RRSP’s make a lot of cents!

12 Mar

So you missed the March 1 deadline to make a contribution to your RRSP and claim a reduction in your taxes for 2018? Think about how much that cost you, both now in terms of money you have to pay CRA on your earned income, and later, when you retire and could benefit from having more savings.

Contributing monthly to an RRSP makes a lot of sense (cents). Not only will it reduce your stress level of coming up with a significant amount of cash once a year, the difference in how much you have put aside is quite dramatic. Here are two scenarios to illustrate the point:

  • Mollie opened an RRSP last year. She contributes $800 per month at the beginning of each month. If she continues to contribute that amount over 10 years and gets an average return of 5% on her investments, she’ll have $124,743 at the end of that time.
  • Jason also opened an RRSP last year. However, he contributed $9600 to it right at the deadline and did the same this year. He plans to continue doing that every year. Even if he gets the same return of 5% on his investments, his total at the end of the ten years will be $120,747. That’s almost $4000 less than Mollie. If we continue the equation for another 10 or 20 years you can see how the difference will multiply. I might be enough for a few nice little winter holidays in retirement.

What about the potential tax refund for each of our savers? According to an online tax calculator, there is a reduction of $2847 in taxes due if Mollie or Jason (living in Ontario) earn $75,000 but contribute $9600 to their RRSP. That’s more than pocket change! All the years that these savings build up, there is no tax to pay either on the amount you put in or the growth in the plan. By not charging you tax, it is like the government is giving you an interest free loan until you retire, and then you gradually take the money out and repay the tax. Besides you will surely enjoy your retirement more with the savings you have and you won’t have to survive on the CPP and OAS.

I work with my clients to set up Cash Flow Plans that help them and their families get more out of the income they already have. The plan often illustrates how they can make monthly contributions to their investments by finding extra money which had been literally flowing out of the house “sans cash flow plan”. 

Contact me if you are interested in exploring Cash Flow Planning and monthly up front contributions to maximize your RRSP and reduce your stress in February. Before you know it, it will be February 2020!
It’s just good advice.