To contribute last-minute or not?

Canadians have great tools to save tax-deferred or tax-free for the future — and the granddaddy of them all is the registered retirement savings plan.

The calendar now turned to February, RRSPs are on the minds of many, with the March 2 deadline looming for the last contributions for 2025.

Yet in the context of the other ways to save — the tax-free savings account (TFSA) and the newer, first home savings account (FHSA) — the RRSP is not always the most attractive place to park, invest and grow money.

The ideal is to fund all of these savings vehicles, based on need, to their annual maximums.

But few people — especially individuals starting out in their working lives — have the ability to do that. So they must choose one or split whatever savings they can contribute, for example, among a TFSA and RRSP.

Still, the RRSP is a powerful tool to save for retirement that shouldn’t be overlooked, especially by individuals earning higher incomes, says Dawn Tam, regional financial planning consultant for RBC in Vancouver.

“If we think back to what the purpose of an RRSP was to begin with, it continues to be the cornerstone for retirement planning,” she says. “The reason is contributions are tax deductible and growth is tax deferred.”

Done right, Canadians contribute when taxable income is high during their working years, receiving a meaningful tax deduction now, and then withdraw the money and pay less tax when their income is lower in retirement.

Launched in 1957, the RRSP was designed to help workers without pension plans. At the time, most with workplace plans had defined benefit pensions, still the gold standard today of retirement plans.

The RRSP acts a lot like a pension plan: contributions are tax deductible, investments inside it grow tax-deferred and withdrawals are taxable as income.

The only thing missing is the employer contribution. Today’s defined benefit pensions are mostly only available in the public sector; in the private sector, group RRSPs by which employer and employee contribute are the norm.

Tam says workers offered these plans are well-advised to join given the employer contributions are free money to save for retirement.

Contributing to your own RRSP outside of the workplace is still broadly advised — but not in all instances.

Those with strong pension plans — defined benefits, particularly — might want to fund their TFSAs instead. Once retired, a high pension income along with the government ones, like Canada Pension Plan, and a sizable RRSP could push individuals into higher tax brackets than when they were employed.

“The small tax refund today might feel good, but it might actually be bad in the long run,” says certified financial planner Jason Heath at Objective Financial Partners Inc. in Toronto.

Individuals with lower incomes — whereby the tax deduction results in about a 25 per cent deduction, for example — should also consider a TFSA as their primary savings vehicle for retirement.

Heath points to working with a couple whereby one spouse earns a high income and maxed out all registered accounts, and the other earns low income.

Their intention was to start a spousal RRSP for her; he’d contribute and she’d build retirement savings.

“I discouraged them,” Heath says, and instead urged them to contribute to her TFSA.

Once retired, she could withdraw income tax-free. If she builds a substantial RRSP, she runs the risk of withdrawing money at a higher tax rate than when she contributed. That would be a net loss in savings from a tax perspective.

What’s more, the couple would likely split income from his RRSP when converted to a registered retirement income fund (RRIF) at age 65, which reduces their combined tax burden in retirement. But if she had her own RRSP, that could serve as a headwind for tax efficient income-splitting.

If you earn a high income, however, and have done some planning to understand that in retirement you’re likely to be in a lower income bracket than today, the RRSP makes sense.

Considering a top-up contribution before the deadline is also worthwhile.

To do that, you need to do some homework before March 2 to optimize the contribution, says Jason Evans, certified financial planner with Evans Retirement Planning in Winnipeg. “The first step is to know what your current limit is.”

One reason is, particularly if you make regular contributions throughout the year or have a workplace pension plan, you do not want to exceed your limit room. That can result in costly penalties and tedious paperwork. Available RRSP contribution room for 2025 can be found on your 2024 income tax Notice of Assessment, he adds.

Ideally, make regular contributions — once a month or, even better, every two weeks to coincide with your paycheque — to maximize your savings that way instead of the last-minute contribution, Evans says. “Start with a small amount that you can stick with and try to increase it next year”

The last-minute contribution is really to optimize the potential of the tax deductions, Tam adds.

“We call it ‘maximizing our tax brackets,’” whereby you determine your marginal tax rate and, providing you have the money and contribution room, you make a contribution to take you to the next lowest tax bracket, she says.

Not only will this help you build more capital when retired, you get a more immediate benefit of a refund in the spring.

“Getting a tax break now is nice, but you will need to pay the taxes when you withdraw the RRSPs in retirement,” Evans says.

He further suggests using the refund to improve your financial situation — making additional RRSP contributions, paying down debt or funding the TFSA — rather than using the extra money for consumption, he adds.

Now that’s ‘optimization.’

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com