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RRSP: Lump Sum or Regular Contributions

Couple Reviewing Savings

Every contribution you make to your RRSP or any other savings account throughout the year helps get you closer to your goals, so why does everyone make a big deal about the RRSP deadline every year? The deadline is simply the final day that you can make an RRSP contribution and have that amount deducted from your gross taxable income for the prior year. As a result, a number of people rush to make a lump sum contribution to maximize their tax refund, and for some this is their only RRSP contribution all year. But is it the most effective way to maximize the amount you can save in taxes each year?

For some people, the answer is yes, particularly if you regularly come into a large sum of money around this time, such as a Christmas bonus. If not, you likely aren’t making the most out of what your RRSP plan has to offer.

Contributions impact your tax savings all year long, not just at the deadline, and there are other benefits to making regular contributions such as a pre-authorized transfer every pay period throughout the year. Paying yourself first is a tried and true savings strategy that is easy and automatic. Most people find they can better afford smaller contributions and ultimately end up saving a higher amount with this method since coming up with a single lump sum contribution isn’t always the easiest thing to do in a household budget, particularly right after the holidays.

If you’re invested in stocks, bonds, or mutual funds, by spacing out contributions you take advantage of something known as dollar-cost averaging, which reduces the impact of price fluctuations throughout the year. This often leads to a lower average cost for each unit of a mutual fund you purchase compared to buying them all at once, particularly if the fund increased in value during the year.

If you’re invested in an RRSP savings account or RRSP GIC, making regular contributions as opposed to a lump sum at the end of the year allows you to benefit from compound interest over a longer period of time. If you want to invest in an RRSP GIC but don’t have the funds to do so at the moment, a contribution to a high-interest rate RRSP savings account will allow you to benefit immediately from higher returns while saving for your GIC. Once you have a large enough sum in your savings account, you can transfer it any time to a Cambrian RRSP GIC and make the most of your long-term savings.

At the end of the day, every contribution you make is better than the one you don’t, but as with any major savings goals, a little planning can go a long way. Thinking of an RRSP deadline contribution as a top-up to your ongoing contribution plan rather than the primary focus of your retirement savings plan will help you reach your goals faster and retire more comfortably.