How much to Your RRSP?

Are you planning on contributing to your RRSP for 2014? Will you make a smaller contribution than you did last year? According to the Stats Man, even as our spending on crap has gone up, RRSP contributions have been on a steady decline. Fewer people are contributing, and the amount we’re socking away is falling too. In fact, we only used about 24% of those eligible contributed to an RRSP in 2011. And we socked away just 4% of what we were entitled to put away in RRSPs.

According to two big banks, fewer Canadians are planning to put money into an RRSP this year. They say they can’t afford it. That’s what happens when you prioritize spending over saving and don’t pay yourself first. The Wealthy Barber must be cringing!

Scotiabank and Bank of Montreal both say people have other expenses, like car payments, credit cards and lines of credit, that are preventing them from making a contribution.What’s I find interesting is the discrepancy in their surveys. Scotiabank found that 31% planned to contribute to their RRSP, down from 39% last year while said 43% of those surveyed planned to contribute, down from 50% in 2013. Since they always claim their surveys are coronet to within a hamster’s whisker, does that mean Scotia’s customers are more indebted than BMOs?

Regardless of the excuse, this unwillingness to use an RRSP to save for retirement totally blows my mind. The tax-man wants to hand you back money you would be paying in taxes and you’re going to let him keep it? Really? You can’t find a single thing – pay down debt, boost your TFSA, go on vacation – that you’d rather do with that “tax” money?

If you think that because you can’t dump a whack of money into an RRSP it’s not worth thinking about, you’re a dope. Every dollar you save now, is a dollar plus growth that you’ll have when it comes time to hang up your spurs.

Put $50 a month into an RRSP, and give your money 25 years to grow at an average return of 5% over the long-term and you’ll almost double your money: you’ll have put away $15,000 but you’ll end up with $29,775.

Give yourself more time, and the results are even better. Let’s say you start contributing at 25 and do so until the normal retirement age of 65. You’ll have $76,301 just by socking away $600 a year. Com’on, you can find $600 a year.

Up your contribution to the mean contribution for 2008 — $2,680 – and in 25 years you would have $133,394. In 40 years you would have $341,829.

Don’t be sad about how little you can save today. And don’t let a small contribution stop you from starting. Find the first $50 a month and aim to get to the $233 a month you need to meet the median contribution amount. Then keep going from there.

You can use your tax refund to boost next year’s RRSP contribution. That’s a great way to build up your savings. Allocate half of your next raise to savings. And you know all that money you’ve been wasting on some bad habit? Why not use it instead to build a future.

Plan now to start contributing month, and this time next year you’ll have formed a habit that’ll do you good for years to come!

I think one of the reasons people may be using RRSPs less is because they’re funneling money to their TFSAs… with limited resources for saving, something’s gotta give. The government, of course, is laughing all the way to the bank. With the switch to using TFSAs, they’re issuing fewer refunds; that’s more tax money in their pockets to spend telling us what a great job they’re doing. In the mean time one of the best savings vehicles languishes. Yes, there are people for whom a TFSA makes a lot of sense. But once you’re making more than $40K a year, if you’re not using an RRSP it’s likely because you’ve bought the claptrap about RRSPs being crappy. They’re not. They are stellar and they’ve helped me save for my future. Don’t just react and not contribute; crunch the numbers and see for yourself.

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Gail Vaz-Oxlade

Gail Vaz-Oxlade wants YOU! Join MyMoneyMyChoices.com to get smarter about your money and help others get smarter about theirs. Isn’t it time we eliminated financial illiteracy? Come find me on Google+ and on Twitter.

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38 Responses to “How much to Your RRSP?”

  1. Anyone know a safe investment that would get me that 5% per month interest?

  2. Thanks Gail for the reminder. For now both myself and my husband contribute 100 dollars a month each to our RRSP while my husband is attending school part-time while working. Also for the last few years we have been putting our tax refund back into our RRSP contributions to boost it up quicker.

    I would like to do more but since I have a pension plan I’m also paying in, I’m wondering if I should put the money in a TFSA instead? Once my husband is done school we will be putting more in his for sure.

    I actually look forward to tax season!

  3. My husband has almost maxed out his RRSP, but I’m no where near to maxing out mine. Is he allowed to contribute to mine and get a tax deduction if he doesn’t have the room?
    I have a pension plan plus TFSAs (hopefully maxing that out this year). Contributing to an RRSP for me hasn’t made a lot of sense as I will receive a very minimal deduction. (I’ve been contributing a very minimal amount, just so I don’t owe taxes.).
    We each have 12-22 year til retirement. (Early vs. “normal” retirement age). And we BOTH have pension plans, and started working in our early 20’s.

  4. I contribute far less to my RRSP now because, after taking early retirement, I only work a little part-time and am very limited in what amount I’m permitted to contribute. Also, I’m starting to think it’s time to stop building my RRSP and begin reducing it in order to spread out the taxes ahead of having to convert it to a RIFF.

