The king of retirement savings is dying… at least for argument’s sake.
March 2 is the upcoming RRSP contribution deadline for the 2019 tax year — an opportunity to make those last minute top-ups to reduce taxes on income today.
The idea and hope, of course, is those monies will grow tax-sheltered to be withdrawn in retirement at a lower tax rate, resulting in net tax savings.
Yet is it really worth the effort?
Maybe that money would be better served contributed to a TFSA, the tax-free savings account?
Arguably, the TFSA is fast becoming the RRSP’s heir apparent.
Consider its annual contribution limit is now $6,000. And if you were at least age 18 in 2009, you now have a cumulative contribution room of $69,500. It’s a king’s ransom indeed, making the TFSA a legitimate contender for the retirement savings throne.
What’s more unlike the RRSP, the TFSA has no contribution deadline, and it’s much more flexible given you can withdraw contributions, like whenever, tax-free.
And… you get that room back the following year.
All these upsides considered, it’s little wonder millions of Canadians are turning onto TFSAs.
“The big question comes down to, ‘How should I be saving for retirement?’” – Jamie Golombek
It’s so popular, in fact, RBC’s annual retirement poll found that last year, for the first time ever, more Canadians (57 per cent) had a TFSA than a RRSP (52 per cent).
So seriously, could the stalwart of retirement savings since the 1950s — King RRSP — be ready for retirement.
And, therefore, all this contribution deadline noise is, well, just noise?
In short, the answer is a resounding ‘NO!’
That’s the response of three leading experts in retirement and tax planning.
Yet even these sages of the financial realm note the RRSP is not for everyone.
Nor is making that last minute contribution (or taking out an RRSP loan to do it).
"The big question comes down to, ‘How should I be saving for retirement?’" says Jamie Golombek, managing director for tax and estate planning with CIBC in Toronto.
"There is a right answer (TFSA versus RRSPs, or both) and that will depend on your current tax rate and your expected tax upon retirement."
Remember that earlier statement about contributing earned income that would be otherwise taxed at a higher rate today than it presumably would be when withdrawn in retirement?
That’s generally when an RRSP contribution makes sense, and it’s mostly likely then a logical choice for individuals with good- paying jobs.
But Golombek and other experts note the RRSP is not just a handy savings tool for the well-to-do.
"For most Canadians, RRSPs should trump TFSAs for retirement and the reason I’d say that is because most Canadians would probably be in a lower tax rate when retired than when they’re working."
“For most Canadians, RRSPs should trump TFSAs for retirement and the reason I’d say that is because most Canadians would probably be in a lower tax rate when retired than when they’re working.” – Jamie Golombek
Head of tax retirement and estate planning services at Manulife Investment Management John Natale concurs.
Still, he notes the promise of a refund on taxes "often puts blinders" on individuals. And they choose to make RRSP contributions over TFSA contributions — which involves no refund (it’s after-tax income being contributed, after all) — even when it may not be advantageous to do so.
Among those who should be questioning if a last-minute RRSP contribution for 2019 this month is the right move is anyone earning less than the third tax bracket (33.25 per cent), or under $47,630, in Manitoba.
The reason being is these folks are unlikely to have a lower income in retirement. As such, they are unlikely to realize long-term tax savings from a contribution today.
For example, they might earn $45,000 now, paying a marginal rate of 27.75 per cent. So a $2,000 RRSP deadline contribution this month would get a refund of about $555 in the spring. Sounds like a pretty good deal, right?
Well, not when considering the big picture. It’s likely the money will be withdrawn in retirement at the same tax rate. It’s just as likely, however, that when withdrawals are combined with fully taxable CPP and OAS (Old Age Security) a retiree’s income could be bumped up into a higher tax rate.
And that’s not even considering the potential for taxable RRSP withdrawals to affect negatively income-tested benefits like the Guaranteed Income Supplement (GIS) for very low income retirees, OAS and the age amount tax credit. All of these can be reduced if RRSP, or RRIF (registered retirement income fund) withdrawals past age 71 are sizeable enough.
Winnipeg certified financial planner and discretionary money manager Doug Nelson says the RRSP may be a no-brainer for individuals earning $100,000 or more annually.
Yet the author of the popular DIY personal finance book Master Your Retirement agrees those earning less than about $50,000 should stick with a TFSA.
"If you are earning between these two amounts, then it depends and/or it may mean that you maximize your RRSP only to the point that the contribution takes your taxable income down to the bottom of the current tax bracket and then add TFSA contributions thereafter."
If it sounds a little complicated, it can be.
Deciding on the right retirement savings contributions strategy requires predicting your retirement income, which involves forecasting investment returns and future tax rates. The problem is many variables involved are often beyond our control -- like tax hikes and bear markets.
If a contribution makes sense from a tax planning perspective, “just get the money in there by March 2, and then come up with the right investment for portfolio later on.” – Doug Nelson
"So getting professional advice is something that I’m a big advocate for," Natale says.
He adds the RRSP isn’t universally a good fit for high wage earners either, particularly those with great work pension plans—typically public sector workers.
For one, these individuals typically don’t have much contribution room due to their pension adjustment. As well, having a TFSA to draw upon to supplement income from their workplace pension, CPP and OAS offers more flexibility than an RRSP. TFSA withdrawals, after all, don’t increase taxable income potentially bumping them into a higher tax bracket while reducing income-tested benefits.
Yet even these workers may want to consider RRSP contributions.
But they need to run the numbers to figure out if it’s to their advantage.
The choice is often more clear for individuals starting out in their career who may need flexibility with their savings. For them favouring TFSA contributions and letting RRSP contribution room grow likely make a lot of sense.
"As their income increases to higher tax bracket levels, then (they can) move the money from the TFSA to the RRSP, create a tax refund, and use the refund to further add to the RRSP," says Nelson, with Nelson Financial Consultants.
Sure it’s a lot for the mind to chew on prior to the deadline.
But at its heart, the RRSP deadline speaks to the need for tax planning advice, both short- and long-term, Golombek adds.
"Don’t conflate making a contribution with trying to figure out how you’re going to invest the money," which can cloud the decision-making process.
If a contribution makes sense from a tax planning perspective, "just get the money in there by March 2, and then come up with the right investment for portfolio later on."
Updated on Monday, February 17, 2020 at 9:34 PM CST: Fixes typo