A PROCRASTINATOR’S GUIDE TO RRSP SEASON
Falling behind on contributions can jeopardize your retirement
Despite the blitz of media articles and advertising reminding investors of the looming RRSP deadline (it’s Wednesday, March 1, 2017), you just haven’t got around to making this year’s contribution. Come to think of it, it’s been a few years now since you did so, which means you have a ton of contribution room available.
While RRSP room is not a “use it or lose it” proposition — you can always carry forward unused room to another year — what you are losing out on is the chance to lower your taxable income each calendar year; and it also means you are not maximizing the opportunity to compound your investments tax free.
In short, there is a cost attached to your procrastination: you’re paying more income tax than you need to and are shortchanging yourself on the ultimate size of your retirement nest egg. I’ve always believed in maximizing RRSPs each year as I go; if you’re making a good salary and are not in a Defined Benefit pension plan, there’s so much RRSP room available that it can be a daunting proposition to catch up once you fall behind a year or two.
Consider that for the 2016 tax year, someone who earned $140,900 income in 2015 and has no Pension Adjustment has a whopping $25,370 in RRSP contribution room, says Adrian Mastracci, president of Vancouver-based KCM Wealth Management Inc. The maximum rises to $26,010 for those with earned income of $144,500 in 2016. Fall behind a couple of years and you could soon be looking at $50,000 or $75,000 of unused room and the wasted opportunities discussed above.
The disciplined low-stress thing to do would be to dollarcost-average your way into the market, and commit to (roughly) a $2,000-a-month pre-authorized chequing (PAC) arrangement with your financial institution (or less for those earning less income). This way, your money moves seamlessly from your paycheque into your RRSP. As with income taxes deducted at source, you barely miss money that never enters your bank account to begin with.
But since you’re a procrastinator, you’ve not yet made an RRSP contribution for calendar 2016, even as this year’s deadline looms. So what to do? There are two situations to consider.
First, the person who is just a bit behind this year and wants to “top up” their contribution so as to maximize their 2016 contribution (and minimize tax payable for the 2016 tax year).
Then there’s the person who has procrastinated for several years and now wants to “catch” up on the whole amount, perhaps by investing $75,000 or more at one fell swoop.
How do you do that? There are several ways: you can beg, borrow or steal. Just kidding but only partly.
You can indeed “steal” from yourself if you have money in a TFSA or non-registered account. In the latter case, you can “transfer securities in kind,” which means you move stocks, equity ETFs or even fixed income from your taxable account to your RRSP (probably triggering some capital gains tax in the process).
This will generate the desired tax receipt in time for the contribution deadline and has the bonus effect of moving those securities from fully taxed status to the deferred tax scenario of being sheltered in your RRSP. You can also use money from your TFSA, with no tax consequences.
Assuming you have no ready cash or TFSA or non-registered funds, and you can’t beg from a spouse or parent, you can literally borrow from a financial institution. While RRSP loans are NOT tax deductible, any lender will be happy to provide either an RRSP top-up loan or an RRSP catch-up loan (also known as a Carry-Forward RRSP loan) in time for you to make the deadline. (TD Canada Trust, for example, lends up to $50,000 for an “on-the-spot” RRSP loan.)
Even though it appears interest rates have bottomed, they are still near historic lows: you can opt for a fixed rate or a variable rate based on the institution’s prime rate.
If you do borrow to top up your RRSP, use the resulting tax refund to pay off as much of the loan as you can, suggests Mastracci, and certainly within a year before the cycle begins all over again. This may even be one of the requirements of the top-up loan.
The contribution can stay in cash initially: for the purposes of generating the tax receipt, cash, GICs or money market funds will suffice. But ultimately you’ll want the growth that only equity investments can provide.
CPA and author David Trahair is not a fan of borrowing to invest. He says it makes little sense to pay a high rate of interest on a loan just to earn a smaller return on the resulting investment. Therefore, those who are still in debt to high-interest credit cards may be better off discharging those loans first.
The problem with falling behind on RRSP contributions is that chronic procrastination can jeopardize your ultimate retirement. That’s why Trahair wrote The Procrastinator’s Guide to Retirement for those who delay thinking about RRSPs until they are 10 years away from their hoped-for retirement age.
Typically, procrastinators are looking for an easy way to bail them out for not saving enough or not having begun earlier in life. But desperately shooting for high returns can backfire if investments are poorly chosen or you end up in the clutches of scam artists.
This is your retirement we’re talking about, and a conservative balanced approach to investing your RRSP will require time, so the earlier you start the better.
So what we said at the outset remains the tough truth: the best course is to pay off all debts, then start as early as possible in life to maximize RRSP contributions each year as you go, using money as you earn it.
If you put your saving on autopilot by contributing to your RRSP automatically as soon as it’s feasible, you won’t have to worry about borrowing or the best time to invest. Time itself will turn out to be your ally. Financial Post Jonathan Chevreau is founder of the Financial Independence Hub and coauthor of Victory Lap Retirement. He can be reached at jonathan@ findependencehub.com