  5. @Pam – We have seen a 5.12% average interest rate since 2003 in a balanced fund at RBC. The key was to keep the money in during the tough times. Yes, we lost a lot, but we stuck with it and weathered the storm and came out ok. Balanced funds are medium/low risk, that’s all I can handle and be able to sleep at night.

    @Cas – Your husband can contribute to your RRSP, it’s called a spousal. Your account gets the money, he gets the tax break. We have been doing this for years. I make about half of what my husband makes, so it made sense for us. He can only contribute up to HIS maximum though, so it only makes sense if his income is considerably higher than yours.

  6. I think Gail hit it on the head with the TFSA option available as well. In general, people tend to have a 1-track mind, not being able to consider a few options at the same. People have convinced themselves that RSPs are no longer useful.

    In the end, ANY savings tool that gives you a benefit NOW is good for you. Don’t let a 1-track mind limit the potential, utilize all you can!

  7. Funny, seems like the question about where do I get 5% (or whatever) interest rate gets asked every time – we forget that it is over a length of time.

  8. I hit the RSP maximum 2 years ago and with my pension adjustment and the regular payroll contributions I was making (for the ‘new’ room I was generating) I came very close to over contributing. So I put the payroll contributions on pause and took my bonus as cash this year (heavily taxed cash, bleh). I will start up again in April now that I’ve got some room. While I doubt there are huge percentages of people in my situation, it’s possible some folks are not contributing for a similar type of scenario.

  9. I’d love to know what percentage of Canadians make under $40k per year (the number Gail quotes as making it worthwhile to have an RRSP). I know many young people who are putting their money into TFSAs instead of RRSPs because they don’t expect to make more than $40k (in today’s dollars) and don’t want the hit on OAS when they retire. Whenever these RRSP statistics are quoted, nobody ever says “x” percent of people making more than $40k contribute. Everyone is lumped together.

  10. I first started contributing $25 per month to my RRSP about 20 years ago. Whenever I received a raise at work, at least half the increase went to my RRSP contribution.

    This year I will not be contributing as my RRSP is maxed out.

  11. My employer matches up to a max 5% of gross salary, so I maximize that every year. Free money, why not.

  12. We currently contribute $75 each per month. I upped it last year from $50. I also have a pension plan at work.

    I would love to max out my contribution room but have to wait until debt is paid off. After that it would probably take over a year to max it out even if we used the same amount we put on debt.

    We also contribute to TFSA’s but again wont be able to max those out until the student loans are gone.

  13. My husband is one tax bracket higher than I am so each year we do a contribution from him to my spousal account that is just big enough to get him down to my tax bracket. After that if we want to contribute more it is done evenly, each into our own RRSPs. Having said that, for many years we haven’t put more than that initial amount into my spousal account. We’ve calculated that we have enough in our RRSPs now so we’ve switched to TFSA contributions, but mostly we’ve focussed on making massive extra payments on the mortgage. We already have enough in our RRSPs for the portion of our retirement after 65 so now we’re doing everything necessary to retire early and a big piece of that is getting rid of the mortgage. When we retire early we’ll first start to drain the RRSPs (in the years when we have no other income or government benefits, so we should be little or no income tax), then we’ll move on to the TFSAs which doesn’t cause a reduction in government benefits once we qualify for those.

  14. I wonder if those figures include those contributing to pensions and other retirement plans affected by the pension adjustments. Right now, nearly 15% of my gross pay goes straight towards my defined benefit pension, and so I have not put additional cash into my existing RRSPs. (FYI, I’m a good 30 years away from retirement)

  15. I have been putting $50/pay into an RRSP for a couple of years now (I’m 29). If I keep at least that pace until I am 60, I will end up with almost $40,000, before taking accumulated interest into account. My goal is to have enough money to leave me mortgage-free before I retire, and it’s nice to know that even with this small amount put aside every month, I should be able to do that without a problem. And if I’m already mortgage-free at that point (which is ‘the plan’), I will feel that much more secure knowing I have funds to get me over hurdles I might come across.

  16. How much of that RRSP money is grabbed back by the Gov’t when we retire and decide to use it?

  17. As my husband’s pension contributions through work are 18% of his pay, he has little room left for contribution then for mine. I have a ton of room. My pension plan costs me very little of my income, which means too that my pension will not be great to rely on for retirement. TFSAs it is.

  18. I cant wait to downsize. we bought close to our upper limit and we have been in this house for almost 2 years and are starting to feel the pinch now. we are paying for preschool and it is much more expensive than we planned. Living in an English town, we were beyond excited to get our son into the preschool program at the French school and jumped on it. the wait list is soooo long. when then mentioned they could take our younger son (I cried cause I thought I had more time) we jumped on it. we had to stop their resps for it (which is paying 1/2 the fees for their current education) and our rrsps savings will only be the small monthly 200$ for this year. no big dumps like years past.

