With the contribution deadline for the registered retirement savings plan (RRSP) approaching, Canadians have more choices than ever for where they want to sock away their savings to get a lift on their tax returns.
While prospective homeowners may be weighing the pros and cons of an RRSP over tax-deductible contributions to the relatively new first home savings account (FHSA), many Canadians indicate they’re feeling stretched when it comes to saving for retirement at all.
Global News spoke to financial planners ahead of the upcoming RRSP deadline to get a sense of how Canadians should be thinking about their investments amid competing priorities and looming economic uncertainty.
Thanks to the leap year, individuals have until Feb. 29 to make RRSP contributions count towards deductions for the 2023 tax year. The income tax filing deadline for individuals is April 30.
Money put inside an RRSP grows on a tax-deferred basis, meaning an individual can claim a deduction on their taxable income for a contribution and pay the taxes on that amount when they withdraw it.
Ideally, this would happen after retirement when income typically falls within a lower tax bracket.
For this reason, RRSP contributions have the most benefit for Canadians who are high-income earners, says Jason Heath, certified financial planner and managing director with Objective Financial Partners.
“The tax deduction, in the very long run, if you look to retirement, is generally only beneficial if you’re contributing at a relatively high tax rate and pulling the money out in the future at a relatively low tax rate,” he says.
Heath tells Global News that Canadians who make roughly less than $60,000 in annual earnings ought to “think twice” about putting their money towards an RRSP.
Jackie Porter, a certified financial planner in Toronto, says that Canadians who experienced a one-time boost in earnings in 2023 should also consider making an RRSP contribution lest they face a “nasty surprise” at tax time.
For example, anyone who got a sizable year-end bonus or those who realized a capital gain from selling stock or a home might want to make a contribution to offset the gain in taxable income, she says.
The annual RRSP contribution limit for the 2023 tax year (the one you’ll be filing for this spring) is capped at 18 per cent of earned income from the year previous, up to a maximum of $30,780. Contribution room rolls over year to year if unused, however.
Not everyone can afford to put away nearly a fifth of their income in savings in a year, so Porter recommends that Canadians consider marginal tax rates at the federal and provincial levels when deciding how much to put into an RRSP to maximize benefits from a deduction.
She notes that for very high-income earners, taxes can eat up a significant portion of annual earnings. By speaking to a financial planner or accountant, an individual can calculate how much they need to contribute to bring their income to a lower marginal tax rate.
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Heath says it may not be realistic to focus wholly on your RRSP when it comes to where to put your savings. In addition to saving for retirement, Canadians could have to balance paying down debt or saving for a child’s education, he says.
Another financial priority pulling Canadians’ money away from retirement contributions could be saving up to buy a first home.
The FHSA launched last year could have some Canadians with limited money to put away for investments and tax planning considering pivoting away from RRSP contributions and towards the new savings vehicle.
The RRSP itself has been used as a tool for prospective buyers to save up for the purchase of a home thanks to the Home Buyers’ Plan, which allows Canadians to withdraw up to $35,000 from their RRSP towards a down payment on the condition that it’s paid back over a period of 15 years.
But Heath says that for Canadians solely focused on saving for their first home, the FHSA is a “superior alternative” to the RRSP and should be the “first priority” for contributions.
The FHSA works in a similar way to the RRSP as contributions are tax-deductible, but they’re also tax-free when withdrawn and put towards the purchase of a first home. An individual can contribute $8,000 annually to the FHSA to a max of $40,000, which can act as an investment or high-interest savings vehicle like other registered accounts.
If Canadians are debating whether to go RRSP or FHSA in February, however, it might be too late for the upcoming tax season. The FHSA’s contribution deadline is Dec. 31, meaning anything put into this savings vehicle now will count towards deductions in the 2024 tax year.
Heath says the biggest selling point for the FHSA is that the withdrawals don’t need to be paid back like they do with the RRSP’s Home Buyer’s Plan. He also notes that it’s not necessarily an either-or decision: both the FHSA and Home Buyer’s Plan can be used in concert to fund a down payment.
Even if someone ends up not buying a home, assets from the FHSA can be transferred to the RRSP with the same tax-deferred withdrawal rules as the retirement-focused vehicle, which Heath says makes it a low-risk choice to prioritize a first-home account.
“It’s not like you get penalized for having contributed to the FHSA and then not using it for a home down payment. You can switch gears and have it used for retirement savings in your RRSP instead,” he says.
This year’s RRSP deadline arrives as forecasts predict more weak growth for the economy and Canadians feel increasingly stressed about their own finances.
BMO’s annual retirement survey released on Wednesday shows that Canadians are feeling the pinch of higher interest rates and inflationary pressures, with 63 per cent of respondents signalling that difficult economic conditions are hurting their ability to save for retirement.
More than a third (37 per cent) of respondents to the polling in November 2023 said they’re putting less money toward their retirement plans this year, with roughly the same amount of gen Z participants saying they’re putting off retirement saving completely.
Heath says it’s understandable, given ongoing shelter inflation and other financial pressures impacting younger generations, that Canadians might be reprioritizing right now paying down debt or building up an emergency fund.
“For a young person struggling with the high cost of real estate … to try to juggle saving for a home down payment, saving for retirement, paying down student debt and keeping up with the cost of living, it’s a lot,” he says.
For Canadians worried they might need emergency access to funds, investing in a higher-interest savings vehicle within the tax-free savings account (TFSA) is a way to keep those funds liquid, Heath says.
Porter says that if Canadians working in more volatile sectors like tech are worried that they might face a job loss in the year, the RRSP can still be an attractive choice.
If Canadians face a sudden hit to their earnings later in the year after making an RRSP contribution, Porter says it might not be a bad idea to withdraw that money again, given that your taxable income will be lower overall on the year without an income stream.
That person would pay tax on that withdrawal upfront, she notes, but if they get another job later in the year and end up not needing the money they withdrew, they could get a deduction if they contribute it again for the 2024 tax year and “it’s like nothing happened.”
Porter says that despite the sense of urgency around the upcoming deadline, RRSP contributions are ideally not done in lump-sum payments as a “knee-jerk reaction in February.”
According to the BMO survey conducted in November, some 62 per cent of Canadians had already made their RRSP contributions for the 2023 tax season last year.
By contributing early and continuously through the year to an RRSP, an individual is giving their money more time to compound and grow, she says.
The goal of an RRSP is usually to maximize your cash flow in retirement, so deciding well in advance what kinds of contributions you need to make to get a better outcome at the finish line is generally more important than maximizing the size of your tax return in a given year, Porter argues.
“Taxes are important, but planning should be the goal,” she says.
Heath agrees that the idea of “RRSP season” is not particularly helpful for having a robust savings plan, noting that some people can feel pressured to make a last-minute contribution and end up taking on a loan that they then pay off through the year rather than making steady monthly contributions.
Once the deadline passes, Heath recommends taking a look at where your RRSP assets are allocated, making sure they’re in longer-term, high-return investment products rather than sitting in cash and minimizing the fees paid on these accounts.
“There’s more than just making the contribution,” he says. “There’s what you’re doing with the money once it’s in there.”