'Tis the season... for RRSPs

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(RYAN REMIORZ / THE CANADIAN PRESS ARCHIVES)

If the RRSP marketing hype is to be believed, Canadians aren't saving near enough.

And at this time of year, just days before the March 1 deadline for contributions for the 2012 tax year, we're inundated with surveys, studies and tips on saving for retirement.

A TD Canada Trust survey found almost 60 per cent of parents talk to their kids about saving for the future, but only 42 per cent actually save much for retirement themselves.

Scotiabank polled Manitobans and our Saskatchewan neighbours to find whether we would like to invest more in an RRSP but can't afford it, and only about 40 per cent of respondents plan to contribute for the 2012 tax return. Middle-aged Canadians are also worried about juggling retirement with helping their kids with college and ensuring their aging parents are well taken care of, a recent RBC study found.

ING Direct did a survey, too, discovering those who save are happier.

All these surveys are really a sly means of flogging product at one of the most lucrative times of the year for Canadian financial institutions -- RRSP season. February is by far the busiest month for RRSP contributions. Last year, we purchased a little more than $7 billion in mutual funds in February, at least double the amount in any other month, according to Investment Funds Institute of Canada statistics.

ING CEO Peter Aceto says this month is consistently the online bank's busiest.

"I will tell you the absolute busiest day of the year on our website and at our contact centre is the last day of RRSP season," he says. "There's no doubt Canadians leave this for the last possible moment."

Of course, the deluge of TV ads are part of the strategy, but you shouldn't fault the messenger. The banks and investment houses are merely trying to help us help ourselves, which helps them, too.

We should feel lucky we can even contribute to an RRSP. Few other nations have as good a savings vehicle for retirement. Around for almost 50 years (it started in 1957), the RRSP has allowed Canadians to set aside a portion of their income for savings, allowing it to grow tax-deferred until withdrawn -- ideally, when retired.

As a carrot to entice us to set aside these savings, we get a tax refund on contributions. It sounds like free money, but it's a return of taxes paid on income we've already earned, with the understanding that when we take out that contribution money later in life, we will have to pay taxes on it.

Optimally, we stash away money now in RRSPs while earning a higher income and withdraw the money later as retirement income, which should be lower and result in fewer taxes paid.

This isn't always a no-brainer decision -- especially now the tax-free savings account has come on the scene.

In some cases, investing in a TFSA can be a better option, depending on your situation, says Kim Parlee, vice-president at TD Wealth Management and a BNN TV host. You don't get a tax refund for contributions, but the money grows tax-free and can be withdrawn as tax-free income, so it doesn't affect income-tested retirement benefits such as the OAS and the guaranteed income supplement (GIS).

"As you get older, you do have to pay more attention to what savings vehicle is more tax-efficient," Parlee says. "But the important thing is just to save money."

And the earlier you start, the better.

Parlee suggests parents should put the savings bug in their children's ears long before they turn 18, when they can open an RRSP or TFSA.

"Often it's a taboo topic. People don't want to talk about money."

Talking about retirement may not mean a lot to nine-year-old.

"Instead, you can talk about saving with your kids for a bike or the movie next week," she says. "That culture of saving can lead to those more complex conversations later on."

Once they reach adulthood, a little knowledge of RRSPs will prove beneficial. The earlier you save, the more time the money has to grow tax-sheltered. Some discussion about whether to save in an RRSP or TFSA is beneficial for adults of any age.

This will be a topic of discussion at an upcoming Saturday event at the Free Press News Café, hosted by PI Financial.

The Winnipeg investment advisory team of David Derwin and Joseph Alkana, who are hosting the event, say today the TFSA is often a small building block in the overall retirement-planning picture for many people closer to retirement. Size matters, and with the current total contribution limit of $25,500 per adult, the TFSA is a small portion of a well-funded retirement portfolio. Still, Alkana says many people -- especially those without work pensions -- may need even more savings than RRSP and TFSA savings combined.

"For the average Canadian, if they want an after-tax income of about $40,000 a year and want to get that income off investments alone, they'll likely need north of $1 million in investments to last about 30 years."

