Tag Archives: RRSPs

Financial knowledge of Canada’s retirement system isn’t improving, study shows

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Financial knowledge about the Canadian retirement system fell from 2020 to 2021, says the Retirement Savings Institute.

The financial literacy of average Canadians is still low when it comes to understanding our Retirement system, says a survey being released Tuesday. The third edition of the Retirement Savings Institute (RSI) surveyed 3,002 Canadians aged 35 to 54 and found the overall RSI index measuring knowledge of the retirement income system slipped from 38% in 2020 to 37% in 2021. This, it says, is “still showing a significant lack of knowledge among Canadians.”

The RSI Index is the share (stated as a percentage) of correct answers to  29 questions posed in the survey.

The best-understood subjects continue to be CPP/QPP and RRSPs/TFSAs. Canadians still find it tougher to understand employer sponsored pension plans and Old Age Security, where the average respondents “didn’t know” the answer to half the questions.

In a backgrounder, the RSI team at HEC Montreal [a business school] says the scientific literature in several countries has established a link between general financial literacy and preparation for Retirement. However, “the level  of general financial literacy among Canadians is fairly low, although comparable to what is observed elsewhere in industrialized countries.” It also finds knowlege about narrower topics like taxes to be “rather limited.”

Starting in 2018, the RSI started to measure on an annual basis the financial literacy of Canadians in their “years of strong asset accumulation in preparation for retirement.” Those younger than 35 tend to have “other concerns and financial priorities than retirement,” the RSI says.

Knowledge rises with education and income, and as retirement nears

Not surprisingly, the closer to Retirement age one is, the more knowledgeable of related financial matters we tend to become. The RSI score was 33.9% for the youngest in the survey aged 35 to 39, rising to 36.6% for the 40 to 44 cohort, then to 37.8% for the 45-49 group, and a high of 39.5% for those 50 to 54.

Also as one would expect, the more schooling the higher the score: those with high school or less had an RSI score of 31.5%, while those with college or equivalent scored 36.9%, and those with a Bachelor’s degree or higher scored on average 45.3%. Similarly, the higher the household income, the better knowledge. Thus, those with household income of $30,000 or less scored just 26.1%, compared to $60,000 to $90,000 families scoring 37.3% and at the highest, families making $120,000 or more scored 45.6%.

Equally unsurprising is the fact that higher earners are more knowledgeable about RRSPs and TFSAs, especially when it comes to contribution room and withdrawal rules. They are less knowledgeable about investment returns in those vehicles, and score a low 12.6% on penalties for over contributions and other rules related to taxes.

Many confused about Employer Pensions

Employer pension plans seems to be an issue. At all ages, Canadians found it difficult to know the difference between Defined Benefit (DB) and Defined Contribution (DC) pension plans. In particular, they tend to be confused about which one reduces longevity risk (DB) and which depends on returns generated by financial markets (DC). Low-income individuals are even less knowledgeable.

Workers who are contributing employer pension plans had significantly higher scores (41%) than those who were not enrolled in such plans (32.9%).

The older and richer understand CPP/QPP better

Also as you’d expect, older people and more well-off people understand the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP) better. As the chart below illustrates, most Canadians are now well aware that taking early CPP/QPP benefits results in lower monthly benefits (shown in the “Penalty” bar), but there is still a lot of confusion about whether CPP/QPP recipients can collect benefits while still working (only 25% correctly answer this.)

Most Canadians know there is a penalty for taking CPP/QPP benefits early but there is much confusion about collecting while still working.

Older people also know OAS and GIS better. As the chart below shows, most people know you have to be at least 65 years old to receive OAS, but knowledge about technical matters like the OAS clawback, the Guaranteed Income Supplement to the OAS, and taxation of these benefits tends to be much scantier.

Basic OAS timing seems well understood but many are murky when it comes to clawbacks and eligibility and taxation of GIS benefits.

Mortgages well understood, bonds and debt not so much

When it comes to major financial products, Canadians are quite knowledgeable about compound interest, but as less so about debt doubling and quite ill-informed about Bonds, as the chart below indicates. ( Continue Reading…

Tax rates likely to rise: what to do about it

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By Eva Khabas

Special to the Financial Independence Hub 

The Covid pandemic has led to unprecedented government spending with a deficit that has reached record heights.

Sooner or later someone has to pay for this and that usually means the taxpayer. Don’t look now but when you start your tax planning it’s probably best to assume that tax rates are going up in Canada.

However, even before Covid the federal government was talking about increasing the capital gains tax.

Capital gains inclusion rate could go back up to 75%

Currently, only 50% of capital gains are, in fact, taxable but this was not always the case. In fact, from 1990 to 1999 75% of capital gains were subject to tax! It’s logical to assume that tax revenues will be increased through a higher capital gains portion that is taxable, since capital gains are perceived as ‘passive’ income from investments. In theory, this means taxes should be generated by wealthier taxpayers.

Loss of Principal Residence exemption?

