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Regular RRSP contributions help you maximize your investment growth and avoid the pitfalls of market timing.
Natee Meepian/iStockPhoto / Getty Images
RRSP season, traditionally the period leading up to March 3, has seen a decline in popularity. This change indicates a trend towards making yearly, consistent contributions to retirement savings plans. This shift offers numerous advantages, primarily by reducing risks associated with market timing and maximizing your time in the stock market.
The Decline of RRSP Season
Financial advisors like Jason Heath, managing director of Objective Financial Partners, notice clients increasingly contribute to RRSPs throughout the year. “The emphasis on January and February being our RRSP season is in the past,” he stated. This shift aligns with modern financial advice, prioritizing regular contributions over a single end-of-season lump-sum payment.
Why RRSP Season is Fading Away
The traditional RRSP season is losing momentum due to several factors. First, the decline in physical bank visits has reduced pressure to make last-minute contributions. Online banking and do-it-yourself investing solutions have become more common, changing the dynamics of financial behavior.
Second, the introduction of alternative savings vehicles like Tax-Free Savings Accounts (TFSAs) and First Home Savings Accounts (FHSAs) provides more options for Canadians. As of 2014, the average TFSA contribution exceeded RRSP contributions, reflecting the broader diversification in savings strategies.
Employer-offered group RRSP plans further exemplify the trend. Many employers now facilitate RRSP contributions directly from paycheques, automating the process and making it easier for employees.
Advantages of Year-Round RRSP Contributions
Financial planners and experts argue that regular contributions offer several benefits. Spreading investments extends market exposure, promoting compound growth. It also reduces risk by avoiding potentially harmful market timing strategies.
David Field, a certified financial planner and founder of Papyrus Planning, emphasized that “Spreading out investments offers more time in the market, meaning more compound growth, and it reduces exposure risk.” Additionally, regular contributions make saving more manageable, breaking down the process into smaller, more achievable steps.
Automation tools can help simplify the process even further. Jason Heath advises setting a reasonable monthly contribution amount aligned with your budget and financial goals. Automating these payments makes it easier to stick to a savings plan.
Tax Benefits and Considerations
Regular RRSP contributions offer tax benefits, but there are additional considerations. For those opting for regular contributions, reducing tax deductions from paycheques is possible. This involves submitting form T1213 to the Canada Revenue Agency, which authorizes the employer to lower the tax withheld from regular paycheques if approved.
While regular contributions offer advantages, they may not be suitable for everyone. People with unpredictable or fluctuating incomes might find consistent contributions challenging. Similarly, those receiving large annual bonuses close to the RRSP deadline may still make lump-sum payments closer to the deadline.
“You want to make sure you’re paying the least amount of lifetime tax, not just paying less tax this April,” Jason Heath warns. This consideration emphasizes the importance of evaluating all financial options before making investment decisions.
Conclusion: Maximizing Your Retirement Savings
The shift away from RRSP season towards year-round investing reflects evolving financial strategies and the benefits of regular contributions. By spread out their investments and automate savings, individuals can maximize their retirement savings while minimizing financial risks.
Whether RRSP season disappears completely, the move towards more balanced, consistent investment practices is beneficial. Financial advisors encourage individuals to assess their financial situation and consider all available options before contributing to their RRSPs.
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