RRSPs: what’s fact, what’s fiction, and what’s specific to education members
For most education members, saving for retirement begins with that very first pension contribution.
While having the benefit of OTPP or OMERS should, in theory, provide you with financial security in your after school years, just under half of you (47%) don’t think your pension will actually be enough to fund your retirement (according to those surveyed as part of the Educators Financial Kickstart Challenge).
That’s where the Registered Retirement Savings Plan (RRSP) comes in to fill the gap—or does it?
A survey conducted by the Canadian Imperial Bank of Commerce has discovered that 67% of Canadians believe the Tax-Free Savings Account (TFSA) trumps the RRSP when it comes to saving for retirement because of its ‘tax-free’ status.
But is the TFSA really a better investment vehicle for retirement than the RRSP?
While the TFSA makes a great investment vehicle to save for goals where you plan on taking the money out sooner rather than later (because you’ll be able to withdraw that money tax-free), making it your sole investment vehicle for retirement may not be your best option. This is particularly true as you move higher up the pay grid, since the more money you make, the higher rate you’ll be taxed.
This is where RRSP’s can offer you your biggest tax break, because every eligible RRSP contribution you make is tax deductible.
TFSA contributions, on the other hand, are not tax-deductible.
You’ll receive a tax deduction for the income tax year for which you make your RRSP contribution. Later, when you withdraw those same funds in your retirement, you will pay tax on those funds at a lower rate (assuming you’ll be in a lower tax bracket).
Fact: Your RRSP can be transferred, tax-deferred, to a beneficiary spouse should you pre-decease them.
General facts about RRSP contributions:
- They reduce your taxable income by the amount you contributed
- Before-tax contributions (directly from your paycheque) are not taxed
- Each year, the lesser of 18% of your reported earned income from the previous year, up to a maximum of $32,490, is added to the amount you can contribute to your RRSPs
- Over-contributions are subject to a tax penalty of 1% per month
- Unused contributions are carried forward to the following year
- You can contribute to an RRSP up to December 31st of the year you turn 71
Educator-specific facts about RRSP contributions:
- A ‘pension adjustment’ for contributions to OTPP/OMERS will reduce your annual RRSP contribution room
- As a member of a registered pension plan, you receive an annual pension adjustment, which appears on your T4 and reflects the value of pension benefits earned in a year
- Refer to your Notice of Assessment, provided by the Canada Revenue Agency (CRA), for your exact RRSP contribution room
Fact: With the Canadian Home Buyers’ Plan, you can withdraw up to $60,000 from your RRSP, tax-free, to put towards your first home. If you’re buying your first home with your partner or another first-time homebuyer, you can withdraw a combined maximum of $120,000 (withdrawals must be paid back to your RRSP within 15 years to avoid a tax penalty)
Fact: You can withdraw up to $10,000 in a calendar year to use towards furthering your education under the Lifelong Learning Plan. You cannot withdraw more than $20,000 in total and it must be paid back to your RRSP within 10 years.
Looking to put the right investment strategy in place to add to your pension income in retirement? Call on Educators Financial Group.
No matter where you are on the pay grid, or how far (or close) you are to retirement—we can put you on the right track to achieving your ultimate financial goals.
Have one of our financial specialists reach out to put your retirement plan into motion.
Be sure to ask us about our Educators Monitored Portfolios for easy, convenient, and hands-free investing.
Sources:
https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/pspa/mp-rrsp-dpsp-tfsa-limits-ympe.html
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/what-home-buyers-plan.html
https://cibc.mediaroom.com/2024-02-12-Canadians-prioritizing-their-immediate-savings-goals-over-long-term-investments-CIBC-Poll
