By Gordon Pape, Editor and Publisher
In case you’ve missed all the advertising, it’s RRSP time again.
Banks, credit unions, insurance companies, brokerage firms, and wealth management companies are all competing for a share of your retirement savings.
Which should you choose? I’ll get to that in a moment. First, let’s look at a few numbers.
The Bank of Montreal released a report this week that showed that, on average, we are holding more money in RRSPs than ever before. The study, conducted on-line by Pollara Strategic Insights, found that the average amount held in RRSPs nationally is $101,155. That’s a 21 per cent increase from 2016. The Ontario figure was even higher, at $120,024.
The study also found that withdrawals from these plans are declining, so fewer people are dipping into their retirement savings for other purposes. Most withdrawals are for the purchase of a house, under the government’s Home Buyers’ Plan.
But there’s another side to this story. While RRSP assets are increasing, the number of Canadians contributing to these plans is slowly but steadily declining. According to Statistics Canada, only 22.5 per cent of tax filers contributed to an RRSP in 2016 (the last year for which figures are available) compared to 22.9 per cent the year before.
‘This gradual downward trend can be observed over the previous 16 years,” StatsCan said. “In 2000, for example, about 3 in 10 tax filers contributed to an RRSP.”
Some of that money is obviously being diverted into Tax-Free Savings Accounts (TFSAs), which debuted in 2009. Another report from Bank of Montreal says that 69 per cent of Canadians now have a TFSA, with an average holding of about $27,000.
That bring us to the first question: Should you use an RRSP or a TFSA to save for retirement? Here are some things to consider.
Income level.
Low income earners should look first at a TFSA. There’s no tax deduction for contributions but if you are in a low tax bracket that shouldn’t be a concern. When your income level moves higher, you can switch to an RRSP and get a better tax break. At some point you could even withdraw money from the TFSA tax-free and contribute it to an RRSP for a big refund.
Contribution amount.
You can only contribute $6,000 a year to a TFSA. For an RRSP, you can add 18 per cent of the previous year’s earned income, to a maximum of $26,500. So, if you want to make large contributions, the RRSP is the way to go.
Age.
You can’t contribute to an RRSP after the year in which you turn 71. A TFSA is your only option. At the other end of the age spectrum, you must be 18 to open a Tax-Free Savings Account (in some provinces it is 19). But there is no minimum age for having an RRSP. A teen-age rock star could save a lot of tax dollars by making a maximum RRSP contribution.
Income expectations.
If you expect to be in a lower tax bracket after you retire, generally the RRSP is the better choice (you’ll save more in tax today than you’ll have to pay tomorrow). But if you think you’ll need to apply for the Guaranteed Income Supplement (GIS) to get by, put your savings in a TFSA. RRSP/RRIF payments are treated as taxable income and your GIS benefit will be reduced by $0.50 for every dollar you receive. Withdrawals from TFSAs don’t affect GIS payments.
So, where you should set up your RRSP (or TFSA)?
Many people prefer the convenience of their local bank branch or credit union. After all, you’re in there anyway so why not?
Well, convenience is great, but you also need to consider cost and potential return. If you want a safe, plain vanilla plan that invests only in guaranteed investment certificates (GICs), you’ll generally find better returns at smaller financial institutions. Check ratehub.ca for the best return and the type of insurance coverage provided. The Canada Deposit Insurance Corporation (CDIC) is the gold standard.
GICs are safe and easy but, with interest rates still low, they won’t earn you a lot of money – 3.75 per cent on a five-year term is the best rate I found. You could load up your plan with mutual funds but their high fees and expenses (the management expense ratio) will eat into your profits at what can be an alarming rate. A cheaper route would be to open an account with a discount broker and invest in exchange-traded funds (ETFs). Alternatively, a company that offers robo-advisor services (BMO, Questrade, WealthSimple, among others) can provide a similar low-cost service.
If you want to actively trade securities, you may want to use a full-service broker, who can provide research and advice. You can also entrust your money to a wealth management firm, who will charge you a percentage of your assets to make decisions on your behalf. That usually ranges from 0.5 per cent to 1.5 per cent depending on how much you invest.
Finally, let me remind you of the first rule of retirement planning – make a contribution! If you don’t put in anything now, there won’t be anything to withdraw when your working career ends.
This article originally appeared in The Toronto Star.