A simple and ef­fec­tive way to save

60 years after its in­tro­duc­tion, the RRSP pro­gram is still rel­e­vant

The Hamilton Spectator - - BUSINESS - LISA WRIGHT

In case you missed the bank ads, the first two months of the year make up RRSP sea­son, lead­ing up to the March 1 con­tri­bu­tion dead­line.

But 2017 also marks the 60th birth­day of the Reg­is­tered Re­tire­ment Sav­ings Plan, Canada’s go-to re­tire­ment in­vest­ment ve­hi­cle.

In­vestors aren’t likely to put on party hats. But since the RRSP has been around for six decades — and thus is also head­ing into its golden years — wealth ad­vis­ers think it’s time to re­flect on how it has evolved.

“Any time you have an an­niver­sary of some­thing, it’s just in­ter­est­ing to look at what’s hap­pened since they in­tro­duced it and con­sider how rel­e­vant it is,” says David Ablett, di­rec­tor, tax and re­tire­ment plan­ning with In­vestors Group.

“And it is ex­tremely rel­e­vant,” says the vet­eran tax plan­ning ex­pert.

Orig­i­nally called a Reg­is­tered Re­tire­ment An­nu­ity, the RRSP was cre­ated in 1957 to en­cour­age work­ing adults and the self-em­ployed to save for re­tire­ment, since pen­sion plans were mostly only of­fered at pri­vate com­pa­nies.

“When it was in­tro­duced, there was no Canada or Que­bec Pen­sion Plan. All they had was Old Age Se­cu­rity,” notes Ablett.

It took nearly another decade for the CPP and QPP to come onto the scene in 1966.

But be­fore those pen­sions came along, there wasn’t ex­actly a rush to open the new sav­ings plans. In fact, the av­er­age in­vestor didn’t even know they ex­isted.

“The in­tro­duc­tion was very, very low-key. The only com­pa­nies ac­tu­ally of­fer­ing them at first were in­sur­ance com­pa­nies,” Ablett says, not­ing that it took un­til the 1960s and 1970s for big banks to jump into the RRSP game for cus­tomers.

At first, con­tri­bu­tion lim­its were 10 per cent of the pre­vi­ous year’s in­come to a $2,500 max­i­mum.

And if an in­di­vid­ual did not con­trib­ute in any given year, that year’s con­tri­bu­tion room was “gone for­ever,” says Cur­tis Davis, di­rec­tor, tax and es­tate plan­ning at Macken­zie In­vest­ments in Toronto. “Cana­di­ans were un­der­whelmed,” says Davis.

“It wasn’t un­til the 1970s that you started to see the con­cept of RRSP sea­son,” Ablett says.

The fed­eral gov­ern­ment made more tweaks to en­tice in­vestors. In 1974, spousal RRSPs were in­tro­duced, so with­drawals could be taxed at the rate of the lower-earn­ing spouse. And in 1978, Reg­is­tered Re­tire­ment In­come Funds (RRIFs) were launched so that RRSP money didn’t need to be cashed out all at once.

The RRSP’s pop­u­lar­ity re­ally took off dur­ing the 1970s and 1980s. By 1987, al­most 3.5 mil­lion in­di­vid­u­als — more than one-fifth of all Cana­dian tax­pay­ers — claimed RRSP de­posits as a de­duc­tion on their tax re­turns, re­ports Sta­tis­tics Canada.

The year 1990 was huge year for RRSPs, says Davis. “Con­tri­bu­tion lim­its in­creased to 18 per cent of the pre­vi­ous year’s in­come, the dol­lar limit was raised to $11,500 and the con­tri­bu­tion carry-for­ward rule was in­tro­duced, al­low­ing un­used room to be car­ried for­ward seven years.”

He notes that 1996 saw even more change, as the pen­sion ad­just­ment was in­tro­duced to level the play­ing field for con­trib­u­tors with em­ployer pen­sions and/or de­ferred profit shar­ing plans.

“And fi­nally, the seven-year carry for­ward rule was re­placed with an in­def­i­nite carry-for­ward,” says Davis.

In re­cent years, though, the RRSP has faced stiff com­pe­ti­tion from the Tax Free Sav­ings Ac­count, which was in­tro­duced in 2009.

To­day, roughly six mil­lion Cana­di­ans — or 23 per cent of tax fil­ers — con­trib­ute to RRSPs.

They can also help first-time home buy­ers with down pay­ments, and pay tu­ition through the Life­long Learn­ing Plan.

Ablett adds that although the sav­ings de­vice has def­i­nitely lost some of its shine com­pared to other in­vest­ment strate­gies in re­cent years, “we never thought it would go away be­cause of all the ben­e­fits it pro­vides.

“Sure, not ev­ery­one is el­i­gi­ble to con­trib­ute or has the funds to do so. But no other tax-plan­ning strat­egy com­bines sim­plic­ity with tax sav­ings quite like the RRSP,” notes Davis.

HAMIL­TON SPEC­TA­TOR FILE PHOTO

Cana­di­ans had about $951 bil­lion in un­used RRSP room in 2014, ac­cord­ing to Sta­tis­tics Canada.

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