Annual Top Up – When Does it Make Sense to Top Up Your RRSP

Your retirement plan is a core part of your financial planning. Investing in an RRSP is an excellent way to save up and achieve your retirement savings goals. Many Canadians wonder when it makes sense to do an annual top up on their RRSP’s.

Like all great things in life; your retirement planning is a long-term project that requires attention and regular maintenance. It’s best to contribute to your RRSP regularly at a consistent level year after year. It’s important to regularly invest in your RRSP, ideally monthly. Remember, your retirement savings plan is meant to be a long-term strategy and short-term market shifts will have little to no impact on your plan’s overall success. Your returns will also be slightly improved from the dollar cost averaging of monthly contributions.

Those who top up their RRSP annually will benefit by having a more robust and diversified retirement plan. This strategy will help position your plan against investment risk. Both people who are part of a group policy or an individual RRSP will gain from making annual contributions and will end up with more money for their golden years.

Another advantage of investing in an RRSP is the tax savings you will benefit from. RRSPs are tax deductible in Canada, any amount you invest will decrease the overall amount you pay in income tax. Also, the gains generated from your RRSP are tax-free until you decide to withdraw the money. It’s important to realize that $1,000 in an RRSP does not necessarily mean $1,000 in your pocket when it becomes time to cash in.

Those participating in a group plan may also immediate tax savings by requesting their employer have contributions deducted before the tax is deducted from their paycheque. Most people find that setting up automatic payroll or bank deductions is a convenient and affordable way to contribute regularly to their RRSP. It can be a very affordable and easy way to save without really thinking about it.

Many Canadians look forward to income tax season because they are due for a refund cheque from Revenue Canada. A tax refund is not a windfall; it’s actually money that you’ve already paid in taxes. Keep the new television on the shelf and plan for the future instead. Topping up your RRSP with an income tax refund can be an excellent way to contribute regular annual amounts without dipping into your savings. A refund of $2,000 may not seem like a lot, but when invested in an RRSP it can really help with your retirement savings plan. Imagine putting that tax return into next years contributions and getting even more tax back, that’s a positive snowball!

The reality is, roughly two-thirds of Canadians do not make RRSP contributions during a calendar year. Typically, topping up your RRSP by 12 percent of your before-tax income annually is a good benchmark. The best route to know how much to put down is to work with a financial planner and have an actual plan. Know how much you need each year to stay on your retirement target number.

There are no hard and fast rules when it comes to retirement saving and it’s important to design an investment strategy built for you, your budget and retirement goals. Any RRSP plan will benefit from regular annual top ups, not only will this strategy help grow your investment; it can provide you with some short-term tax savings.

At Tanner Financial Services, we’ve been helping both group and individual RRSP investors since 1999. Our experienced financial advisors are here to help you achieve your retirement savings goals. Learn more by speaking with our team today.

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