Saving for Retirement – RRSP Season

Ben: Hello, and welcome to another Consolidated Credit Webinar. This time we’ll be looking at what all the fuss that RRSP season is about. Today our executive director Jeffrey Schwartz has been kind enough to join us so we can take a step back and examine what exactly happened during RRSP season and why it might matter to you.

So, RRSP season has come and gone, and some of you are probably even wondering what that even meant. What’s all the fuss about? Why should I even care? Well, that’s what we’re going to take a look at today. We’re going to look at some of those questions in detail and give you some tips on where you can go to get help. And as always, we’ll end off with a Q&A session and cover some of those burning questions you have about RRSPs or RRSP season. I’ll let Jeff lead us off here with, “When is RRSP Season?”

Jeff: Thanks Ben. As we’ve said, RRSP season has come and gone this year, and now your focus has probably shifted to the upcoming tax season. And given the tax implications of RRSPs, it might make sense that these two deadlines are only 60 days apart.

So, that answer our first question: “When is RRSP season?” For most people, it’s the first two months of a new calendar year. You’ve got until March 1st to contribute to your RRSPs up to the maximum amount, which is typically 18% of last year’s total income. That means if you’re set to earn about $100,000 in 2019, you’ll have until March 1st, 2020 to contribute up to $18,000.

The reality is that RRSP season is all year long, but we can get into that a little bit later. There are some exceptions to this rule: for instance, if you have an employer RRSP Matching Program, a pension, or you’re self-employed. So be sure you understand what your situation is so you don’t get hit with penalties for over-contributing.

Ben: OK Jeff, I’ll try to tread lightly a little bit here. It’s never a good idea to insult your boss, but you’re a little bit older than I am. But I’m not exactly a young man, but I’m willing to bet that we have different retirement goals. So a question we get a lot in my retirement planning workshop is, “Should I care about RRSPs, or RRSP season?” Sometimes it’s older baby boomers looking at retiring in three to five years and maybe a fresh college graduate looking to enter the workforce. But they all ask me in some form or another, “What can an RRSP do for me?”

Jeff: And you’re right Ben. Different people will always have different financial situations or goals and they can be intensely complex, or simple and straightforward. There are so many factors involved, like, how old are you? When do you want to retire? What kind of assets have you built? How much debt do you have right now? What do you want to leave to your family when you’re gone?

Really, in order to answer your question about whether or not you should care about RRSPs is to first ask yourself, “Do I have to have an RRSP?” If you do, what do you want to do with it? And if you don’t have an RRSP, then what’s your long-term goal?

As you’re probably aware, CPP, OAS, and GIS (if you qualify) will not be enough to live on comfortably or close to how you’re living now when you’re retired. You’ll need some other sources of retirement income to meet all of your wants and needs so you can actually take time to enjoy your retirement.

Ben: Great. And that brings me to another popular question: “How do RRSPs work? What can they do for me?” Those are two very important questions and they depend a lot on your financial situation and your tax situation. But when used wisely, RRSPs can lower your annual tax bill. For people who regularly contribute to their RRSPs – and maybe they find themselves in a higher marginal tax rate – the benefits can be high there. They’ll be getting a refund on the taxes they’ve already paid, and they’re building a retirement income stream here.

So, Jeff, another popular line of questioning I get from workshop participants is, “What are the benefits of an RRSP if I don’t have to pay taxes each year?

Jeff: That’s a great question, and while there’s no taxable benefit for you when you’re contributing to an RRSP, you’re still saving for a secure retirement, and that’s never a bad idea. That means years and years of compounding interest and sheltered growth in a relatively secure investment vehicle which will literally pay off big when it’s time to think about retiring and withdrawing that money.

Ben: Great. So I guess that leads into the next question: “What do you want to do with your RRSP if you do have one?” Hopefully, you’re a little bit better informed about what RRSPs can do now, and maybe start opening one, or contributing to one, or come up with some sort of retirement plan of your own.

Those are some great financial goals to have, but before we jump on the RRSP bandwagon, let’s take a second to find out what you want to do with your RRSP. Is there somewhere else you could put that money that will better serve your needs? These are serious questions that you need to spend a little bit of time answering as best you can.

Jeff: Yes. Definitely spend a little bit of time exploring answers to those questions. You may want to speak with a financial counsellor or a trusted advisor to clarify your situation first. If you’re looking for a place to save money first for paying off a debt or a home reno, don’t do it with an RRSP. Find some other place to save that money, like a TFSA.

Ben: OK, once and for all, here are the three biggest benefits to an RRSP. The first is tax savings and retirement income. That was the reason these registered retirement programs started way back in the 50s. And I’m willing to bet that was probably before your time, Jeff. So, they’re meant to save taxes so you can pay them at a lower tax rate later.

