Tag Archives: RRSPs

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/.  

 

 

The pros and cons of RRSPs: What you need to know

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By Allan Small

Special to the Financial Independence Hub

If there is one thing COVID-19 has not impacted, it’s RRSP season. March 1, 2021 is the deadline for contributing to an RRSP for the 2020 tax year. The question is, should you?

The basics: Anyone who files an income tax return can contribute 18% of earned income to a maximum of $27,230 for the 2020 tax year. If you have an employer-sponsored pension plan, your RRSP contribution limit is reduced by the Pension Adjustment (PA). Unused contribution room can be carried forward to use in the future.

Generally speaking, RRSPs make sense for anyone who wants and can afford to invest for the long term. Here’s why:

Pros

  • Contributions are tax deductible.
  • Earnings grow tax-sheltered within the plan.
  • You can defer tax on investment earnings and contributions to the future. This is particularly useful if you are a high-income earner and your marginal tax rate is likely to be lower in the coming years.
  • RRSPs can hold a wide range of qualified investments. For example, you can hold GICs, savings bonds, Treasury bills, bonds, mutual funds, Exchange Traded Funds (ETFs), equities (both Canadian and foreign), and income trusts in an RRSP.

Deciding what to hold in your RRSP really comes down to the same factors you have to consider when making any type of investment: your comfort level with risk, your investment objectives and your time horizon. For example, if your goal is to grow your wealth over time and market volatility doesn’t keep you up at night, then you may want to consider growth investments such ETFs, mutual funds and stocks. If you want income, then income-generating and interest-paying investments are worth looking into.

All of this said, RRSPs do have their drawbacks.

Cons

  • While you can withdraw funds from an RRSP before you retire, you will have to pay a withholding tax and you also have to report that money as taxable income to the Canada Revenue Agency.
  • The Government of Canada controls the amount of money that must be withdrawn annually once the RRSP matures. When you convert the RRSP to an Registered Retirement Income Fund, which must be done when you turn 71, you are required to withdraw a minimum amount each year starting at age 72 even if you don’t need the money.

RRSPs work best for people who can use a tax deduction and can afford to put money away for the future. Another consideration: Is your income in retirement (and therefore the marginal tax rate you’ll have to pay) going to be equal to or greater than it is during the years you can contribute to an RRSP? If this is the case, you won’t be achieving any tax savings by contributing to an RRSP. However, you could still benefit from deferring tax. The question then becomes, do you pay the income tax now or later? Continue Reading…

How to use your TFSA account

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By Dale Roberts, Cutthecrapinvesting

Special to the Financial Independence Hub

It’s the new year and you may have a couple of questions on how to use your TFSA account. The Tax Free Savings Account is one of the greatest additions to your investor tool kit. It is true to its name in that the monies grow completely tax free. When you take the monies out for spending there are no tax implications. We need only keep track of our contribution limits.

Out of the gate it’s important to know the contribution allowances. The program was launched in 2009 (the brainchild of then federal Finance Minister Jim Flaherty). The initial contribution limit was $5,000. There is also an inflation adjustment mechanism and that is why you will see the TFSA limits increase over time.

TFFA Limits History

  • The annual TFSA dollar limit for the years 2009 to 2012 was $5,000.
  • The annual TFSA dollar limit for the years 2013 and 2014 was $5,500.
  • The annual TFSA dollar limit for the year 2015 was $10,000.
  • The annual TFSA dollar limit for the year 2016 and 2018 was $5,500.
  • The annual TFSA dollar limit for the year 2019 was $6,000.
  • The annual TFSA dollar limit for the year 2020 was $6,000.
  • The annual TFSA dollar limit for the year 2021 is $6,000.

The total contribution allowance to date is $75,500 for 2021. You can carry forward any unused contribution space. Keep in mind that the eligibility for TFSA is based on age of majority. You would have had to have been 18 years of age or older in 2009 to qualify for that full amount. You would also have to be in possession of a Social Insurance card/number.

If you reached age of majority in 2018, that would be your first year of eligibility. To date your contribution limit would be …

Starting the TFSA in 2018

2018 – $5,500, 2019 – $6000, 2020 – $6,000, 2021 – $6,000 for a total of $23,500.

Of course we have to wait for January 1 or later to use that $6,000 for 2021.

Remember if you go over, you will be penalized by 1% per month, for the amount that you have overcontributed. Check with CRA for your contribution eligibility.

