RRSP still ahead in retirement savings plans
Many Canandians still unsure of TFSA details
This may be a banner year for retirement savings contributions, with a majority of Canadians planning to make contributions to RRSPS and/or TFSAS, says a new poll.
Almost one in four (24%) will contribute to both, according to the Harris/ Decima poll of 855 adults conducted in December for the CIBC, but 58% will contribute to at least one. The Registered Retirement Savings Plan still gets the slight nod, with 19% planning to contribute only to the RRSP, while 15% plan to contribute only to the new Tax Free Savings Accounts. Tfsa-only contributors came largely from young people aged 18 to 24 and those 65 or over.
In the past two years, 93% of tax filers were eligible to contribute to RRSPS but only 26% actually did so, says Jamie Golombek, managing director of Tax & Estate Planning for CIBC. By including TFSAS to describe retirement savings vehicles in general, CIBC has managed to make it appear that the percentage of retirement savers has almost doubled compared with the previous two years. Mind you, in previous years, CIBC’S pollsters didn’t filter the data in such a broad manner: TFSAS only came into existence in 2009. Even so, Golombek says he’s encouraged by the combined data and “if we get 60% saving for retirement, that’s pretty good.”
Ideally, Canadians should contribute to both vehicles but many need to choose one or the other based on their particular financial situation. CIBC’S research shows 75% of Canadians filing tax returns earn $50,000 or less a year, which generates no more than $9,000 in RRSP contribution room for those without employer pensions. “That’s a lot to save for someone making $50,000 so you can see why people are not maximizing RRSPS.”
In January, a BMO poll found 40% of Canadians still don’t know the difference between RRSPS and TFSAS. While superficially similar, they are actually mirror images of each other in the way they operate from a tax perspective. As Golombek notes, RRSPS provide an immediate benefit in reducing tax payable for the tax year the contribution is made, while TFSAS do not. Once sheltered inside the plans, investments in either grow tax-free but TFSA funds are eventually withdrawn free of tax. That’s not the case for RRSPS, which (if converted after age 71 to a RRIF) are subjected to forced annual taxable withdrawals.
Golombek recommends saving in TFSAS for those in lower income brackets. That’s because the tax deduc tion generated from RRSP contributions are often less than the higher marginal effective tax rate on the RRSP or subsequent RRIF withdrawal. Those who haven’t yet taken advantage of the TFSA now have built up $ 20,000 in contribution room.
Despite the pluses of both vehicles, 26% said they won’ t be contributing to either plan this year, with one in four saying they just don’t have the money to do so. Golombek concedes coming up with large lump-sum contributions can be daunting, especially after the holiday season. That’s why he suggests setting up regular (usually monthly) savings plans that spread payments over an entire year. This arrangement can be the basis for having less income tax withheld at source.