The Government of Canada instituted Registered Retirement Annuity Plans, later called Registered Retirement Savings Plans (RRSP), in March of 1957. At that time in our history, the Canadian Medical Association lobbied the federal government on behalf of their members, stating that they wanted a national retirement savings plan to be created since doctors did not have workplace pensions. Therefore, we can thank the medical profession for the creation of these plans that are now an integral portion of the average Canadian’s retirement assets. The Canada Pension Plan commenced in 1965. The Old Age Security Act and the Old Age Assistance Act came into force in 1951, but there have been several changes in these two programmes over the decades. Thankfully, many of us will be complementing our Canada Pension and Old Age payments with funds saved over the years through RRSPs.
When the Registered Retirement Annuity commenced, the annual contribution limit was ten percent of income, with a maximum of $2,500. In 2019, the eligible contribution limit is eighteen percent of 2018 earned income, with a maximum of $26,500. How times have changed! To put figures into perspective, in 1957 gasoline cost thirty-one cents a gallon, milk cost a dollar a gallon and many homes cost less than $20,000.
Fortunately, the Canada Revenue Agency calculates our earned income each year and shows the available RRSP contribution room (including unused contribution room from prior years) on our annual Notice of Assessment. If you would like to see how it is calculated, earned income equals the total of:
Net employment income, net business income (including partnerships), net rental income, Canada Pension Plan or Quebec Pension Plan disability pensions, and spousal support payments which have been included in income.
Once this number has been determined, the following items are deducted:
Business losses, rental real estate losses, deductible spousal payments paid, union and professional dues (per line 212 on your tax return), and employment expenses (per line 229 on your tax return).
There are a variety of assets that can be placed in an RRSP. These include bonds, equities, exchange-traded funds, foreign currency, guaranteed investment certificates, income trusts, labour-sponsored funds, mortgage loans, mutual funds, and savings accounts. The allocation of assets is arbitrary and left to the discretion of each individual. Most financial planners believe that it is preferable to have diversification in a portfolio of both registered and non-registered investments. As a person’s financial needs change over time, particularly as one gets close to retirement, it is best to consult a financial professional who can provide independent, unbiased advice that will moderate your risk tolerance and provide a healthy return on your investments.
There are a variety of RRSP plans to choose from. These include individual, spousal, group RRSPs and pooled RRSPs. There are numerous rules and regulations concerning each of these funds and it would be impossible to provide all of the details in this short article. Funds must be withdrawn from RRSPs by the end of the calendar year in which you turn 71. Several years ago, the federal government set up a Home Buyer’s Plan and a Lifelong Learning Plan. RRSP funds can be withdrawn for each of these plans, but must be repaid within specified time limits. If you fit the criteria, these are excellent methods of using RRSP funds prior to retirement. However, there are a number of regulations that need to be adhered to.
For the majority of taxpayers, who do not participate in either the Home Buyer’s Plan or the Lifelong Learning Plan, the choices when turning 71 are to withdraw the entire amount and pay the income tax (this is not recommended for most individuals), set up an annuity, set up a Registered Retirement Income Fund (RRIF), or a combination of these. Since financial circumstances differ for each individual, it is recommended that you obtain professional advice before making decisions that you may regret later. The average life expectancy for a Canadian male in 2018 was 80, while the average life expectancy for a Canadian female last year was 84. Therefore, we will probably be living at least twenty years after retirement so it is imperative that we put our financial plans in order well before retirement.
Finally, I would like to encourage you to contribute to your RRSP on a periodic basis throughout the calendar year, rather than waiting until February of the following year to make your contribution for the prior taxation year. First of all, you earn investment income as soon as contributions are made. Secondly, it is usually much easier for people to come up with small amounts periodically than come up with a large amount once a year. For example, I decided several years ago to contribute twenty-five dollars on a monthly basis to an RRSP Daily Interest Savings Account via pre-authorized withdrawal. When the balance in the DISA account reached five hundred dollars, I opened an RRSP GIC since the interest rate was more beneficial. I currently have over three thousand dollars in RRSP GICs with my bank. I got used to the withdrawal and really didn’t miss the money. I have other RRSPs from prior years – I’m not depending on this amount for my entire RRSP portfolio. I just wanted to give an example of how a relatively small amount each month (less than a dollar a day) can add up over a period of time.
As you can imagine, there are a number of rules and regulations concerning Registered Retirement Savings Plans and I could not possibly mention everything in one article. I would encourage you to think of RRSPs and income tax planning in general as a year-round exercise and do not be afraid to ask for advice from trusted professionals before making decisions that might affect your retirement savings in a negative fashion. Although it is tempting to visit a bank in February to make an annual RRSP contribution from your savings account, or complete an application for an RRSP loan, it may not be the best use of your financial assets. I once heard someone say that we spend more time planning our annual vacation than planning for our retirement. Hopefully this article has provided some food for thought!