RRSP Season: Why Last-Minute Contributions Could Cost You
The image above, posted on Flickr, is of a Hina Matsuri display, the Doll Festival, held in Japan on March 3 every year. On this day, families with girls wish their daughters a successful and happy life. March 3, 2025 also happens to be the RRSP contribution deadline for the 2024 tax year.
The Unexpected Problem
It’s February, and “RRSP season” is in full swing. Canadians are scrambling to make last-minute contributions before the deadline. Some are even taking out RRSP loans to maximize their deduction, and the banks do their best to make it easy. But what if I told you that this approach might be costing you money and increasing your financial stress?
The Procrastination Trap
Many people see RRSP season as an opportunity, but in reality, it reflects a procrastination trap that leads to suboptimal outcomes. Why? Because contributing at the last minute means missing months of tax-deferred growth. And if you borrow to make your contributions before the deadline (March 3, 2025 is the last day you can contribute for the 2024 tax year), you are further eroding the financial benefit of the RRSP.
Why This Problem Hurts You
The Cost of Procrastination
Imagine two people: Alex contributes $6,000 to his RRSP at the beginning of January every year, while Robin waits until the end of the year to contribute. This is still two months earlier than some people do, but let’s give Robin a break (it also gives me a break, as this is easier to calculate).
Because Alex’s money is invested for the full year, after 20 years, his retirement savings could be significantly more than Robin’s without contributing a single dollar more or pursuing a more aggressive portfolio allocation. Looking at the table below, you can see how the difference is nearly $10,000 better for Alex versus Robin.
The RRSP Loan Trap
Banks love promoting RRSP loans but borrowing money at 5.20% to get a tax deduction of maybe 23% (see table below) is not necessarily a great deal, especially if you add the factor of waiting until the last month to contribute. Let us imagine that you borrowed $6,000 to contribute to your RRSP by March 3 and that you were in a 23% tax bracket. That would reduce your taxes by $1,380.
However, we have to consider the interest that is a part of the loan being paid back. To fully pay back the loan over 12 months requires payments of $514.19. Multiplied by 12 months means a total of $6,170.34 will have been paid, of which $170.34 is interest. This reduces the effective tax deduction to $1,209.66 ($1,380 – $170.34). Contribution amounts and interest rates will change over time, but assuming these figures held steady, this would cost the borrow-and-contribute RRSP holder about $3,407 over 20 years.
Combine the last-minute contribution pattern (a loss of $9,920) with borrowing at interest to contribute (a loss of $3,407), and we have a 20-year difference in returns of $13,327. I will concede that contributing at the last minute and borrowing to contribute – as long as the loan is paid back in a year – are better than not contributing at all, but these patterns of behaviour come with costs.
The Stress Factor
In sum, every February, many Canadians experience financial anxiety trying to find a lump sum to contribute. This creates a cycle of stress, last-minute decisions, and often suboptimal investing choices.
A Better Way to Contribute to your RRSP
Small, Regular Contributions Win the Race
Instead of a lump-sum scramble as the deadline approaches, automate your RRSP contributions throughout the year.
Contributing $500/month instead of a $6,000 lump sum helps you avoid the stress and also allows you the benefit from dollar-cost averaging. When you borrow to invest you are actually paying more than $500 per month anyway (see above). This approach allows you to contribute earlier and avoid the cost of borrowing.
Perhaps most importantly, by automating the payments you will hardly even feel the money leaving your bank account. Indeed, it might be even better to have the contributions coincide with your payment schedule, most likely bi-weekly (every two weeks) or semi-monthly (twice a month) so that the money is transferred to the RRSP before you even look at your chequing balance.
If you’re investing in mutual funds, you may also be able to set up a systematic investment plan so that the money is automatically invested in the fund (or funds) of your choice.
What About Lump Sum Investing?
