Did you struggle earlier this year to make your full RRSP contribution?
Now is the time to set up an automatic monthly contribution program so you will never face that problem again. The benefits:
- It's much easier to contribute, for example, $800 a month than to come up with $9,600 every January or February. . . right after the holiday spending season.
- This "year ahead" approach means your tax-sheltered money starts growing sooner and can yield a higher final total than contributing in January or February for the previous year.
- If you invest in the stock market, this dollar-cost-averaging strategy can accumulate more shares or mutual fund units when prices are low.
- If your RRSP contribution will eventually produce or increase a tax refund, you can ask the tax office to allow less tax to be withheld from your pay cheques - in effect giving you a raise - rather than having to wait for the following spring for your refund.
- You can then redirect this extra money every pay day to pay off debt faster, or to build more investments outside your RRSP.
You can easily set up such an automatic RRSP contribution program with your financial institutions. Ideally, transfer the money every pay day to reduce the amount required.
This neatly shifts the responsibility so you don't have to think about making the decision. It's just like a regular debt repayment: it happens automatically and you simply live on the money that's left.
Financial planning is all about setting up mechanisms like this to enable you to get ahead as efficiently (and painlessly) as possible. Note that you can also ask the tax office to allow less tax to be withheld from pay cheques if you have other deductions that will produce a tax refund. Typical deductions include child care expenses, support payments, carrying charges and interest expenses for investments, rental losses, charitable donations and so on.
You need to complete the tax form T1213, available on the Canada Revenue Agency website under Forms and Publications.
Mike Grenby is a columnist and independent personal financial advisor; he'll answer questions in this column as space allows but cannot reply personally. Email [email protected].
