Regular contributions offer peace of mind

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This article was published 24/02/2014 (4224 days ago), so information in it may no longer be current.

The best time to buy an RRSP is your first day of work. The second-best time is today.

That’s an old saying Sunrise Credit Union branch manager Mike Brolund strongly agrees with, and it’s an appropriate thought as the March 3 RRSP deadline quickly approaches.

But how do you avoid getting anxious this time of year?

“The best way is to pre-plan,” Brolund said. “We encourage our members to set up a pre-authorized contribution throughout the course of the year, so when it comes time to file their taxes, they’ve got the contributions already looked after.”

Many credit unions and banks, such as Sunrise, will offer special products and incentives to help investors get the most out of their RRSP.

“We will pay a one-per-cent bonus if they have a regular contribution to an RSP deposit,” Brolund said.

With a minimum $25 automatic pre-authorized withdrawal per month, the bonus goes into the savings plan.

“The products that we offer are the same all year around,” he said. “We’ve got variable-rate deposit, we’ve got term deposits that will pay a guaranteed rate of interest and our preferred shares are also RSP-eligible.”

The nice thing about RRSPs, Brolund said, is that the growth compounds and is tax-sheltered until presumably when people retire and they’re in a lower tax bracket.

Brolund encourages getting a head start on contributions.

“The easiest way is when they get their notice of assessment back from their taxes — so their last year’s taxes are completed — it will tell them what their RRSP contribution room is, so if they’re mindful of that, then they can contribute up to that amount.”

And if money is tight come deadline, banks are more than happy to offer a loan to make contributions.

“Loans are available all year around,” Brolund said. “The loans we have for contributions are at prime, so it’s a favourable interest rate.”

Brolund said taking out a loan may be ideal for those closer to retirement to take full advantage of the tax shelter.

“People that are getting closer to retirement are most likely to be able to afford a larger loan payment,” he said. “As we head into retirement, in a perfect world all the rest of your debts are getting paid off, maybe your mortgage is almost paid off or you don’t have a car loan, things like that, so maybe you can afford to borrow the money to make a large top-up contribution to your RRSPs, but it’s up to each individual.”

Reducing household debt is still a concern for many and should be a factor when looking to take out a loan. So for some, a loan may not be the best course of action.

“For some, it does make sense, for others, not so much,” Brolund said. “If you’re close to retirement and you have a lot of debt already, I’m not sure that borrowing more money just to put it into an RRSP is the right thing for you to do because it doesn’t really have a lot of time to grow tax-sheltered anyway.”

As the deadline draws near, however, Brolund said there’s less of a scramble to contribute than there was in the past.

“There’s not really a big rush like there might have been (in the past),” he said. “There was a period of time when that’s all you did for the month of February was RRSP contributions.”

According to a recent survey by BMO Bank of Montreal, more than 40 per cent of Prairie investors said they have already made contributions to their RRSP and 49 per cent said they had plans to. A whopping 81 per cent of those surveyed have an RRSP — significantly higher than any other part of Canada. The average contribution on the Prairie’s last year was $3,811, the second-highest average after Atlantic Canadians.

Brolund said investors are simply more educated than they used to be.

“People are just more educated, more conformable using RRSPs as a means to defer tax and to plan for retirement,” he said.

“Nowadays, people are doing a better job of planning ahead and getting ready for it. Some of the last-minute stuff we see now is more people just topping up their contributions. They may have done a preliminary assessment once they got their T4s together and saw that they have to pay some tax maybe and they decide to top up to avoid paying the tax or avoid paying more tax.”

Brolund also said that in the past, institutions didn’t necessarily have the means or programs to allow people to make regular contributions. Instead, they had to put lump sums into their savings plan.

» Brandon Sun