Getting Better RRSP Results

When is the best time to make your RRSP contribution? Any time is a good time. Unfortunately, the fact is that most Canadians wait until the legal deadline to invest in this important tax shelter. Given the choice, though, it's better to invest in advance of the deadline for two important reasons:

First, those who set their contribution targets early and invest well in advance (often on a monthly basis) find it's easier to budget for a larger tax-sheltered investment (up to their affordable RRSP contribution limit) than those who wait.

Second, the more you contribute, the better off you'll be, both in the short term, through tax deductions (the true cost of your contribution is much lower than it appears because each RRSP investment generates a tax deduction) and in the long run, as you accumulate a larger total portfolio.

To illustrate, let's assume you are allowed to invest $8,000 in an RRSP on an annual basis. If this tax shelter held an investment earning an eight per cent* return for 20 years, your RRSP would then be worth $366,096 based on a total investment of $160,000. If, however, you contributed only half that amount annually ($80,000 in total) and earned the same eight per cent* return, your RRSP portfolio would only be worth $183,267 at the end of 20 years.

The outcome is important because a larger portfolio means more lifestyle choices later in life and a more comfortable retirement. Making your contribution at the beginning of the year, instead of at the end of the year, gives your RRSP investment greater time to compound tax-free and grow in value. Investing $5,000 at eight per cent at the beginning of the year over a five-year period will give you $2,344 more than if the same amount was invested at the end of the year. Compounded for 30 years, this becomes an extra $45,267. Obviously, there is significant benefit to making your contribution early in the year.

As important as it is to make your maximum contribution each year, contributing on a regular basis is also a sensible investment strategy. You will find this year's contribution limit on the Notice of Assessment sent to you from the Canada Revenue Agency (CRA). On the same note, it is equally important to start your RRSP as soon as possible. An extra five years of tax-free compounding investment returns makes a big difference. Investing $5,000 per year at eight per cent gives you $365,530 after 25 years compared to $566,416 after 30 years. The difference is $200,886. Ultimately, it's a matter of choice.

What's vitally important, however, is to never miss a year. Always contribute and always contribute to an investment that delivers superior long-term returns — returns that outpace inflation.

The information contained herein is considered accurate at the time of posting. CIBC, CIBC World Markets Inc. and CIBC Investor Services Inc. reserve the right to change any of it without prior notice. It is for general information purposes only. Clients are advised to seek advice regarding their particular circumstances from their personal tax advisors.

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