Timing RRSP contributions is one of the most common quandaries facing investors as they wonder whether it best to make their contributions in lump sums or as regularly scheduled payments.
Many investors find pre-authorized contributions (PACs) the most appealing because it relieves the pressure of having to find all the funds at once. PACs allow them to contribute regularly to their RRSPs by a systematic withdrawal of funds from a designated source, such as a bank account.
PACs are very flexible, as frequency and contribution amounts can be tailored to individual preferences. For instance, many investors opt to make contributions concurrent with their paycheques.
Using PACs also makes sense from an investing perspective, as they are essentially a method of dollar-cost averaging and enable cash dividends to be reinvested on a regular schedule at prevailing prices.
During the 2008 financial crisis, this strategy allowed investors to build their portfolios at historic lows. By regularly investing through PACs, they ultimately lowered the total average cost base of their investment.
PACs are an efficient way of compounding savings. An investor who contributes $500 into an RRSP at the start of every month and earns a compound annual return of 6 per cent, would have just over $505,000 pre-tax after 30 years. However, if that investor instead made lump sum payments of $6,000 at the end of every year, the result would be approximately $474,000 in pre-tax assets, or $31,000 less.
Investors aren't restricted to making contributions solely through bank accounts. Some employers set up group RRSPs that allow for automatic payroll deductions, which means RRSP contributions are made with pre-tax income. Many investors prefer this route, but the downside is that many group RRSP plans limit the types of investments that can be held.
An investor who is unhappy with the investment options in the employer's
group RRSP may consider opening a broker-age RRSP account and arrange for monthly deductions from their pay. Although the payments are post tax the investor can compensate by reducing the amount of tax deducted at source, which the CRA allows where there are expectations of RRSP deduction claims.
Investors with assets held in non-registered accounts can use some of their earnings to make RRSP contributions.
Many will sweep the cash dividends and interest from their non-registered accounts into their RRSPs, while others make in-kind contributions of securities.
A similar approach can be used with rental property income and other sources of regular income.
Those needing to make lump sum payments may have options. Instead of scrambling at the end of the RRSP season to come up with the contribution, these investors might do a bit of planning and consider ear-marking year-end bonuses or tax refunds for RRSP contributions.
Regardless of the approach, investors should make certain their timing fits their ability to contribute and that their contributions fit their RRSP limits. A quick check of the last CRA assessment will provide that information.
Kim Inglis, CIM, PFP, FCSI, AIFP is an investment advisor and portfolio manager with Canaccord Wealth Management, www. reynoldsinglis.ca.