The deadline cometh… but does anybody care?

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This article was published 19/02/2022 (1680 days ago), so information in it may no longer be current.

There’s nothing like deadline pressure to get some people motivated. If that’s you, perhaps knowing you have until the end of the day on March 1 to contribute to your RRSP for the 2021 tax year prompts you to slap down a wad of cash into the registered retirement savings plan.

Or maybe your advisor has contacted you, asking if you’ve had any large bumps in income last year, and if you do, is advising you to make a last-minute contribution that could result in tax savings upon filing.

It’s likely, however, you’re among a minority of adult Canadians contributing last-minute to an RRSP.

Plenty of surveys come out this time of year to illustrate how people are saving for retirement in part to highlight the approaching RRSP deadline.

For those unaware: The government gives us the first 60 days of the new year to contribute to our RRSP for the previous tax year. The reason is that by then most people know their income for the previous year. And providing they have the money to contribute, they can optimize their RRSP contribution — like, right now — to maximize tax efficiency (receive a refund).

Of course, recent studies show many Canadians are saving for retirement and have already made contributions to their RRSP in January and February. An IG Wealth study released this month found 62 per cent of respondents have an RRSP with the average account about $133,000. As well, 57 per cent are contributing before the deadline. That doesn’t mean they’re making last-minute contributions; rather, “a lot of people make monthly automatic contributions,” says Aurele Courcelles, assistant vice-president of tax and estate planning at IG Wealth.

These contributions happen, deadline cometh or not.

That said, “those working with an advisor are more likely to make sure they’re maximizing the value of their contribution room, adjusting their contributions on an as-needed basis.”

People with a plan built by a financial professional are more likely to make a last-minute bump to their retirement savings because they have a plan.

Contributing or not, Courcelles adds the deadline is a good time to have a discussion about retirement planning.

“Now is a great time to ask, ‘Why am I contributing to an RRSP?’”

Based on other survey findings, more people could explore their answer.

Even the IG Wealth poll found one in five Canadians indicated they do not know how taxation works for retirement income, and less than one in five have not thought about what their expenses will be in retirement.

“Basically the study found too many people are looking at their RRSP as their (entire) retirement plan, but they don’t look at the bigger picture.”

Another RRSP study — by Edward Jones — notes about one in four Canadians plans to contribute this year before the deadline. Among the reasons for the rest who were not contributing are that they couldn’t afford to, are instead contributing to the TFSA (tax-free savings account), or are focused on debt repayment.

All are valid reasons for not making a last-minute contribution, says Dave Wiebe, financial advisor with Edward Jones in Brandon.

But whether these are the best decisions is debatable.

“For example, if you’re prioritizing debt, that could be wise given interest rates are likely to rise.” If you have a home equity line of credit debt, the cost of carrying that balance is likely to increase, he adds.

Yet what about this strategy? You could make a contribution — say $10,000 — to your RRSP before the deadline, and then take the refund and put that money against the debt.

“That’s a way to turn the $10,000 into more like $14,000 (depending on your tax rate), versus just $10,000 just toward debt,” Wiebe says. The basic math here is $10,000 contributed to the RRSP resulting in a $4,000 refund that goes toward debt.

Then there’s the TFSA v. RRSP decision. Here, understanding the basics is helpful, says Jeffrey Zhang with H&R Block Canada.

“You need to understand each savings vehicle and their advantages.” Contributing to an RRSP is most effective for high income earners because contributions are deductible against taxable income. Invested capital grows tax-free, but when money is withdrawn, it’s taxable. If well planned, the money withdrawn in retirement will be taxed at a lower rate than while working, resulting in net tax savings. That becomes a more difficult trick to pull off if you don’t earn a lot of money.

So someone earning less than $50,000 before taxes annually may want to prioritize a TFSA strategy. You do not receive a tax refund, like an RRSP, he says, but the invested money grows tax-free and, more importantly, can be withdrawn tax-free in retirement. In contrast, if you contribute to an RRSP, sure you get the refund, but you may end up in retirement withdrawing the money and paying more tax than you would have when you were working.

And if you have very low income in retirement, RRSP withdrawals could reduce your share of GIS (Guaranteed Income Supplement), whereas TFSA withdrawals do not.

Big picture here is that there’s lots to consider, Wiebe says.

“It’s really situation specific,” he says.

And if you aren’t sure how to save for your future — retirement included — ask for help, Courcelles says.

“Don’t just blindly make your RRSP contribution,” he adds.

“You should be working with an advisor to determine what’s the best move for you.”