Also, the big fear of every Canadian is that government will remove the principal-residency exemption. Currently, taxpayers can sell their primary residence at a gain and not pay any taxes.  Many taxpayers rely on the appreciation in value of their homes as their main source of retirement income. The impact of making gains on principal residency taxable would be devastating to many, if not most, Canadians.

Before discussing what to do about all this, let’s make sure we understand what capital gains are, how they are different from your other income, and when these gains become taxable.

So, what exactly is capital gain? In a nutshell it’s the growth in the value of an asset being held for investment purposes, so that asset is not for resale. A long-term holding period would indicate that the gain is capital. Currently, only half of the capital gain is taxable, while most other income is fully taxed.

In most cases the capital gain is subject to tax when the asset is sold, but there are also times when you may have to report capital gains without an actual sale occurring. For example, at the time of death there is the deemed or assumed sale of all assets, with any capital gains included in the tax return of the deceased. This would, of course, affect beneficiaries.

It’s important to note that increases in personal tax rates will also result in you paying more tax on capital gains. This is because the tax rate on capital gains is applied at the same tax rates in Canada as on employment and other income. In addition, reporting a higher overall total income would also result in more tax because a higher income puts you in the top tax bracket.

Defence # 1: Timing

So, now we see that many tax-reducing strategies primarily revolve around two things – 1) timing, and 2) reducing your taxable income. First, let’s look at timing.

If you have higher overall income from various sources in 2021, and expect lower taxable income for 2022, consider disposing of the asset(s) in 2022 wherever possible so the gain attracts a lower marginal tax rate for you.

You can also use time to advantage by deferring the cash outflow – the tax you pay to the government – and disposing the assets early in the year. Your tax bill is due April 30th of the following year, so if you sell the capital asset in January of 2022 you still have 15 months until tax must be paid on that.

Staggering gains over multiple years

Now, let’s assume you have a large capital gain. How can you stagger that gain over several years? One strategy is to defer cash receipts from the sale over multiple years. The Canadian Income Tax Act allows you to spread that gain over five years (and in some cases over ten years), provided you receive proceeds from the sale over a number of years. For example, if you receive 20% of the proceeds in 2021, you only need to include 20% of the gain in your taxable income as it can be spread over five years.

RRSPs and TFSAs

All these strategies are of a short-term nature. If the assets are disposed of in the long term, consider holding them inside your RRSP. You don’t have to declare those assets as income until you make a withdrawal. Likewise, you can use your TFSA so some of the gains are not subject to tax at all. Either way, your tax advisor can help determine if assets can be transferred to your RRSP or TFSA. Continue Reading…

Where to invest 2021 RRSP contributions

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By Graham Priest

Special to the Financial Independence Hub

In today’s low interest rates environment, investors are looking beyond GICs and equities to generate greater returns over the long term. The economic recovery has surpassed expectations, and individuals are looking beyond COVID-19 and a return to some normalcy by the end of the year. With this in mind, there are several different kinds of investments that Canadians could consider making from their RRSP contributions in 2021.

For example, technology stocks and other “work from home” related stocks that performed well in 2020 might take a breather in 2021 if more of us start heading back to the office.  Areas of the market that underperformed in 2020 may exceed expectations this year. For example, recently energy stocks have started to display strength. Emerging markets is another area that will likely perform well in the next year. If the USD declines in value, it will be an added benefit for emerging markets, as a large portion of their debt is denominated in USD.

Additionally, after a rough 2020, Real Estate Investment Trusts (REITs) are gaining a leadership role within the market. Many REITs have strong yields that provide income that exceeds the interest paid on government and corporate bonds. However, REITs are a good investment inside a TFSA. The income distribution from a REIT is generally taxable income, and in a TFSA, there is no tax on that income.

Put high-growth investments outside RRSP

Investments that have the potential for exponential growth may be better suited outside of an RRSP, as withdrawals from an RRSP are taxed as income. Withdrawing large capital gains tax-free from a TFSA is a better option for investors who have RRSP and TFSA accounts. Continue Reading…

Retiring at 50: How achievable is it?

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By Emily Roberts

For the Financial Independence Hub

Most of us dream about and count down the days until our retirement, picturing ourselves at the beach, enjoying a cocktail while laughing about the days we spent slogging away at the office. These thoughts can be what get some of us through the workday, and even if you love your job and could never picture doing anything else, retirement is still the end goal for all of us so that we can enjoy our later years in peace and tranquillity.

Yet some of us go one step further and think about early retirement. While this may seem like an unachievable dream for many, it can in fact become a reality if executed properly. Retiring at 50 isn’t impossible, but it isn’t easy, either. Typically, people will retire between 65 and 67. This can seem like an age if you dislike your job or simply wish to slow down.

If you are wondering how you could retire early but also the benefits of retiring all together, read the following guide. Not only will it explain the advantages of retirement, but it will also list of the best ways to increase your chances of an early retirement as well as the signs that you may not be ready to retire just yet.