Now, at the same time, you’re adding an additional source of income to any pensions or any investments that you’ve had or what you’re planning on drawing down on in retirement. So, another thing that you might want to consider is the Homebuyers Plan (HBP).

If you’re planning to buy a home and you have money in an RRSP, you can make tax-free withdrawals up to $25,000. But of course, it’s not that simple. There are some qualifying requirements to meet, so speak with an advisor or someone at your financial institution about all the pros and cons of using the Homebuyer’s Plan before you commit to it. Because you’re going to have to pay that money back into the RRSP eventually. So Jeff, perhaps you can spend a little bit of time shedding more light on that Homebuyer’s Plan option.

Jeff: Certainly. It’s one that I know about personally. It’s probably easier to think of the Homebuyer’s Plan as a loan. In fact, that’s how I was able to get my first home as well. I dipped into my RRSP and paid it back interest-free over time. So, how you want to think about it is, it’s a tax-free loan from your RRSP to yourself. You’ll have up to 15 years to pay back that loan.

Think about the long-term consequences before jumping in on this plan. Yes, you’ll be buying a house or condo, which is a fantastic financial goal and a great asset to start building equity with. But what are some of the other potential costs of this program?

For one, it may have taken you years or decades to build that RRSP up to that amount. So, it could be seen as robbing from your future to pay for the present. But that doesn’t mean it’s a bad thing, either. It’s really one of those pros and cons options that you’ll need to evaluate and do your homework on before you decide whether it’s the right choice for you. Building equity in an asset that will usually gain value over time is a great use of your money, but so is saving for a secure retirement. As with any choice, there’s going to be consequences. You have to make sure you know all the ins and outs of the Homebuyer’s Plan before you start house hunting.

Ben: Great. Those are some great points on the Homebuyer’s Plan. These are big decisions, so don’t rush them. If you don’t understand something, find help. Another reason you might want to tap into your RRSP funds is for continuing education, or perhaps starting a second career a little bit later on in your life. And that program is called the Lifelong Learning Plan. And for someone considering a career change, it can be a great way to finance your education or some training.

The Lifelong Learning Plan does have some wordy eligibility criteria to meet, but essentially it allows you to withdraw up to $10,000 a year to finance full-time training or post-secondary education. The total amount that can be withdrawn is $20,000 over four years.

Another great benefit of the Lifelong Learning Plan is that any withdrawals are made tax-free. But similar to the Homebuyer’s Plan, this is a loan. You’re going to have to pay that money back. At least 10% of the money borrowed must be repaid each year for a maximum of 10 years. That’s why it makes sense to take a little bit of time looking at what you are earning.

Jeff: I think we’ve established that saving for retirement, however you plan to do it, is never a bad idea. From those stats, it’s clear that this is a source of financial stress for far too many Canadians. It’s your money. These are your retirement goals. So make sure your RRSP aligns with those goals.

If your goals don’t align with the benefits of an RRSP, it doesn’t mean you should stop planning your retirement altogether. It just means that contributing to an RRSP makes more sense for others than it might for you. And that’s why we should take a minute to go over TFSAs and how they might be a better choice for some over an RRSP because there’s often a lot of confusion about the two.

Ben: I agree. Contributing to an RRSP is never a bad idea. I also hope that we’ve stressed the importance of some type of a long-term savings plan, even if it’s not an RRSP. If an RRSP is not going to help you achieve your retirement goals right now, then you might want to look into the benefits that come with a TFSA. It’s an easy-to-use, low-risk investment vehicle, and the interest earned within the TFSA is 100% tax-free. If you’re young or are earning a lower income, then contribute to a TFSA. And if you start earning more money and are moving up in the tax brackets, then you can always move money back over to an RRSP. So, what’s your savings plan?

Jeff: If you’re one of the many Canadians out there who is confused about what’s better – a TFSA, or RRSP – just ask yourself: “Can an RRSP help me achieve my retirement goal?” If it doesn’t make sense right now, then contribute as much as you can to a TFSA.

All these acronyms are tough to keep up with. It’s a place to deposit and withdraw money. Low-risk investments that can be made within a TFSA will grow tax-free. And if your income situation changes later on, you can always move that money from your TFSA to your RRSP.

Ben: Another common question I get is, “Do I need to contribute to my RRSPs?” or “Do I need to contribute to my RRSP by the deadline?” I’d say yes, or maybe no. You’ll have to decide that on your own.

Hopefully, some of what we’ve talked about today made things a little easier. The bottom line is, ask yourself now, what’s your long-term financial plan? What goals have you set for yourself, and how do you plan on getting there? If you’re still unsure about what to do with your RRSP, maybe you’re unsure if you should even start one, then maybe talk with friends or family.

