Don’t Keep Waiting ‘Till April To Get Your Money Back
As we get closer to the end of October, the spectre of the RRSP contribution looms ever closer. If you’re like most people, the end of the year means scraping together for gifts – and RRSP contributions. My clients are familiar with my philosophy on RRSP contributions: Make them early and make them often. But I don’t just flog RRSPs because they promote retirement savings and give you a shot at a nice tax refund. I promote RRSPs because they can help increase your take-home pay.
If you aren’t up to date on your contributions, don’t feel too guilty. Most Canadians play catch-up with last year’s RRSP contributions after the New Year. The problem with this strategy is threefold:
- Your growth potential on your RRSP investments is much lower if you aren’t starting at the beginning of the year
- Your savings strategy is done on a one-off basis, instead of automatically
- You are giving an interest-free loan to the government.
Every dollar of income taxes are subtracted from your pay is one less dollar you can put to work for you. Instead, it’s being put to work for the government.
When you file your tax return, and get a refund, you have informed the government about the deductions and credits you normally claim throughout the year (e.g. Those generated by RRSP contributions, tuition & education expenses for your child, deductible interest, etc). To lower the amount of income tax deducted from your paycheque, tell Canada Revenue Agency about these deductions and credits ahead of time.
Instead of playing catch-up with your RRSPs, set up an automatic withdrawal plan to transfer money from your bank account to your RRSP investment.
Example: Your usual RRSP contribution each year is $6000. Instead of making a lump-sum contribution, you break up the contribution into $250 payments that are invested bi-weekly. Not only is this more manageable, your first $250 has had one year in the market to grow. The next contribution has one year less two weeks, etc.
It makes more sense to have the withdrawal come out the same day your pay is deposited into your bank account. This way, you won’t be tempted to spend it. The resulting increase in your take-home pay should be used towards building your savings automatically. If you then deposit that money in a Tax Free Savings Account (TFSA), not only have you avoided having to pay tax on the income, you also won’t pay tax on any of your investment growth. As with all investments, this should be done automatically as well. Your monthly budget will be the same, but you will build a decent investment portfolio instead of waiting for the government to give you your own money back.
Tags: Investments, Mutual Funds, RRSP, Tax Free Savings Account, Tax Planning, Taxes, TFSA
This entry was posted on Tuesday, October 20th, 2009 at 8:02 am and is filed under Investments, RRSP, TFSA, Tax Planning. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