Good reasons to retire

There are many good reasons to retire. For starters, you may be unable to complete your typical day-to-day duties at work as you age. This is especially true for those who work in a physically demanding role such as construction or mining. Your body will be unable to keep up with this labour-intensive work and you are more prone to injuries.

However, retirement is a time for you to slow down and enjoy life. Rather than worrying about getting up and making it to the office in time, you can live your life at your own leisurely pace. While this may seem odd at first, the time you usually spend at work is now yours to do with it as you wish. If you’ve always wanted to focus on your art, then retirement can be the perfect time for you to focus on this hobby and passion of yours. Furthermore, if you have a family, retirement can provide you with the free time to focus on reconnecting with your family (and friends!) and make long-lasting memories with them. This is especially valuable for those who have grandchildren.

Other benefits of retiring include being able to look after your mental and physical well-being. Having a career and being so focused on your job can cause you to forget about what is important: your health. We neglect healthy, balanced meals with those that are quick and typically full of saturated fats. We also lose track of time or are simply too tired to head to the gym even though working out consistently is essential. What’s more, some of us simply need to focus on our mental health more than others and heading to work and working specific hours can be harmful to our mental well-being.

Why Early Retirement can be beneficial

There are numerous benefits associated with retirement; however, there are even more linked to early retirement. For instance, when you retire early, you are able to focus on yourself and the hobbies you have longed to invest time in but was never able to before. With the free time and extra drive you have to spend on your hobbies, you could even consider turning your hobbies into a means of making extra money. For example, if you love to paint or draw, then you could always sell your artwork either online and through a website such as Etsy, or you can make a day of it and sell your work at a local market or yard sale. While you will want to have the mindset of this being a hobby that could potentially bring in some income, this can be a great way to bring you purpose while you’re retired. Continue Reading…

RRSP holdings on the rise even as investor knowledge about them falls

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A seemingly contradictory finding about RRSP trends was uncovered by BMO Financial Group’s latest  (its 11th) annual RRSP survey, released Wednesday. While the average RRSP balance rose to $112,295 — up 3.3% over $111,929 in 2019 and 41% more than $79,492 in 2015 — at the same time Canadians’ knowledge of the benefits and features of RRSPs has fallen since 2015. And women are 18% less likely to know how much they’ll need to retire.

This comes after a pandemic year in which 12% did not contribute at all, resulting in a a 15.5% decrease in overall contribution amounts since 2019; even so contribution amounts for this year are 15.8% higher than the survey found in 2018.

The BMO RRSP Survey was conducted by Pollara Strategic Insights via an online survey of 1,500 adult Canadians  between Nov. 17th and 23rd, 2020.

Robert Armstrong

In a press release, BMO Global Asset Management Director Robert Armstrong said investors need to consider long-term factors like increasing cost of living and longer average life expectancies when planning for retirement: “With these challenges in mind, it’s encouraging to see a national increase in RRSP holding amounts.”

What’s discouraging is that while most regard RRSPs as effective retirement planning vehicles, knowledge about them has steadily declined over the last five years:

  • 71% know how to contribute to an RRSP, an 8% decrease from 2015
  • 61% know the RRSP contribution limit, but the percentage who know this has fallen 12% since 2015. (The RRSP contribution limit for 2020 is $27,230, or 18% of investors’ annual income: whichever is less. Any unused contribution room from previous years is also carried forward.)
  • Only half are aware of what investments are eligible to be held in RRSPs, a 10% decrease from 2015 and only 44%  are aware that RRSPs can hold ETFs, while 79% know that RRSPs can hold mutual fund. (Holdings can include: mutual funds, cash, GICs, stocks, bonds and ETFs.)

Because of the inherent complexities of RRSPs, Armstrong suggests professional advice is valuable to help investors meet their long-term financial goals.

Gender gap

 The study also found a gender gap in retirement planning and RRSP knowledge:

  • Among those surveyed, women are 9%  less likely to know how to contribute to an RRSP and 10%  less likely to know the difference between RRSPs and TFSAs compared to men
  • Only 62% of women know the RRSP contribution deadline (the deadline for this year is March 1, 2021) and 55% know how much they can contribute to the account, compared to 70% and 67% of men, respectively
  • Only 41% of women know which investments can be held within an RRSP
  • Women are 18% less confident than men in their retirement plans, and 18% less likely to know how much money they will need for retirement
  • Women were more likely than men not to be contributing to their RRSPs this year because of pandemic-related reasons (15% versus 9%)
  • Women are less likely to have withdrawn funds from their RRSPs before the age of 71, with 25% having done so compared to 31% of men

BMO has several programs aimed at helping women build their investing confidence:

  • BMOforWomen.com is regularly updated with content to help inspire financial confidence
  • The podcast Bold(h)er podcast features inspiring stories of women making bold moves in their careers and businesses
  • BMO investment professionals provided access to online training to promote and engage women investors and business owners in tailored, goals-based conversations

For personalized advice on meeting financial goals in general, see www.bmo.com/myplan. For RRSP information in particular, visit www.bmo.com/rrsp/.