At the beginning of this blog post, we compared Alex to Robin and noted that Alex contributed to his RRSP in a lump sum at the beginning of the contribution year rather than the end. I think it is fair to say that most people contribute to their RRSPs on a Dollar-Cost Averaging basis because they cannot gather up enough money to contribute all at once. However, if your ability to save is such that you can contribute to your RRSP in a lump sum at the beginning of each year, then go ahead and do so. While you are at it, make a lump-sum contribution to your TFSA as well. But I digress.
One issue, though, is that you will probably find that your contribution room changes yearly. For that reason, you may want to contribute a smaller amount via Dollar-Cost Averaging and then top it off once you receive your Notice of Assessment and are told your available contribution room for the year.
The Tax Benefit Happens Anyway
This is an important point to remember. Many people rush their contributions just for the tax deduction, but RRSP tax savings apply whenever you contribute whether in February or July. If you set up automatic contributions, you still get the same deduction but without the last-minute panic.
The Positive Results of Change
Less Stress, More Savings
You won’t have to think about RRSP season anymore because your contributions will be made automatically. As hinted at above, there is no such thing as an RRSP “season”; you can contribute any time of the year. If you automate the contributions, it will be just like another bill you need to pay, like for heat or electricity. This assumes you are not having trouble paying your monthly bills. If you are, then a different conversation is called for.
You’ll avoid borrowing money and paying unnecessary interest. There are solid reasons to borrow and pay interest, and indeed, borrowing to invest can be a smart strategy, especially if you can deduct the resulting interest from your income. You cannot do that, however, with the interest on a loan taken out to contribute to an RRSP or any other registered account.
You’ll accumulate more wealth over time because your money is invested sooner and for longer. Here, I am referring once again to the benefit of Dollar-Cost Averaging, monthly (or bi-weekly or semi-monthly) contributions to your RRSP. By continuously contributing to your account, you have the potential for growth on the contributed amounts right from the very beginning.
A Simple Action Plan
- Set Up Automatic RRSP Contributions. If you can’t do $500/month, start with $50, $100 or $250. Anything is better than nothing.
- Review Your RRSP Plan Annually. Adjust your contributions based on changes in income and the Pension Adjustment, both documented on your T4. If you have variable income or are self-employed, wait until you get your Notice of Assessment and adjust your contributions accordingly.
- Think of RRSPs as an Ongoing Habit, Not a One-Time Event. A 35-year-old has about 30 years to go before retiring and could easily have another 30 years in retirement. Preparing for retirement is a lifelong endeavour.
The Call to Action
To recap, consider these three points:
Make RRSP season a thing of the past
For many Canadians, RRSP season has become an annual ritual—one filled with stress, rushed decisions, and sometimes even costly mistakes. But it doesn’t have to be this way. Instead of treating RRSP contributions as a last-minute scramble, you can shift to a system that allows you to save steadily and effortlessly throughout the year. By making smaller but regular contributions, you’ll break free from the cycle of financial anxiety and set yourself up for long-term success.
Automate your contributions today, and you’ll never have to stress about last-minute RRSP decisions again
One of the easiest and most effective ways to ensure consistent saving is to automate your RRSP contributions. Setting up automatic transfers, perhaps aligned with your pay schedule, ensures that saving for retirement becomes a built-in habit rather than an afterthought. This approach eliminates the emotional burden of making lump-sum decisions and ensures that your money is working for you as soon as possible. Plus, with automation, you never have to worry about missing out on valuable tax deductions or investment growth.
Your future self will thank you for the extra savings and peace of mind
Imagine looking back 10 or 20 years from now and seeing a well-funded retirement account, built not on last-minute contributions but on steady, disciplined saving. Your future self will be grateful for the financial security and the peace of mind that comes with knowing you planned wisely. Instead of wondering whether you’ll have enough to retire comfortably, you’ll have the confidence that you made the right choices early on. The best time to start was yesterday; the second-best time is today, so act now and build a stress-free path to retirement.
This is the 280th blog post for Russ Writes, first published on 2025-02-17.
Note: I will not be posting to my blog for the next two weeks (February 24 and March 3).
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.