Reader question on over contribution

“Ooops, I over contributed in December of 2020.” If you recently jumped the gun and overcontributed by $6000 you would be charged 1% per month, meaning a $60 penalty. Thing is you earned another $6,000 in contribution space on January 1, 2021. You would only face one month of over contribution. You might as well sit tight. You would not be able to have that contribution reversed, even if you quickly move that money out of the TFSA account. If you move the monies in and out there will be no benefit, but you could created fees if it is stocks or ETFs.

If you ever make a more costly (but honest) mistake on over contribution, you can take that up with CRA and your financial institution. It’s possible that you might get some help from your institution or from the CRA. Good luck.

Calculating your TFSA after removing amounts

The formula or rule is quite simple. If you remove $12,000 in one year, you would add that full amount to next year’s contribution allowance. And of course that contribution allowance would also include that calendar year’s new room. For example if you took out $12,000 in calendar year 2020, you would add that $12,000 to the $6,000 allowance for 2021. Your 2021 contribution allowance would be $18,000.

Yes, you get to keep any contribution room gains you made in your TFSA if you sell. You lock in that space. Those investment gains can boost your total TFSA contribution room above the calendar year totals.

This event may be considered if you were looking to use or gift some monies next year. You might sell now and lock in that TFSA space. Obviously, if you’ve been investing those monies, your account is likely or should be at an all-time high.

Please note that if it is a stock or bond or ETF or mutual fund, the trade has to settle within the calendar year. Check with your discount brokerage or advisor on timing and settlement details.

Saving or Investing for your TFSA?

I am a big fan of using your TFSA for investing. There’s the potential or likelihood of much greater gains and hence much greater tax savings when you invest your TFSA dollars.

Also consider that interest rates are sooooo low you might have very modest ‘gains’ with any savings account. The benefit of the TFSA for savings is more muted in a low interest rate environment.

But of course, 2020 proved to many the importance of that emergency fund. You might hold an emergency fund that is 6 months of total spending needs as a starting point. Here’s my personal finance book, OK it’s a blog post …

Oh look, I just found $888,000 in your coffee.

And it can make sense to hold some cash as a portfolio asset. After all it’s an obvious hedge for any deflationary environment. The spending power of cash will increase in any deflationary period.

On that cash front you might consider EQ Bank where you can earn 1.5% in a savings account and 2.3% in registered account such as that TFSA. You may choose to hold some TFSA amounts in savings and some in higher growth investments.

On the investment front you might consider a one-ticket (all in one) ETF portfolio such as those from Horizons, iShares, BMO Smartfolio, Vanguard or the TD One Click Portfolios.

You may decide to build your own ETF Portfolio.

On the mutual fund front you might have a read of this post from Jonathan Chevreau on the top mutual funds in Canada. I am a big fan of those funds from Mawer.

Beneficiary form – successor holder

Ensure that you fill out a beneficiary form for all of your registered accounts. For taxable accounts you might consider joint accounts. Continue Reading…

Retired Money: RRSP must start winding down after you turn 71 but TFSA is a tax shelter that lasts as long as you do

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My latest MoneySense Retired Money column has just been published and looks at the twin topic of RRSPs that must start to be converted to a RRIF after you turn 71, and the related fact that the TFSA is a tax shelter you can keep adding to as long as you live. You can find the full column by clicking on the highlighted headline: How to make the most of your TFSAs in Retirement.

Unlike RRSPs, which must start winding down the end of the year you turn 71, you can keep contributing to TFSAs for as long as you live: even if you make it past age 100, you can keep adding $6,000 (plus any future inflation adjustments) every year. Also unlike RRSPs, contributions to Tax-free Savings Accounts are not calculated based on previous (or current) year’s earned income.  Any Canadian aged 18 or older with a Social Insurance Number can contribute to TFSAs.

Once you turn 71, there are three options for collapsing an RRSP, although most people think only of the one offering the most continuity with an RRSP; the Registered Retirement Income Fund or RRIF.  More on this below but you can also choose to transfer the RRSP into a registered annuity or take the rarely chosen option of withdrawing the whole RRSP at one fell swoop and paying tax at your top marginal rate.

Assuming you’re going the RRIF route, all your RRSP investments can move over to the RRIF intact, while interest, dividends and capital gains generated thereafter will continue to be tax-sheltered. The main difference from an RRSP is that each year you must withdraw a certain percentage of your RRIF and take it into your taxable income, where it will be taxed at your top marginal rate like earned income or interest income. This percentage start at 5.28%  the first year and rises steadily, reaching 6.82% at age 80 and ending at 20% at 95 and beyond.