It's unlikely GICs will get most people to where they want to be financially at retirement, Derwin says.

For that matter, even the oft-heard buy-low, sell-high mutual fund strategy is increasingly questionable in this new normal of low interest rates and stock market volatility.

"It's not saying that the stock market can't chug along, but the odds of a prolonged bull market are very much against you," Derwin says.

"A hundred years of history shows that bull markets just don't launch from this type of environment."

But plenty of alternatives are available, including those paying you to wait for a bull market, such as corporate bonds, dividend stocks, preferred shares and convertible bonds offering the option to turn debt into equity.

"Even a smaller investor can access individual corporate bonds," Alkana says, adding the strategy does entail some homework and/or professional advice.

The upside -- besides a steady income -- is bonds don't come with fees, aside from a trading commission.

"That's extremely important for any investor over a long period of time."

Although bond funds have a lower management cost than equity funds, their annual fees can erode returns in a low-interest environment, Alkana says.

Most financial institutions are offering low-cost alternatives to actively managed mutual funds if that is a concern.

ING has Streetwise index funds, which allow investors to buy an index such as the TSX at a lower MER (management expense ratio) than funds where a manager picks stock trading on the TSX.

"They (Streetwise funds) rebalance on a quarterly basis so you don't have to do that on your own, and charge no fees for buying or selling," Aceto says.

Still, regardless of your investment choice, the main thrust of any strategy is the same: Save.

"Keep it simple," Aceto says. "Don't be paralysed by the perception that's it's more complicated than it has to be."

giganticsmile@gmail.com

Quick facts

Should you RRSP? That's the topic of discussion two Saturdays from now, Feb. 23, at the Winnipeg Free Press New Café. Hosted by PI Financial, the event will focus on the pros and cons of RRSP investing for individuals who own a business, have a good work pension or earn high incomes. The event starts at 10:30 a.m. for coffee and registration, followed by a discussion and Q & A from 11 until noon. Lunch, beer-tasting and a hockey game -- the Jets vs. Philly -- to follow. Best of all, it's free -- aside from a small, optional charitable donation for the beer-tasting. Call 204-982-0012 to register.

TFSA vs. RRSP: BNN's Money Talk focused on this dilemma in a segment that aired this past Monday. The short piece featured a tax expert running through a few different scenarios, including a 30-something individual earning $50,000 a year with no work pension, a single mother in her 50s earning $130,000 a year with a pension and RRSPs and a 65-year-old collecting CPP, OAS and a pension with an existing RRSP. Find the Feb. 4 broadcast online at bnn.ca/Shows/Money-Talk.

RRSP factoids

Deadline for 2012 is March 1. The RRSP deadline is always 60 days after the end of the tax-filing year.

The maximum annual contribution is 18 per cent of income up to a contribution of $22,970 for the 2012 filing year; unused room can be carried forward for future use. To find out your deduction limit, go to the CRA website and sign in using My Account.

Income eligible for RRSP refund: Earned income from an employer or self-employment, rental income and CPP disability payments are eligible for an RRSP. Income from CPP, OAS, work pension, investment income, death benefits and limited partnership are not.

-- CRA website

Other countries' retirement savings accounts

United States

Individual retirement account (IRA): This is similar to the RRSP. Money grows tax-deferred and contributions can be deducted from taxes to get a refund. But the annual limit is much lower than for an RRSP, and it's further limited by annual household income. As well, its rules are much more complicated than those for the RRSP.

401 (k): This is the American version of the group RRSP, DPSP (deferred profit-sharing plan) and even defined-benefit pension plans in Canada. The employer contributes to the plan, and employees can elect to defer income to the plan. The maximum annual contribution is $49,000, and employees may defer up to $17,000 a year of income.

United Kingdom

Individual savings account (ISA): This is more like a TFSA than an RRSP. Contributions of after-tax income grow tax-free. As well, withdrawals are not subject to taxation. The total annual limit is 11,280 pounds, or about $17,600.

-- Investopedia; wikipedia

Republished from the Winnipeg Free Press print edition February 9, 2013 B10