  19. I have been contributing 5% and my employer matches another 5% since I started with my employer almost 4 years ago, however my husband does not have any. We have been discussing what to contribute for him, and whether or not we should pay down our mortgage in 10-15 years instead, and then once it’s paid off put the amount we would be paying on our mortgage into RRSP’s. I am 35 and my husband is 37, so there should be at least 13-18yrs after the mortgage would be paid to put in to RRSP’s. Would you recommend this? My thought is it would give us some flexibility if something ever happened to our incomes, without pulling on my RRSP’s.

  20. @ TRacy Parkin: you really need to do both; contribute into RRSPs and pay down your mortgage. So, contribute monthly into an RRSP (whoever would get the best tax break) and use the refund you get for paying down your mortgage.
    @ Cindy: As I understand, how much is “grabbed back” by the govt in taxes depends on how much you withdraw… It’s your income, so, if you’re very frugal, not much.

  21. But aren’t RRSPs taxed when you take the money out after converting to an RRIF?

    So it’s not free money from the government, it’s just deferring the tax until you retire.

    And while you are taxed on a TFSA because it’s not deducted from your income, the growth is tax free, and you are not taxed on it when you take it out.

    So why isn’t the TSFA a better option in the long run?

    Or should I do both. Contribute to an RRSP, take the refund and put it in a TFSA? Has anyone done the math on this?

  22. My understanding is that money taken from an RRSP is taxed – counted as taxable income at the time it’s withdrawn. This is one reason why, if your a low wage earner, it is not worth putting money in an RRSP because you can lose out on other government benefits. Whereas if you put money in a TFSA you don’t get penalised in the same way.

    Like one of the earlier comments, I would like to know how many people earn 40K or under … my feeling is that it’s a lot more now with growing income inequality and so, while I understand that for some, consumer debt and mindless spending is an issue, I don’t think it is for all.

    As well, many new jobs (certainly in Ontario) are contract only or part-time and contract and poorly paid to boot … with that kind of economic/work climate who is going to be dumb enough to put money into an RRSP? It makes more sense to put the money into other more easily redeemable investments so that, when one finds oneself unemployed or between contracts, there is some money to fall back on as a safety net.

    As well, there is a huge amount of education debt out there – couple that with the temporary contract employment market and rising housing costs (my rent has risen from 825 to 877 in the space of a couple of years – my income hasn’t raised by the same amount) – then it’s not hard to see why people, particularly new graduates, aren’t saving as much as they used to.

  23. I wish I could contribute more, but the limit is so low compared to what I could put into my 401K in the US. Very frustrating!

  24. I used to max RRSP and TFSA and still had money to save. It was before my young kids came along. As a young person living in a modest apartment, my partner and I were able to save tons. Plus without kids, I was freely able to work extra hours. Those days are gone however. I cannot work like before anymore and I have a mortgage to pay. I look forward to days when I could work as much as I want without worrying about who is going to stay with the kids.

  25. I have a bit of committment-phobia, so I contribute $0 to RRSPs because sealing my money off until retirement (a good 30-35 years away) doesn’t really interest me.

    I have been plunking my 10% into a Tax-Free Savings Account, because I love the idea that my funds are always accessible no matter what life throws at me, and I won’t have to worry about calculating any tax implications down the road (alright, I admit it – I’m lazy!)

  26. My husband and I are maxed out in our RRSPs and TFSAs, and both have defined benefit pensions, so we are on our way to a comfortable retirement in less than 10 years.

    There were lean years when daycare, mortgage, RESPS and kids’ activities competed for our hard earned dollars, but we always managed to put at least a few thousand in our RRSPs each year, catching up our unused contribution room when our other costs went down.

    Reading stories like this makes me paranoid that my retirement income will be clawed back and/or taxed heavily to pay for those who were not as diligent in their own saving habits.

  27. My husband and 1 put 1000.00 a mth into RSPs, we have around 250,000k invested, 25 years away from retirement. I think we can wade up on our contribution but my husband is against it…? We still have a mortgage of 300,000k.

  28. My wife and I have been investing in RRSP’s since the 80’s. We started off small then added abit more each year. It’s not been easy, and some years have totally sucked, but they are working for us. Sure, there have been loses, but the gains have out paced those loses. We’ll be contributing again this year, and plan to in future years as well. I have friends and acquaintances in their 50’s who over the years have not invested in anything for their future(They’re in trouble). They keep telling me why RRSP’s are a bad idea. Lately, I’ve been hearing this from some financial “experts” as well. oh well, I hear ya, but I don’t believe ya ……… My wife and I have a target and a plan for financial independence, its not easy, but its working, it’s measurable, and RRSP’s are at the present part of that plan

  29. Just a reminder that ‘rrsps’ are a vehicle, not an investment product. People who say ‘rrsps’ are a bad idea when they mean mutual funds are not being accurate enough. You can stow cash in an rrsp if you want.

