How to Make it Through RRSP Season

Young professionals should learn to view the RSP as one of several wealth-building strategies to juggle, says Doug McDonald

Pause before putting money into your RRSP and remember alternatives such as mortgage overpayments and high-risk plays in TFSAs

Financial planners say young professionals looking to build wealth should pause before locking up all their spare cash in a registered retirement savings plan (RRSP) and consider alternatives such as parking higher-risk investments inside a tax-free savings account (TFSA), or–if they’re in the real estate market–making mortgage overpayments.
As the March deadline to contribute approaches, bank surveys flip flop between cheering our prudent planning and bemoaning our impoverished nest eggs: RBC recently dubbed 2014 the year retirement savings would outrank debt reduction, BMO found nearly two thirds of Canadians would contribute at least $2,000 to their RRSPs this tax season, but also that overall contributions had dropped in 2013, while Scotiabank found 40 percent of respondents were planning to raid their RRSPs this year to pay debts, cover living expenses or top up a down payment for a first home.

It’s a fragmented picture. And while there’s no universal advice that fits all, Doug Macdonald, financial planner at Macdonald Shymko & Company Ltd., said young professionals should learn to view the RSP as one of several wealth-building strategies to juggle.

“What’s your marginal tax rate? 22 percent? Let’s pay down the mortgage,” he said. “Forty-four percent? Let’s do a bit of the RRSP and we’ll take the tax refund and pay down the mortgage.”
No mortgage and no plans for one anytime soon? Consider a high-risk investment play within a TFSA, said Macdonald, where the money remains accessible but investment income doesn’t get taxed.

Lynn Williams, a financial planner and owner of The Lifestyle Protector, endorsed keeping a good portion of savings liquid regardless of income levels.

“If you just think your house will help you in retirement, you’re going to find you can’t eat your house. So you might have some place to live in, but nothing to live on,” she said, advising Canadians to get into a regular savings habit. “I’m a savings fan. I believe in building up wealth separate from your home, so that you’re diversifying.”
This year’s RRSP contribution deadline is March 3rd. Whatever that means for you.