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Pay yourself first this RRSP season. A get rich slowly method that really pays off

May 27, 2019

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Pay yourself first this RRSP season. A get rich slowly method that really pays off

Planning & Advice

Did you make an RRSP contribution this year? If so, you may have been like the majority of Canadians (60%) who waited until the last two weeks before the deadline to contribute*.

The last-minute scramble is stressful and risky. Missing the deadline could cost you a potential tax refund — plus the growth that reinvested refund could have earned.

There’s a stress-reducing, money-making solution — set up a pre-authorized contribution (PAC) and pay yourself first.

Setting up a pre-authorized contribution has several benefits:

  • You’ll make saving a regular and rewarding habit without lifting a finger 
  • Never worry about another RRSP deadline or taking advantage of new contribution room as it becomes available
  • By investing more of their money sooner, those who contribute regularly can earn more

Set up a Pre-Authorized Contribution (PAC) and enjoy compound growth all year round

Stay ahead of the game with a PAC — and you can gobble up more compounding growth in your investment account the whole year through.

Here’s an example. Let’s say you budgeted to invest $12,000 into an RRSP. You may have considered two options: 

  • Option A: Invest $1,000 each month in 2019 for 12 months, earning a 6% annual return.
  • Option B: Invest $12,000 on February 29, 2020 (the RRSP contribution deadline for the 2019 tax year). 

With Option A you’d be $335.56 richer on March 1st. That means, instead of making a $12,000 RRSP contribution for the 2019 tax year, you’ve got $12,335.56 to invest. 

Apply this strategy over the decades and that compounding effect can make the additional returns more meaningful. 

But what if I need that money throughout the year? The TFSA to RRSP solution

You may want to or need to keep your investment funds available for spending. You might not have regular income (think gig economy) or you may have a potential spending need such as a trip or new car or property.
 
You don’t have to commit to an RRSP right away. Use a TFSA account for the regular contributions. The flexibility of a TFSA allows you to make withdrawals without tax consequences at any time. So you can dip into those funds should you need them throughout the year. Then, as you approach the March 1st RRSP contribution deadline, transfer the money from your TFSA into an RRSP account. 

That way you get the flexibility of a TFSA with the tax advantages and refund potential of an RRSP. That’s called the proverbial win-win!

Have your cake, and eat it too! 

Paying yourself first each month instead of waiting until the end of the year is a smart way to reach your financial goals sooner. Couple that with the flexibility of the TFSA to RRSP strategy mentioned above, and you get compounding growth and peace of mind in knowing those funds can be accessed throughout the year in case of an emergency.

Setting up a PAC is fast and easy! You decide how much or how little you’d like to contribute and how often you’d like to make a deposit.

WealthBar clients can set up recurring deposits in minutes from our mobile app or desktop site. 

Is your money living up to its potential? 

Speak with a WealthBar financial adviser to find out. It’s free, even if you’re not a client.

*Source: RRSPs: The last minute is here 

Disclaimer: 
This blog post may make financial planning assumptions such as rate of return, inflation, and/or tax rates to illustrate a concept. It is provided for informational purposes only and is not to be considered as investment advice. Investment returns are not guaranteed. The value of your investment may go down as well as up. There may be significant differences between the investments that are not discussed here, including different investment objectives and risk factors. 

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