  30. avatar Slipstreamghost Says:
    January 13, 2014 at 10:11 pm

    I think they are a scam and a way for institutions to make more money. They are good only when you are young and to build some equity for example when you come to buy first house. You might be a saving on you your income tax now, but in the big scheme of things… You calculate inflation in 35 years then at the end when you turn 70 and forced to cash in you pay tax on it.

    To me the only reason why they came up with this scam is to minimise the hit they are taking on the aging population.

    A good financial plan would have been with incentive. When you turn 70 you are forced to cash in and you don’t pay tax. If you cash in before you pay tax.

    I am all for saving. I was debt free except for my house then tragedy struck and I’m in a muck.

    I am not a dope. This whole business should be a two way street. Not a one way. So in essence you are taxes, then you are taxing yourself for an uncertain future only to be taxed all over again.

    If I’m completely wrong, or partially wrong. Please enlighten me. My comment is not an attack, it’s an observation.

  31. I’ve saved anywhere from 10-13% of my gross income over the past 7 years. Unfortunately, prior to that I wasted 9 years (from when I started working at 16) not saving anything, which has left me with a lot of carryover contribution room. No matter. I will catch up. In 2014, my goal is to save 18% of my gross income. I calculated exactly how much I need to put away monthly to achieve my goal. No magic. Just math and a cut in frivolous spending. Voila. Planned success.

  32. RRSPs aren’t a “scam” It’s funny that people see it that way. Instead of paying the full amount of tax in your high earning tax bracket now- you invest in RRSPs- lower the amount of taxes you pay now. THEN when you start pulling out RRSP at retirement- you pay the taxes that you avoided paying at the time of contribution. But remember- in the meantime you’ve earned a ton of interest over the years ( free money) and you are paying in a lower tax bracket because your income isn’t as high. Not perfect but you still come out ahead. I guess if you can’t avoid the taxes that we all pay to help our nation run ( EI, OAS, health care etc…) it must be a “scam”. TFSAa are great for lower income earners because they aren’t in that high tax bracket and won’t benefit from a refund- so they pay their full share of taxes now and don’t split the costs to later.

  33. Jennb – Thank you for explaining it so clearly. I’m not sure why so many people think RRSP’s are so complicated when it’s such an easy way to invest in your future.

  34. This year, I’m going to contribute as much money as possible until I hit the point where I’d drop myself into a lower tax bracket (and thus get less money back from the taxman).

    Now if only I had that plan (and action) in place when I first started working!

  35. Ann, have you thought about using the tax return you get for the large RRSP contributions to make advance payments against your mortgage principle? You could kill two bird with one stone.

  36. Correction:

    Incorrect terminology: I made a boo boo earlier ….. I don’t invest in RRSP’s, I invest in strategically allocated mutual funds based on my age and comfort zone that reduce my taxable income under the Registered Retirement Savings Program.

    Im happy with the growth in 2013 of my mutual funds. For instance between interest and dividends(not including bi weekly contributions) my funds grew by an average of about 15%.(some were higher, some where lower) I know this because every two weeks I go on-line and check the value of LIRA’s and RSP’s and graph them. Yes, I’m a numbers nerd, and i like my money, and keeping track of it gives me a nice feeling as i watch it grow. The nay sayers can nay all they want, and I’m sure in some cases they may be be right. But for me, RRSP’s are working nicely and I’ve got the data that shows this to be true.

    Jennb(see above) sums it up nicely .. good job

    And I have been living out of Gail’s magic jars for a few years now ……… its really helps

  37. I agree with Jennb except that any interest you earned in the RRSP will also be taxed when you take it out. If you held the same amount of money outside of an RRSP, it would be taxed as you go along, so assuming you are in the same tax bracket before and after retirement, I think you end up with the same amount of retirement income either way. I think the only benefit you get from the RRSP is from being in a lower tax bracket in retirement, which you should balance against the risk of OAS clawback. I can understand why some Canadian’s aren’t using an RRSP, as I struggle with the decision myself sometimes.

  38. Under OAS rules i believe you can earn up to $71k a year before it impacts the amount you will get monthly. The way our financial planner explained it to us was that if you expect to have a gross income of 71k/yr after you retire then save in a TSFA. If you are like most of us who don’t even come close to that pre retirement, then you should be using an RRSP to save for retirement.
    Deferring taxes until a time when your yearly income will be low (OAS & CPP only) is a smart thing. Besides, for those who have trouble leaving money alone when they can still get to it (TSFA), locking it into a RRSP is not a bad deal. We are using both. I think it is a situational and personal choice issue. As long as you are saving, it is a good thing.

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