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Does making an RRSP contribution make sense for you? (iSTOCKPHOTO/iSTOCKPHOTO)
Does making an RRSP contribution make sense for you? (iSTOCKPHOTO/iSTOCKPHOTO)

Investing

To RRSP or not to RRSP Add to ...

Many Canadians will have to answer this burning question before the RRSP deadline on Feb. 29.

But it’s not just a case of checking out if there’s enough left in your bank account for a contribution, or thinking about what you’ll invest in, says Adrian Mastracci, a portfolio manager with KCM Wealth Management Inc.

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Instead, you need to start by asking yourself what your long-term needs are, he says. That will help you make the right decision about whether now is a good time for you to contribute to an RRSP or not, or whether it’s more beneficial for you to put your money in a TFSA (Tax-Free Savings Account), or pay off debts.

People need to ask themselves: “How does the RRSP fit into my total plan,” he says. “Stand back and ask the question: How can an RRSP benefit me?”

The RRSP began in 1957 and is now 55 years old, says Mr. Mastracci, but that doesn’t mean Canadians still don’t get confused about when they get the most benefit from contributing to an RRSP.

Before tossing in your cash, ask yourself: Should I put in the maximum allowed? Should I postpone or skip contributions this year? How will a contribution be a benefit? How will I pay for it? What are my alternative investment options?

Mr. Mastracci offers these scenarios as examples of instances where a person might choose to delay or skip an RRSP contribution:

  • If you’re in a low tax bracket, you won’t likely see much of a benefit (such as a sizable refund) in making an RRSP contribution and might prefer investing in a TFSA instead. “The TFSA is a different animal,” he says, and it doesn’t have to be changed at any time, unlike an RRSP, which has to be switched to an RRIF (Registered Retirement Income Fund) once you turn 71.
  • If you don’t have the cash, and don’t want to or can’t borrow, then holding off on contributing makes sense.
  • If you’re an investor seeking growth, you might prefer to invest outside an RRSP as only half of capital gains are taxed personally.
  • If you’ve invested an inheritance, your future tax rate might be higher than it is now, and so adding to an RRSP might not make sense.
  • If you have a large RRSP and no investments in unregistered accounts, you should review the impact of the RRIF minimum withdrawal rules after age 71. They may deplete your RRIF faster than you would want.
  • If you don’t have an emergency fund or need to save for a specific reason, choose a TFSA. Those with high debts would be better off reducing them than boosting their RRSP.

Here are some of the times when making an RRSP contribution provides more of a benefit:

  • If you expect your tax bracket will be lower in your retirement, then an RRSP makes sense.
  • It makes sense to do spousal deposits when the recipient spouse is in a low tax bracket or is younger than the contributor.
  • If you’re self-employed, then an RRSP can be a pension replacement.
  • If you can make an RRSP contribution and do something useful with the refund, such as pay down debt, reduce your mortgage or fund a TFSA, then you’ll get more benefit from your RRSP.
  • Investors can do well by keeping interest income in their RRSP while at the same time pursuing dividends and growth outside of their RRSP.
  • You can make your 2012 contribution early in the year if you the cash or other “in-kind” assets to add to your RRSP.
  • If you have cash now, but expect that you’ll be in a higher tax bracket later, then you can make the contribution now and defer taking the receipt until you jump up to the higher tax rate.

If contributing to your RRSP makes sense to you, then it’s best to get the money in their sooner rather than later, Mr. Mastracci says. “The longer [the money]is in there the longer it can grow tax deferred.”

And figure out what is feasible for you, to make a once-a-year lump-sum contributions, or a regular contribution each month or quarter. “It’s better to do something, whatever works,” he says.

For tips, stories, videos and live chats ahead of this year's RRSP contribution deadline, check the Globe Investor 2012 RRSP season section for daily updates.

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