RRSP season: the big gimmick
It’s RRSP season.
Let’s call RRSP Season it what it is: the Hallmark holiday of the financial industry. It’s a made-up name for that time of the year when financial institutions push RRSPs and encourage you to get your contribution in ASAP.
RRSP season is as gimmicky as Valentine’s Day. Both holidays serve as a reminder to do something good (save for your retirement/tell your loved ones you appreciate them) and result in a frenzy of last-minute activity (making an appointment with your bank/wrestling someone for the last heart-shaped box of chocolate at Shoppers Drug Mart). Admittedly, both could have a nice payoff but in reality, shouldn’t we be doing these things all year round?
“RRSP season” simply means that the deadline for contributing to an RRSP is March 1st. If you make an RRSP contribution on or before March 1, 2023, you can deduct it from your 2022 income for tax purposes. After March 1, you will have to use it against income you earn in 2023 or later.
Since making an RRSP contribution isn’t usually high on the fun list, some people just don’t get around to it all year. As the heat ramps up in February – thanks to the bank marketing frenzy - they make an appointment at the bank branch and throw in a random amount. Trust me – I’ve seen in action. When I worked in a bank branch many years ago, I loved RRSP season: it was busy, slightly frantic, and really boosted my sales points. We even decorated the branch!
So why is RRSP season a problem?
There are three things “wrong” with RRSP season: it applies pressure to a situation that needs proper consideration, it enables ad-hoc retirement planning, and it can result in poor investment decisions. (I’d like to make an analogy to Valentine’s Day but that seems risky – something along the lines of getting swept up in the hype.)
As the RRSP season marketing ramps up, people can be made to feel like they can’t miss out. The messages coming from the financial institutions can make people feel like “Everyone else is doing it, so I should too.” People don’t want to lose out on reducing their taxes when other people are getting tax breaks.
This is a terrible way to look at RRSP contributions – although paying less income tax is great, without understanding how it works, RRSP contributions might be made inappropriately.
Here is the quick and dirty on the tax benefits of contributions: you contribute while you are working and you get to lower your income by the amount of the RRSP contribution. If you earn $75,000 a year and make a $5,000 contribution, you are only taxed on $70,000 of income (roughly speaking). When you are retired and you take that $5,000 out of your RRSP, you will pay tax on it just like it was regular employment income. The benefit is that at age 75 you might be in a lower tax bracket than when you were 55 because you’re not working. So the tax break you get at 55 is bigger than the tax you pay at 75.
This doesn’t work for everyone, though. Some people aren’t in a high tax bracket now; for example, self-employed individuals might be able to lower their taxable income with deductions. Or taxable income might be lower due to losses on a rental property or simply by earning a modest income.
In addition to considering your taxable income, you need to account for your other savings options, especially the TFSA, which is a flexible, never-taxable account that has several benefits versus an RRSP.
The RRSP contribution rush doesn’t promote proper planning. Retirement savings plans should be just that: plans. It’s ideal to have a plan for how much you want to put away for retirement every year, to have a sense of how much you need to save to retire when you want. And furthermore, it’s much better to sock away an amount every month, or every paycheque, rather than waiting until the end of the year. Why? Well, we are people who like to spend our money and if it’s in our bank account, that’s likely to happen. Putting it in an RRSP makes it much harder to access. You know, it’s the old “pay yourself first” thing, which can also be thought of as “reverse budgeting” (spending what you have left after saving).
Sure, I’ll take that
Lastly, the last-minute RRSP contribution method doesn’t allow for a proper conversation about how to invest it. In my bank branch days, I’d have a stack of mutual fund order sheets on my desk at the end of the day starting around February 24. Customers were getting the quick-and-dirty version of investment advice: neither of us has time to dedicate to an in-depth conversation about investment options so we made a quick decision based mainly on how much risk the person thinks they can tolerate. The result was usually an easy mutual fund sale that the customer probably didn’t understand. Sometimes (and even worse), the customer would be in a rush and not even take the time to do that – and the money would sit in a RRSP account doing nothing.
What’s the alternative?
Look, I get it. I’m really into financial planning and investing so for me, the answer is obvious: make a plan. Figure out how much to contribute to an RRSP, if anything. Set up automatic transfers into your RRSP from your chequing account. Learn about what investments are best for you. Taking a little time to get this set up and making it a year-round endeavour will save you from RRSP season. The same might be said for Valentine’s Day.