Take Advantage of the RRSP Benefits
The RRSP was designed in 1957 to help Canadians save for retirement by offering a tax incentive: allowing savings on pre-tax dollars. Since then, the RRSP has played a leading role in many financial plans. So, it’s confusing to learn just how many Canadians are not taking advantage of this investment tool. 4
About 1 in 5 Canadians Contribute to their RRSP. 1
There can be many reasons for not contributing to an RRSP—but lack of information should never be among them! Here are a few potential reasons why Canadians may not contribute to their RRSP:
- It’s hard for them to prioritize saving over other expenses.
- They feel they don’t earn enough to contribute.
- The value of the RRSP is not understood.
- There is no room left to contribute.
- They have a TFSA so believe that is enough.
Many of these reasons for not contributing are actually good reasons to be thinking of contributing.
- An RRSP is a great savings vehicle because your contributions are tax deductible.
- Tax-deductible contributions mean you’ll have more of your income available today for your current needs.
- Even a small amount is worth contributing, as it allows you to take advantage of compound growth over time.
- There is always value in saving for your retirement and other financial goals.
- You may be missing out by not considering the full contribution available for you and your spouse or partner.
- There are big advantages to combining retirement savings strategies. Having a TFSA doesn’t mean you should forgo contributing to an RRSP, together they make a strong investment strategy.
What are the benefits of an RRSP?
- Tax-deferred growth. Your RRSP contribution lowers your taxable income, so you’re reducing the amount of tax you have to pay for the year you are contributing.
- Flexibility. RRSPs can hold a variety of qualifying investments, such as mutual funds, bonds, equities and more.
- Building your retirement portfolio. Especially if you have no company pension plan.
- Deferring taxes to when you are retired, when your tax rate will most likely be lower.
Understanding the Real Value of Working with an Advisor
Every year, your financial situation may be a little different than the last. Making sure you adjust your financial plan for these changes can be another task to add to your already full plate of responsibilities. Advisors can help ensure your financial review is not forgotten or delayed, and on average help clients grow their assets 2.73 times more than unadvised individuals over a 15-year period. 6
How Much can you Contribute?
The total amount you can contribute depends not only on your limit for this year but also on how much you have contributed in previous years. The unused portion remains available from past years. However, you do need to make sure you have deducted contributions from any pension plans you might have through your employer when working out what room you have available. To find out what contribution room you have available, check the assessment notice the CRA sent you last year, which you should have received after your tax return was processed.
18%
RRSP contribution limit is18% of your earned income, up to the annual government limit for that tax year.
Maximum RRSP contribution 2019 tax year: $26,500 5
Maximum RRSP contribution 2020 tax year: $27,230 5
RRSP Contribution Strategies
Lump-sum Contributions
Once you know how much you can contribute for this year, consider making a lump-sum contribution if you have or expect to have a:
- Bonus at work
- Tax refund
- Extra cash on-hand
- GIC or other investment at maturity
A lump sum does not need to be a large amount of money each year; over time, even small lump-sum payments add up and compound.
Automated Contributions
Setting up a monthly RRSP contribution, you allow your investments to grow all year long, and it evens out your portfolio returns should market conditions change. This allows you to take advantage of dollar-cost averaging. Choose an amount that fits well within your budget. Then set it up and forget it. Setting up a PAD (pre-authorized deposit) directly into a designated RRSP account is the best way to make automatic contributions. It will keep working for you without any additional effort required by you. It’s a simple, painless, convenient and effective strategy.
Spousal RRSP Contributions
Spouses, including common-law, can contribute to a spousal RRSP for each other. It’s important to remember that with spousal RRSP contributions, the couple overall benefits, but the funds will be held in the RRSP owner’s name. Spousal contributions offer additional tax benefits when:
- One spouse is in a higher tax bracket than the other.
- There is a difference in portfolios between the spouses.
- A person is seeking greater flexibility in retirement income planning.
Consider a TFSA
A TFSA (Tax-Free Savings Account) is a retirement savings vehicle that can work well in conjunction with your RRSP. They are often combined to help build a solid investment plan. If you have reached the ceiling on RRSP contributions for a given year, investing in a TFSA account may provide another great option to save for retirement.
What is the difference between TFSA and RRSP?
A TFSA allows you to contribute up to $6,000 7 per year, and the investment grows tax-free, meaning you don’t pay any additional tax when you withdraw your funds. You can also access your funds at any time, contrary to an RRSP. When combined, the TFSA and RRSP contribute to your ability to build a strong retirement plan.
Annual Contribution Deadlines 8
| TFSA | December 31, 2019 |
| RRSP | March 2, 2020 |
Annual Contribution Limits 9
| 2019 | 2020 | |
|---|---|---|
| TFSA | $6,000 | $6,000 |
| RRSP | $26,500 | $27,230 |
When it comes to investing in an RRSP, different options are available to you, its just a matter of working out which is right for you. A customized plan based on your retirement goals can help sort out which savings should go where, if you’re saving for both short-term and long-term goals. Lastly, investing in a TFSA account can create some synergy with your RRSP strategy
Speak to an IPC Advisor to discuss a customized plan based on your retirement goals.
Sources:
1. Statistics Canada. Table 11-10-0044-01, Selected characteristics of tax filers with Registered Retirement Savings Plan (RRSP) contributions
2. Statistics Canada. Table 11-10-0044-01, Selected characteristics of tax filers with Registered Retirement Savings Plan (RRSP) contributions
3. Canada.ca, MP, DB, RRSP, DPSP, and TFSA limits and the YMPE, updated November 2018
4. Statistics Canada Website, Trends in RRSP Contributions and Pre-retirement Withdrawals, 2000 to 2013, Derek Messacar, Released February 2017
5. Canada.ca, MP, DB, RRSP, DPSP, and TFSA limits and the YMPE, updated November 2018
6. Cirano Report: Econometric Models on the Value of Advice of a Financial Advisor, July 2012
7. Canada.ca, Contributions, updated January 2019
8. Money Dates 2019, Investment Planning Counsel, 2019
9. Canada.ca, MP, DB, RRSP, DPSP, and TFSA limits and the YMPE, updated November 2018
Prior to implementing any strategies contained in this document, Individuals should consult with a qualified Tax Advisor, Accountant, Legal Professional, Financial Advisor or other professional to discuss the implications specific to their situation.
Investment Planning Counsel Inc. provides this publication for informational purposes only, and it is not and should not be construed as professional advice to any individual. The information contained in this publication is based on material believed to be reliable at the time of publication, but IPC cannot guarantee the information is accurate or complete.
Individuals should contact their IPC advisor for professional advice regarding their personal circumstances and/or financial position.
