As the RRSP deadline approaches, many Canadians will scrape together what they can from the dregs of their post-Christmas finances to make a contribution.
Despite constant pleas from financial advisers to develop a regular, disciplined and year-round approach, many still opt for the I'll-find-it-somehow-at-the-last-minute method.
While nine out of 10 RRSP contributors this season expect to invest as much or more than last year, according to a survey released in December for Manulife Investments, an arm of insurer Manulife Financial Corp., only about 40 per cent contributed through bi-weekly or monthly payments in 2002.
These laggards are not likely to be advised by Myron Knodel, manager of tax and estate planning with Investors Group Inc. in Winnipeg, who says most of his clients make regular RRSP contributions. He encourages others to do the same.
The danger of waiting until the deadline is the chance you won't be able to come up with the cash, he says. "If you don't have some kind of disciplined plan in place, you'll start to get behind in your RRSP contributions. That starts to become a bigger problem for each year it occurs."
You can contribute up to 18 per cent of your previous year's earnings to an RRSP, to a maximum contribution of $14,500 for 2003. This will rise to $15,500 for 2004, $16,500 for 2005, and $18,000 for 2006. Without a regular savings plan, even high earners have difficulty maximizing their contributions, Mr. Knoedel says.
Tessa Boyce, regional manager of BMO Mutual Funds Inc. in Toronto, says the Bank of Montreal encourages clients to make regular contributions to their RRSPs.
"I can't think of any better way to do it unless you're lucky enough to have enough cash on hand that you can make your whole 2004 contribution in January" and take advantage of a full year of tax-sheltered growth.
Mr. Knodel says people who make monthly or bi-monthly payments are also purchasing some protection from market swings. "It's a particularly good strategy if you are putting your money in equity markets and you are concerned about market volatility," Mr. Knodel says.
For fixed-income investments, "the rule is, the sooner you can make your investment, the better," because your money will have a longer period to earn interest.
Regular contributions are a relatively painless means of forced saving for cash-strapped investors, he says. "You don't miss the money because you're used to having it taken directly" out of each paycheque or your bank account.
Setting up a regular contribution plan also enables you to apply to the Canada Customs and Revenue Agency (CCRA) to have your employer reduce the amount of income tax withheld from each pay cheque, says Ms. Boyce. "That makes it easier to budget for the contribution" because it makes more cash available to you.
To have the tax reduced, it is necessary to fill out CCRA tax form T-1213 and also send the agency copies of the paperwork from the financial institution establishing your contribution program to confirm that you are contributing regularly to an RRSP. "It keeps more money in your hands and makes it more affordable" to contribute regularly, she says.
Most banks will accept monthly RRSP contributions starting as low as $50. "Often people will start out with small deductions and gradually increase the amount as they realize they can live without the money," Ms. Boyce says.
"If you think of your RRSP as an obligation you have to yourself for your future, it's easier to develop the discipline to pay yourself first" with monthly contributions.
© The Globe and Mail
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