The RRSP season has now come to an end. The usual last minute RRSP contributors were able to make their final contributions yesterday to obtain tax receipts for the 2009 tax year. Looking back over the past two months, I have noticed that the amount of RRSP contributions were less than in previous years. There weren’t as many contributors as in years past and those investors that were able to make a deposit contributed less. Many advisors are blaming the economy on a slow RRSP season, but I think there is more to it than that.
It is true that the economy is coming out of the worst recession since the 1930s. Corporations and small businesses in general have not earned as much this past year as they once did. Therefore, management and employees were not able to receive bonuses as they once did either. A lot of the bonus money handed out at the end of the year in previous years went directly into RRSPs. Thus, the slow economy has had a negative impact.
Secondly, and perhaps more importantly, investors over the past few years have become very negative towards investing their hard earned money. In 2008, they witnessed the harsh reality of what a recession can do to their portfolios. Thus, I believe that instead of trying to make an RRSP contribution this year, many individuals have chosen to pay down debt such as lines of credit or mortgages instead. I am a big proponent of paying down debt when it makes sense, however individuals need to decide whether paying down their debt is the right option or is investing that money into an RRSP the better way to go.
A big part of the decision is dependent upon the interest rate being charged on the debt in question. If an investor could borrow money at three or four per cent today through a mortgage or line of credit to hopefully make eight or 10 per cent, why wouldn’t they do it? In my opinion, interest rates are so low today that it makes sense to invest versus pay down debt.
When interest rates are five or six per cent, then perhaps the decision is not so simple. I believe the markets are poised to have another positive year and those that can invest should look to profit from it. In some cases, investors can actually do both options, invest in an RRSP and pay down debt. The money the RRSP contributor will receive back (in some cases) from the government for making an RRSP contribution, can then be applied back towards their debts. Thus, it does not have to be one or the other.
I believe the final decision of whether to invest or not, or whether to invest in an RRSP or pay down debt, has more to do with the mindset of a person than anything else. Individuals seem nervous to make an investment. We know that whatever decision makes a person more comfortable will dictate their actions. It is therefore unfortunate, because due to the recent recession, what seems to make individuals comfortable today may not be the right thing to do for their future.
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Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.