Friday, March 9, 2018 / by Ruth Ballantyne
(NC)-Coming up with a significant amount of cash in order to make a lump sum contribution to your RRSP can be difficult. Financial planning experts suggest that monthly instalments, withdrawn automatically from your bank account, may be less financially painful and give you additional advantages.
According to Aurele Courcelles, the director of tax and estate planning at Investors Group, monthly pre-authorized contributions allow you to take advantage of the rises and falls of the stock market through dollar-cost averaging while enforcing the personal savings discipline we wish we had on our own.
"Coming up with a significant chunk of cash before the RRSP contribution deadline can be difficult," says Courcelles. "Setting up a regular payment plan with an amount that you can afford will not only ensure that the money makes its way into your retirement savings, but also that you benefit from the compound investment returns."
He provides the following example:
• You set up a regular investment plan to invest an amount you can afford - $250 into your RRSP on the first of every month.
• At a compound annual return of 6.5 per cent, you'll have $278,000 of pre-tax assets after 30 years.
• If you wait until the end of each year and invest $3,000 in a lump sum, you'll have only $259,100.
• By PAC-ing each month, you add potentially $18,900 to your retirement fund - and it doesn't cost you an extra penny.
Note that the rate of return in this example is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investment. The illustration ignores the tax savings produced by the tax deductible RRSP contributions.
"Your regular PAC contributions generate a tax benefit for the current tax year and you immediately start enjoying long-term tax-deferred appreciation," Courcelles adds.
More information on this topic is available from the Investors Group, or contact a financial advisor to get specific advice about your circumstances.
Editor Note: This column, written and published by Investors Group Financial Services Inc. (in Quebec-a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments.