February. RRSP season. Really?
Well, the turn of the calendar to the short month means RRSP ads are ramping up big time. It’s RRSP “season”, the deadline Feb 28.
You can donate to an RRSP at any time of year. Why is February RRSP season?
Because of the deadline. Marketers know how we tend to procrastinate until a deadline looms, and they take full advantage of that. Most people delay until confronted with a deadline.
While it makes sense from an income tax perspective to have the deadline match that of all other tax documents and just before tax filing season, it’s a dumb time of year for the average consumer.
They’ve just spent their money on Christmas and, for the lucky ones, a sunny, palm-treed getaway. Now they’re faced with RRSP contribution time.
Aha! Perfect for the lending institutions–RRSP loans to meet the magic deadline!
Oh, how they prey on our human frailties! And how we oblige!
If only we’d contributed methodically throughout the year, we wouldn’t be spending the returns on our RRSP investments to pay the interest on the money we borrowed to buy them!
But should we even be buying them? It’s not as obvious as the marketers—even the government–would have you believe.
Investing in RRSP’s may be a good idea under the right circumstances:
- If you plan to make less after you retire than you do now–enough so, to put you into a lower tax bracket. For many, that may be a reality. But it doesn’t need to be. Those who have been savvy investors throughout their lives often make more in the later years as the compounding curve on their investments rises ever more steeply. (That’s another topic; it could consume many posts.)
As “Rich Dad” (Robert Kiyosaki) likes to say: “If you plan to make less after you retire, you probably will. But why plan that way?”
- If you expect tax rates not to rise between the time you invest in the RRSP and the time you start withdrawing. Otherwise, even if you end up in a lower bracket, it may not mean a lower tax rate. It depends on how much faith you have in our governments not to raise tax rates between now and then. Please let me know if you have that crystal ball.
- If you invest your RRSPs into funds that, after all fees, will return to you more than inflation eats away from those earnings. Otherwise, you’re just storing your money at a declining value. (And please don’t confuse RRSPs with mutual funds, as many people do—and I once did; they are two completely different things.)
Of course, if you have plenty of money and are just buying RRSPs to defer taxes, and don’t mind making zilch, or less than that, in the meantime, then this is not a concern.
- If you make a windfall income one year that will put you into a higher tax bracket and you would like to defer those taxes to another year when you won’t have that problem. In this case, you may not have any intention to leave them there until retirement.
- If you need the public pressure of RRSP marketing to incentivize you to save up money for the future. If you can afford the taxes now, though, you may also want to consider a TFSA option (depending on how you come out on points 1-4). Both are ways to grow your money with the benefit of paying the taxes on them at the time of your choosing.
The bottom line: Buy RRSPs if, after serious analysis of your situation and perhaps some mathematical calculations, they make sense in your circumstances. Don’t buy them just because the marketers are pressuring you, or there are societal expectations.
Because buying them may or may not be a good thing.
At least, that’s how I see it . . .