After almost six decades, this rare Canadian tax shelter is still saving Canadians money.
The Canadian government first created the Registered Retirement Savings Plan (RRSP) in 1957, to promote savings for self-employed individuals and those without an employer-sponsored pension plan. It's now 2014, and that makes the RRSP 57 years old. If you were numerically inclined, you'd be excused for thinking it's an auspicious year to contribute to a plan.
RRSPs continue to be the go-to retirement investment option for Canadians, especially as employer-sponsored defined-benefit pension plans decline and the government has made changes to the Canada Pension Plan (CPP) and Old Age Security (OAS). The maximum government benefit one can expect is about $18,700 a year, leaving many seeking other sources of retirement income.
According to a recent Leger survey for H&R Block Canada, RRSPs are the most common instrument used by Canadians to prepare for retirement, with 40 per cent currently using RRSPs as part of their retirement planning. A whopping 81 per cent felt RRSPs are a good way to save for retirement.
The good news is the majority of Canadians leave their money in their RRSPs, with only one-third reporting they had withdrawn some of their funds in the past. Only four per cent planned to make a withdrawal this year, in order to pay bills.
RRSPs are one of the last tax shelters available to Canadians. An RRSP allows you to defer paying tax on your contributions until retirement. Since you can expect your income to drop after you stop working, you should pay less tax on RRSP withdrawals. The benefit is two-fold: you deduct RRSP contributions from your net income now, which usually reduces your tax liability, and the money is allowed to grow tax-free until you retire. But if you withdraw money from the plan early, the full amount is taxed at your marginal rate and is not added back into your contribution room.
The Leger survey also revealed some interesting insights on Canadians' opinions about RRSPs. Three-quarters of Canadians surveyed felt RRSP contributions should be guaranteed by the government, in the same way certain personal bank accounts are protected.
Given a sudden, $10,000 windfall, 40 per cent of Canadians said they'd likely put it into an RRSP. Not surprisingly, those already saving with an RRSP were much more likely (55 per cent) to put away a lottery win or other unexpected infusion of cash than those who do not (28 per cent).
And while more than 80 per cent felt RRSPs were a good choice for retirement savings, 77 per cent view RRSP as only part of a larger retirement plan that should include other non-registered sources of income.
So where else are Canadians putting money away for their golden years?
Twenty-three per cent use tax-free savings accounts (TFSAs). There are substantial differences between an RRSP and a TFSA. Introduced in 2009, the TFSA lets you save with greater flexibility but does not give you the tax deduction; you can withdraw without the financial penalties associated with taking money out of your RRSP. The contribution limit for TFSAs is standard and it is not tied to income. Every Canadian taxpayer older than 19 gained another $5,500 in contribution room on January 1, 2014.
Seventeen per cent of Canadians are still relying at least in part on private pension plans. That number is rapidly declining; in 2009, at a meeting of Canadian finance ministers in Whitehorse, the number of Canadians in the private sector with employer-sponsored pension plans was pegged at 40 per cent.
Astonishingly, 21 per cent of Canadians aren't saving for their retirement at all. Given the limited amount of CPP and OAS payout we're likely to receive, this could lead to a lean retirement. It can be hard to find money to save for retirement, especially as 2013 was a financially challenging year for many. But if you build a habit of saving even $25 or $50 a month, the early start means you benefit from starting sooner.
Remember, RRSP deposits are not secured and there is risk involved, so make sure you understand how you are investing your money and the fees involved. But given the 57-year-success story represented by RRSPs, the plan is obviously beneficial for many.
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