could save thousands of dollars in management fees over the span of your career should be compelling. As management fees are already subtracted from the published returns, you may sometimes think that there aren’t any. But fees are always part of the picture!

Management fees for a mutual fund within an individual RRSP often range from 2% to 3%. In a Group RRSP administered by an insurance company, such fees can be 0.5% to 1.5% lower, which has a major positive impact on your savings. If you contribute $3,000/year for 30 years and pay 1.5% rather than 2.5% in fees, you will accumulate $25,000 more, for comparable returns. That’s a lot of money!

After the holiday season, Is it the RRSP season?

Few people can boast about having a few thousand dollars lying in their bank account for an RRSP contribution in January or February. Therefore, is contributing during the RRSP season the most effective way of saving for retirement? Once again, the answer is no!

An RRSP contribution that's smaller but more frequent!

To save enough for your retirement, you need a strong savings plan based on a regular RRSP contribution frequency. This makes budgeting much simpler. Indeed, contributing $50 every 2 weeks is much easier than contributing $1,300 at year end.

It has also been demonstrated that it is a lot easier to save when the amount is deducted directly from your pay, before it is deposited in your bank account. This is another advantage of Group RRSPs and VRSPs.

How can I pay no income tax?

When you contribute to a Group RRSP or VRSP through payroll deductions, you receive a tax refund immediately rather than when you file your tax return. Thus, if you contribute $50 at each pay, $50 will actually be deposited in your group RRSP or VRSP but your net pay will only be reduced by approximately $30. The $20 difference is your income tax saving.

There is much to be gained from saving tax immediately on each pay instead of receiving a single refund later on. This could result in thousands of dollars in additional returns, and you will no longer have to wait all year for your refund.

Is it possible to achieve greater returns?

By spreading your RRSP contributions over the year, and thanks to the income tax saving at source, your return potential will be much higher. Indeed, by making an RRSP contribution on each pay, this amount will be invested immediately on the markets and generate a return.

On the other hand, if you wait until the end of the year to contribute an amount equal to the sum of your contributions on each pay, no return will be generated during the year. Contributing at each pay may translate into thousands of dollars more in your pocket at retirement, depending on the performance of the stock and bond markets.

Can I take advantage of the HBP with a group plan?

Group RRSP and VRSP members can also take advantage of the highly popular Home Buyers’ Plan (HBP) to access the real estate market with greater ease.

Is it time to review your strategy?

Take this RRSP season as an opportunity to review your RRSP contribution strategy and focus as much as possible on group Registered Retirement Savings Plan or Voluntary Retirement Savings Plan contributions as they provide several benefits. This can only be to your advantage!

It is also important to determine the right contribution amount. To do so, you must set your budget, assess your currents savings, project your future income and determine your retirement needs. There are several well-designed tools available to assist you in this task. To get a clearer picture, we invite you to read our article “Will your employees have enough money at retirement?”.

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Holding a Bachelor degree in Actuarial Science and a Fellowship with the Canadian Institute of Actuaries, Vincent Soucy worked for the first 10 years of his career in an actuarial consulting firm where he advised national clients on their benefit and retirement plans. He joined AGA in March 2014 and now supervises the consulting, underwriting and actuarial teams.
Vincent Soucy, FCIA, FSA