Now, that doesn’t mean take the advice of your crazy Uncle Gary who keeps his retirement funds stuffed under his mattress so the government can’t get it. That’s not going to earn him or you any interest or tax-deferral benefits. So we see right there that 61% of people in that 2017 Financial Planning Standards Council poll all started to seriously think about their retirement savings plans when triggered by a discussion with family or friends. Maybe at your next family event or dinner, you might want to ask some of your older family members what their plans were.

Jeff: Right Ben. Talking about money usually isn’t the most comfortable topic to bring up at the dinner table. But with retirement planning, it’s a bit different. People love to talk about their dream retirement with one another. That being said, however, I’ve spoken with a number of Canadians who have unfortunately had their retirement dreams put on hold after speaking with a pushy salesperson. Typically, they wind up leaving the salesman’s office more confused than when they went in with a pile of confusing graphs and glossy reports.

So find a trusted advisor to speak with. A good place to start might be at your workplace. Many great organizations out there offer an employee RRSP matching program. And for 83% of the participants in that poll, that’s what it’s going t take to encourage active retirement planning. If your company offers an RRSP matching program, jump on it right away. It’s essentially free money offered by your company to ensure you have a better chance of planning a secure retirement.

Ben: Great, so while we’re on the topic of that, maybe Jeff if you could just explain to us if you need help, where can you go, or who should you look for.

Jeff: If you’re looking for a trusted financial advisor, a CFP (Certified Financial Planner) or a financial counsellor can help you lay the groundwork for a secure retirement. If you have some more lofty retirement goals, then you may want to look for a financial advisor who specializes in retirement planning. They’ll have a much better understanding of what will be needed to get you on your way to your retirement dreams. CRSs (Certified Retirement Counsellors) or RRCs (Registered Retirement Consultants) are great places to start. You can find out a ton of great information about financial planners by visiting the FPSC website.

So, that wraps up our webinar here, and we’ll just take a second or two to answer a few common questions we get.

Ben: Sure. The first one we get quite a bit is, “How much should I contribute to my RRSP? Is there a dollar amount I should focus on, or a percentage?” That sort of thing. Jeff, maybe you want to take a stab at that one.

Jeff: Firstly, the fact that you’re considering putting money aside for an RRSP each month is a great idea because that really eliminates the need to come up with a lump sum of cash right before March 1st. If you’re doing it all year long, you get the growth throughout the year in addition to the fact that you’re saving yourself from having to contribute a lump sum all at once and coming up with that cash.

So, let’s address what you really asked, and it’s a complex question. You’ll need to take a serious look at your monthly budget to see what you can safely stash away for retirement while meeting all of your monthly financial obligations but still leave room to save for your other financial goals. Now, according to Money Sense, each year two-thirds of Canadians don’t contribute anything at all. So any contribution you make is an accomplishment. If you’re able to stash away the maximum 18% of your income per year in RRSP, you’re doing great.

But your situation might be different. Start with your monthly budget, and if you don’t have a monthly budget, it’s time to start one. After your monthly expenses are paid, if you’re able to it away 5% to 15% of your monthly income into savings, figure out how much of that amount you’ll need for your other savings goals, like your emergency savings funds, or if you’re planning a vacation, or purchasing new appliances, and so on . The rest of that savings should be earmarked for retirement. And the earlier you start, the better, so stop waiting.

Ben: I like that. Start with a budget, and then go from there. So, another one I hear often is, “How long can I have an RRSP and what can I do with it once I retire?” Well, you’ll have to transfer that money out of your RRSP by the end of the year that you’ll be turning 71. But you’ve got a few options on how to do that, where you want to do that, and that sort of thing. Certainly seek the advice of a trusted financial professional, hopefully one that has experience, because those options include taking out the money in cash, which has its tax implications.

You can also purchase some annuities for some regular type of retirement income. And the other option which is pretty popular is transferring your money to a Registered Retirement Income Fund, or a “RRIF”. A RRIF allows you to keep that money invested with the opportunity for it to grow tax-deferred. But every year you need to withdraw a minimum amount from your RRIF, and any amounts taken above will be taxed. So, there are a few different options, so you really want to speak to your financial advisor or professional about what you want to do.

If you wanted to connect with us, please do. We hope you have a little bit of a clearer understanding of what RRSPs can do for you and why there always seems to be a mad rush to contribute before the RRSP deadline. So hopefully next year you’ll be ready and actively working towards that goal, that dream retirement.

Please feel free to contact us here are Consolidated Credit Canada with any of your burning financial questions. We hope you enjoyed the webinar and we’ll see you next time.