I know. Here it is not even Thanksgiving and I’m urging you to think about something that normally isn’t on your radar until February — RRSP contributions.
There’s a method to my nagging. When you ignore your RRSP until the deadline you risk two things: Not maximizing your contribution or, worse, borrowing to make it.
It is all too easy to do the latter if you have a personal or home equity line of credit. I’ve even seen people take a cash advance on their credit card at RRSP time planning to pay it back with their tax refund.
But when the refund cheque arrives there are always other more pressing needs for it. You swear you’ll get rid of the RRSP debt and start contributing monthly. Then “oops!” here’s February again and the cycle repeats itself.
Even if you haven’t contributed a dime to date, you’ve still got five months before the deadline. Don’t worry so much about what to invest the money in, focus on getting the dough sheltered inside your RRSP.
Let’s say your contribution room for 2009 is $2,000. If you start now with $200 a month you will only need to find $1,000 in the new year to max out your contribution rather than $2,000. Big difference.
The other major reason for getting on top of your RRSP is the benefit of having the deduction. If you don’t contribute you can’t deduct — ergo, higher taxes. And if you don’t need the deduction right now you get to carry it forward until you do.
It is very easy to build up tens of thousands of dollars in contribution room and very hard to come up with the money, without borrowing, to take advantage of the tax deduction it represents.
Setting up an automatic contribution is by far the best way to go with your RRSPs. Once the habit of contributing regularly is ingrained and the money isn’t available for you to spend, you won’t think twice about it.
Alison’s Money Rule:
Start your RRSP contributions early and avoid New Year’s financial stress.
– Alison Griffiths is a financial journalist, author and host of Maxed Out on the W Network. Write to her at email@example.com.