A new survey from Edward Jones Canada finds 41 per cent of Canadians plan to contribute to their registered retirement savings plans (RRSP) before the March 2 deadline.
Yet, only 53 per cent are confident in what happens as their RRSP matures.
Let’s face it; the lure of a tax refund in the spring is what really motivates most Canadians to contribute.
In the scramble to raise short-term cash, the benefits of a long-term investment strategy often go overlooked.
Tax advantages aside; the investments inside an RRSP are what ultimately determine its success or failure.
First, it’s important to know that the March 2 deadline only applies if you want to deduct contributions from your 2025 tax bill.
Contributions can be made any time and claimed in 2026 or future years. You can avoid the annual RRSP rush by making regular contributions throughout the year.
Even if you meet this year’s deadline, contributions can be ‘parked’ in cash for now and invested later.
That leaves time to stand back and plan how to get the most out of your RRSP investments over the long term. Managing a diversified portfolio can be difficult for the average investor and the cost of a qualified advisor is usually well worth it.
It’s all about the investments
The size of an RRSP tax refund is based on the amount of income reported. That’s great if you’re rich but for most Canadians, actual savings are small. From an investment perspective the greatest advantages are forced savings and a long time horizon for investments to grow tax free until the cash is withdrawn in retirement.
The best way to grow investments over a long period of time, while limiting the risk of overall losses, is through diversification. Diversification can be achieved in countless ways but it generally means a diversity of equity sectors and geographic regions, and fixed income to act as a stabilizer for equity market volatility.
The balance can be adjusted according your return goals, tolerance for risk and how soon you will need cash.
The best investments for an RRSP
RRSP contributions can be invested in just about anything that trades on legitimate financial markets.
Most Canadians invest for retirement through mutual funds because it’s the only way for them to get diversification through professional investment managers.
Many mutual funds outperform their benchmark indices over long periods of time but fees on Canadian mutual funds overall are notoriously high. Once you subtract fees, most mutual funds under perform the benchmark indices they track.
Exchange-traded funds (ETFs) can provide a similar level of diversification for a sliver of the cost of mutual funds. Instead of having a manger choose the holdings, ETFs mimic the holdings in an underlying index such as the S&P 500 and S&P/TSX Composite. The most basic ETFs are market-weighted; meaning the weighting of any particular holding in an ETF fluctuates with its price at any given time.
As the value of a portfolio grows, investors can break free from annual mutual fund fees and diversify by investing directly in stocks. The best stocks for an RRSP are those with long histories of growing earnings over time, strong fundamentals for future earnings, and paying consistent dividends.
Generating income is very important for long-term investors saving for retirement.
For more sophisticated investors, the derivatives market can offer further options that leverage existing holdings to generate income with very little risk.
Investments not right for an RRSP
Time is one of the RRSPs best advantages. Making regular contributions throughout the year takes away much of the risk and stress of having to time volatile markets.
That makes trendy or speculative investments such as crypto currencies or penny stocks less than ideal.
Investors with strong stomachs looking for quick returns would be better trading in a tax free savings account. You can’t deduct TFSA contributions from your income but if you hit the jackpot, gains are never taxed.