To invest or not to invest? That is always the question this time of year, in the lead-up to the looming March 1 RRSP deadline.
We talked to Nancie Taylor, senior wealth advisor at Meridian Credit Union, on why you should buy into Canada’s oldest retirement investment vehicle outside regular company pensions.
Should people just starting out in their careers bank their RSP contribution room for when their income is higher?
Everyone’s financial situation is different. That being said, saving from a young age is the key to financial freedom during retirement. Setting up a simple PAC (pre-authorized contribution) when you start your first job will allow you to incorporate savings into your monthly budget. Depending on your tax credits and income level, it may also be beneficial to allocate a portion of your year-end bonus to your RSP tax-free. This is an option every young person should inquire on with their employer. It is important not to just look at the tax benefit of an RSP, but also the ability to save from a young age and allow savings to compound over multiple market cycles. We must also remember the benefit of the “first time home buyer” option we have in Canada. Young professionals can enjoy the benefit of tax-free growth in their RSP and use this savings and growth to put a down-payment on their first home. So there are a multitude of benefits with starting to contribute to an RSP from a young age.
Do self-employed people or business owners really need an RSP?
More often than not, Canadian small business owners pay themselves enough salary and bonus to ensure they can maximize their RSP contributions each year regardless of whether they actually need the cash personally. The ins and outs of being self-employed and having your own business really need to be analyzed on a case-by-case basis by a tax professional to ensure you are maximizing your savings for retirement.
Should I really invest in an RSP when the markets are so volatile?
Timing the market is essentially impossible. You might get it right once, maybe twice, but to do it on a consistent basis is near impossible. I encourage every investor to find an advisor they trust, have a financial plan, and don’t let the unpredictable short-term swings in markets get them off their path. Investment professionals focus on three and five-year numbers and that’s what investors should focus on as well. Focusing on the last six months, or even one year will only lead you to chase returns, make basic investment mistakes and erode any potential for returns.
What are the benefits of a short-term strategy such as “park-and-play”, where last-minute contributors park their money for the short term and then decide later where to invest for the long haul?
When it comes to making RSP contributions before the deadline, this strategy could make sense for investors. It is better to get the contributions in before the RSP contribution deadline and benefit from a tax refund a year earlier than it is to wait until you’ve determined what you want to invest in, miss the deadline and have to wait another year for the refund. It’s even better to start contributing regularly starting at the beginning of the tax year. Over time, it’s better to get your money invested sooner, in regular contributions, then gather your money in a lump sum and try to time the market.
Is it worth trying to catch up on missed RSP contributions for people close to retirement?
It is very important to always look at your financial situation in its entirety. Understanding the benefits of different account types and tax benefits that are associated with different accounts will allow you to figure out what is best for you in your unique situation. It is always important to keep in mind that an RSP allows you to compound your savings with no tax implications until you need to withdraw your money. Depending on your income needs and age of retirement, it might be beneficial to max out your contribution to allow your money to grow until you need it. You don’t have to withdraw from your RSP until age 71. For others, it may make more sense to contribute to a TFSA, if they have larger amounts in RSPs and are getting closer to age 71, when they have to start taking out money. It’s important to look at everything from a wide lens to ensure your financial goals are met during retirement.
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