It’s that dreaded time of the year again.
It’s tax season but more specifically, Thursday is deadline day for RRSP contributions for the 2017 tax year.
If you’re like me, you’ve forgot about contributing smaller sums to your registered retirement savings plan over the past year and are stuck with dropping in one large lump sum or taking out a loan.
Putting a little into an RRSP monthly is not as easy as some may have you believe as daily life tends to get in the way.
Earlier this month, BMO Financial Group released its annual RRSP study that showed one-third of Canadians are not making RRSP contributions a priority this year, with 44 per cent not having enough money to make a contribution.
Other reasons for taking a pass include paying off debt (25 per cent) and spending money on other things (21 per cent). The national online survey was conducted over the Christmas period.
It might be fairly easy to rationalize to spend, rather than save money today, because bills have due dates and kids need money for things such as dance and soccer registration fees. There is no overwhelming sense of panic to save because retirement may not be for another 25 or 30 years.
According to the study, the number of people contributing to their RRSPs this year (47 per cent) is stable compared to 2017. However, the average amount has decreased to $4,616 from $5,088 last year.
Atlantic Canadians plan to contribute $2,440, on average, to their RRSP before the deadline.
Contributions to an RRSP are capped every year at 18 per cent of a person’s pre-tax earned income from the previous year up to a ceiling of $26,010, compared to $25,370 in 2016.
For those lucky enough to have an employer-sponsored pension plan, your RRSP contribution limit is reduced by the pension adjustment. The pension adjustment is calculated by your employer and reported to the Canada Revenue Agency on your T4 slip each year.
A statistic surprising to me was the percentage of those who withdraw money from an RRSP like it’s a piggybank.
According to the study, a full 40 per cent of Canadians have made a withdrawal from their RRSP, which is heavily taxed and must be paid back. Those who have done so have withdrawn an average of $20,952, an increase of $3,739 over last year.
Reasons for people withdrawing from their RRSPs include to purchase a home (27 per cent), to help pay for living expenses (23 per cent), for emergencies (21 per cent), and to pay off debt (20 per cent).
The only time it makes sense to make a premature withdrawal from an RRSP is when buying a new home or paying for continuing education, as these withdrawals may qualify for the home buyers plan or the life long learning plan.
In Atlantic Canada, the top reason to withdraw from an RRSP is to buy a new home – a total of 30 per cent according to the BMO study will do so by taking out, on average, $23,505 for a down payment.
But now back to the saving for retirement.
Canadians have proven to be savvier savers rather than intrepid investors.
As already mentioned, more than one-third of people are not planning to contribute to their RRSPs this year, although the BMO study indicates 59 per cent of Canadians are putting money into their savings accounts and keeping it as cash.
The remainder is putting their money into an investment plan such as an RRSP or a tax-free savings account (TFSA).
I personally like the TFSA because you can treat it as the aforementioned piggybank – take money out, when you want it, without penalty as long as the money isn’t withdrawn in the same year it was deposited. The TFSA doesn’t give as large a refund as an RRSP will do at tax time however it does protect an investor’s savings from capital gains taxes.
Whatever refund that’s received as a result of investing should be spent in a way that’ll get you ahead financially. It means pulling out of using that cash for a warm getaway and putting it back into your RRSP or another investment vehicle.
It may not be fun, but it will help your family out in the long run.
Chris Shannon is the business reporter at the Cape Breton Post in Sydney, N.S. He can be reached via email at firstname.lastname@example.org or on Twitter @cbpost_chris.