RRSP Contributions: lump sum payments or monthly withdrawals?
We’re in full RRSP season and many Canadians wonder what the best option is between lump-sum payments every winter and monthly withdrawals.
Contributing to you RRSP has several advantages: aside from the obvious retirement savings, RRSP contributions are deductible and can be used to reduce your tax.
An RRSP also gives you a certain degree of flexibility in your financial future, and you can tap into your RRSP for the Home Buyers' Plan that gives first-time home buyers the opportunity to withdraw up to $25,000 for their down payment.
Both options (lump-sum or recurrent) work to contribute to your RRSP, but regular deposits are definitely preferred.
Contributing regularly forces you to save every month, and you can also set up a pre-authorized withdrawal from your bank account directly into your RRSP.
Another important reason to prefer the monthly withdrawal method is that it can make investing less volatile since you’re investing the same amount each month.
However, with all of that money being set aside, it's important you keep tabs on how it's growing. You should also ensure that your monthly withdrawals keep pace with your earnings, as your contributions should amount to about 10 % of your annual income.
Together with monthly withdrawals, it’s a good habit to set money aside in a savings account and then deposit the cash into the RRSP once or twice a year.