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Tag: RRSP contributions

  • With pensions declining, Canadians must plan their own retirement – MoneySense

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    “The decline of defined benefit and contribution pension plans has fundamentally shifted the burden of retirement planning on to individuals in recent years,” Christine Van Cauwenberghe, head of financial planning at IG Wealth Management, said in a news release. 

    As pensions disappear, many Canadians lack a retirement plan

    Employers began phasing out defined benefit pension plans about 30 years ago, the release said, leaving more Canadians without the same level of guaranteed income than previous generations.  

    “Our data shows that while Canadians recognize this shift, many still lack a clear picture of what they need to save–and how to convert their savings into a ‘personal pension plan,’” Van Cauwenberghe said. 

    The survey found only 11% of non-retired Canadians say they know how much annual income they will need in retirement, while roughly half say they simply do not know at all. Only one-third said they have a retirement plan and savings.

    Meanwhile, the survey said about a quarter of employer pension holders didn’t know the details of their plan, including whether it is a defined benefit or defined contribution plan. 

    Canadians remain unprepared for longevity and market risks

    The survey also highlighted knowledge gaps among Canadians despite having to increasingly rely on their own personal savings. Only four in 10 respondents indicated an understanding of old age security, a registered retirement income fund, or the tax implications of retirement income. 

    Other findings included that few Canadians have accounted for longevity risks to their retirement plan, including inflation, health-care costs and market downturns. About 67% of respondents have not stress tested their plan for any potential major economic or financial risks. 

    The online survey of 1,350 Canadian adults was done by Pollara Strategic Insights, on behalf of IG Wealth Management, between Jan. 9 and 14. The polling industry’s professional body, the Canadian Research Insights Council, said online surveys cannot be assigned a margin of error because they do not randomly sample the population.

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    Tax-free savings are outpacing RRSP contributions

    In recent years, data shows Canadians have favoured financial vehicles geared more toward tax-free savings than retirement. 

    In April last year, Statistics Canada released figures on the utilization of tax-sheltered savings accounts by Canadians in 2023, based on income tax filing data. 

    The agency found that 11.3 million tax filers made a contribution to either a registered retirement savings plan or a tax-free savings account. Of that group, 3.8 million contributed only to their RRSP, while five million contributed only to their TFSA. About 2.5 million contributed to both their TFSA and RRSP. 

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  • From RRSP to RRIF—managing your investments in retirement – MoneySense

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    When the time comes, RRSP, or registered retirement savings plan accounts, are converted to RRIF, or registered retirement income fund accounts, a change that needs to be made by the end of the year that you turn 71.

    Shifting your portfolio for RRIF withdrawals

    You can hold the same investments in a RRIF as you hold in an RRSP, but you won’t be able to continue making fresh contributions like you did before the conversion. Rather, the opposite will be the case. You are required to withdraw amounts based on your age every year, with the percentage rising as you get older. “It’s designed to be depleted throughout your lifetime. So I find that’s challenging for a lot of people,”  Andrade says.

    Part of the shift in retirement can be a change in the composition of your portfolio. Andrade said she typically takes a “bucketing” approach for clients when building a RRIF portfolio, with a portion set aside in something with no or very little risk that can be used for withdrawals. That way, if the overall market takes a downturn, clients aren’t forced to sell investments at a loss because they need the cash.

    Planning withdrawals to protect retirement income

    Andrade says having the available cash is important when you are depending on your investments to pay for your retirement. “I want to make sure the money is there when I need it and if the market performs poorly or there’s a downturn, you still have time to recover,” she says.

    Withdrawals from an RRIF are considered taxable income. So even though the money may have come from capital gains or dividend income inside the RRIF, when you withdraw it, it’s taxed as income, making the planning of the withdrawals important. 

    There is no maximum to your RRIF withdrawals in any given year, but you may incur a significant tax hit if the amount is large and pushes you into a higher tax bracket. If a big withdrawal pushes your income high enough, you could also face clawbacks to your OAS.

    Tailor your retirement plan to your needs

    Just because you are taking the money out of a RRIF account doesn’t mean you have to spend it. If you don’t need the money and have the contribution room, you can take the money and deposit it into a TFSA where it will grow, sheltered from tax.

    Sandra Abdool, a regional financial planning consultant at RBC, says having money outside of your RRIF can help you avoid making big withdrawals and facing a large tax hit if you suddenly find yourself with a pricey home repair or needing to make big-ticket purchase like a new vehicle.