Some may be upset they are required to withdraw the money even if it’s not needed to live on. After all, you’re gradually being forced to break into capital, assuming you abide by some version of the 4% Rule (see this article.)

in 2020 only, you can withdraw 25% less than usual in a RRIF

For 2020 only, one measure introduced to cushion seniors from the Covid crisis was a one-time option to withdraw 25% less than normal from a RRIF; so if you turned 72 in 2020 you can opt to withdraw 4.05% instead of 5.4%. Continue Reading…

Are you tax planning for you …. or for your estate?

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By Aaron Hector, B.Comm., CFP, RFP, TEP

Special to the Financial Independence Hub

“In this world nothing can be said to be certain, except death and taxes.” – Benjamin Franklin

While death and taxes may be certain, the variables in and around them are certainly not. That’s why they warrant attention and planning. The following analysis provides some food for thought when deciding whether to use proactive tax planning to optimize your living net-worth or your after-tax estate.

A tisket, a tasket, a future tax basket

Most retirees have baskets of “future tax” that are just sitting there in abeyance. The most common of these tax baskets is the one that’s attached to RRSP accounts. When you contribute to your RRSP, you get a tax deduction which gives you a break on the taxes payable in that year. But when the time eventually comes to make a withdrawal, each dollar you remove from your RRSP will be fully taxable and increase your income accordingly.

Depending on the situation, there could be several other future tax baskets as well. For example, you might have unrealized capital gains that are attached to a non-registered investment account, or even an additional property. When these assets are sold in the future, the capital gain at that time will be subject to taxation.

Our tax system is progressive, which means the tax rates continue to increase as your income does, thus moving you from a lower tax bracket to a higher one. When you die (without a surviving spouse), all of the remaining tax baskets are dealt with at that time. This often results in a significant amount of taxable income that’s exposed to the highest marginal tax rates which can exceed 50%, depending on your province of residency.

Managing future tax

What can be done to manage this future tax in a way that avoids exposure to such high tax rates? One popular approach is to look at your projected retirement income and identify when in the future there might be years where income is lower than average or higher than average, and then try and shift income away from the high years to fill in the low years. This “tax averaging” often results in an acceleration of income in earlier years, which then lowers the exposure to high tax rates later in life or upon death.

If you think this sounds challenging, remember that any financial planner worth their salt should be able to review your assets and liabilities, then map out your projected income going forward on a year-by-year basis. The low-income years most commonly occur immediately following retirement; the paycheque has stopped, but maybe you have ample cash and non-registered savings that can be used to fund your lifestyle. It’s quite possible that the income you would report on your tax return in these years would be minimal. However, by the end of the year that you turn 71 your RRSP accounts must be converted into RRIF accounts, giving rise to forced annual withdrawals that are fully taxable. These mandatory withdrawals might mark the beginning of your high-income retirement years and may even result in your Old Age Security (OAS) being clawed back. That being said, it really depends on one’s individual circumstances.

The nice thing about the future tax is that, for the most part, you have flexibility in deciding when you convert that future tax into current tax. Just because you can wait until age 72, when you are forced to make your first withdrawal from your RRSP (RRIF), doesn’t mean that you must wait until you are 72. Furthermore, this doesn’t need to be a cash flow decision. If you don’t need the money to fund your lifestyle, then you can simply take the money that is withdrawn from the RRSP and then (subject to withholding taxes) reinvest it back into another account such as your TFSA or non-registered account. The point here is that you have the option of choosing what you believe to be an optimal year to increase the amount of income that will be reported on your tax return.

Similarly, you can choose to trigger a capital gain within a non-registered account at any time. A sale of a stock doesn’t need to be an investment decision – it can be a tax decision. Simply sell the stock, thereby triggering the capital gain, and then immediately rebuy it. The capital gain will then be reported on your tax return in the year it was sold, and your taxable income will be increased accordingly.

In a nutshell, every dollar of income that you accelerate is a dollar of income that you don’t have to report in the future, and you get to choose what tax rates get applied to that dollar; the current marginal rate, or the future marginal rate (which could be higher). It’s easy to see how this process can result in your paying a lower average lifetime tax rate.

How to impact your lifetime assets and estate

Let’s dig a bit deeper. How do these choices carry forward and impact your lifetime assets and ultimately your estate? I’ll begin with some foundational ideas and then provide a real-life example.

Imagine a scenario where your current marginal tax rate is 30% while living, but if you died then the marginal tax rate on your final tax return would be 50%. Continue Reading…