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    “How you weave this is very much specific to each client. It’s really going to depend on what are your sources, how much income do you need, what is your current tax bracket, and what is the tax bracket projected to be by the time you get to 71,” she says.

    Abdool says you should be having conversations with your financial adviser well before retirement to ensure you are ready when the time comes. “By putting a plan in place, you’re going to be prepared knowing that the income you’re looking for will be there and you’ll have the peace of mind knowing how things are going to unfold in the future,” she said.

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  • Why late-career savers need to be careful with RRSPs – MoneySense

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    When should you keep contributing to your RRSP?

    If you have a group RRSP with matching contributions from your employer, this provides a significant boost to your savings. Many group plans offer matching contributions of 25%, 50%, or even 100% on contributions up to a certain dollar amount or percentage of income. To get your hands on this free money, you have to keep contributing. Defined contribution (DC) pension plans fall into this same category, with employer contributions making maximum participation a compelling opportunity. 

    If you do not have much retirement savings or pension income, RRSP contributions are also generally advantageous. The reason is that you are likely to be in a lower tax bracket in retirement. Paying a lower tax rate in the future than today makes RRSP contributions even more compelling. 

    Anyone in a high tax bracket today—especially near or at the top tax bracket in their province—will probably benefit from making RRSP contributions. 

    If someone plans to retire abroad in another country, late-career RRSP contributions are also typically advisable. The withholding tax rate on RRSP and registered retirement income fund (RRIF) withdrawals for non-residents generally ranges from 15% to 25%. Most countries have lower tax rates than Canada and will recognize tax withheld in Canada as a credit against foreign tax payable. Some countries do not tax foreign income at all, so the withholding tax on RRSP/RRIF withdrawals may be the only tax implications of withdrawals. 

    Compare the best RRSP rates in Canada

    When should you not contribute to your RRSP?

    Although most people find themselves in lower tax brackets in retirement, some may pay more tax. One example may be someone who has a spouse with a large RRSP or pension whose income is fairly modest today. Pension income-splitting allows most pension income, including RRIF withdrawals after age 65, to be split up to 50% with a spouse. So, a high-income retiree can move income onto a low-income spouse’s tax return. A low-income taxpayer today may be in a much higher tax bracket in retirement in a case like this. It would make sense for them to redirect retirement savings to a tax-free savings account (TFSA) if you have the contribution room or simply save in a non-registered account.

    Someone who is transitioning to retirement and working part-time may be another good example of someone whose tax rate may be higher in the future, and further RRSP contributions are not advisable. 

    Someone whose retirement income is likely to be in the $100,000 to $150,000 range should also consider the impact of Old Age Security (OAS) pension recovery tax. OAS clawback acts like an effective 15% tax rate increase for RRSP/RRIF withdrawals for OAS recipients. 

    Government support like the Guaranteed Income Supplement (GIS), a means-tested benefit that is payable to low-income OAS pensioners, could be affected by RRSP/RRIF withdrawals. So, if someone has a choice between RRSP and tax-free savings account (TFSA) contributions, and may have little to no income beyond CPP and OAS, a TFSA may be a better choice than an RRSP. 

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    If someone has debt with a high interest rate, especially credit card debt, this may be another reason to pause the RRSP contributions. 

    Should most people contribute to RRSPs? 

    Most working age Canadians can expect to be in a lower tax bracket in retirement than in their working years. As a result, most people should be contributing to their RRSPs and will be better off in the long run by growing their savings. If someone has maxed out their TFSA, and choosing between RRSP and non-registered savings, RRSP contributions may still be advantageous even if their tax rate is the same or slightly higher in retirement. 

    There is a non-financial benefit to segmenting savings into less accessible accounts like an RRSP. A TFSA or savings account is more likely to be raided for a discretionary expense, so the psychology of RRSP contributions is a worthwhile consideration beyond the financial factors. 

    If you have an employer match on your retirement account contributions, you should almost always be contributing regardless of your current or future tax rate. 

    Professional financial planners can help you project your future income, taxes, and investments using financial planning software. This can help determine whether RRSP contributions will benefit your potential retirement spending or estate value in the future based on your actual numbers, rather than a rule of thumb.

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    About Jason Heath, CFP


    About Jason Heath, CFP

    Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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