How much to Your RRSP?

Are you planning on contributing to your RRSP this year? Do you know that fewer than 40% of us contribute? That totally blows my mind. The government is standing there waiting to hand you back the money you paid in taxes so you can pay down your debt, make a payment against your mortgage, fund your TFSA, or go on a family vacation and you’re going to let them keep it? Really?

Sometimes people think that if they can’t dump a lot of money into their RRSPs, it’s not even worth thinking about. Not true. Every penny you save today is a penny plus growth that you’ll have when it comes time to punch out at work.

Put $25 a month into an RRSP, and give your money 25 years to grow at just 5% and you’ll almost double your money: you’ll have put away $7,500 but you’ll end up with $14,888.

Give yourself more time, and the results are even better. Let’s say you start contributing at 30 and do so until the normal retirement age of 65, you’ll have $28,402 just be socking away $300 a year. Com’on, you can find $300 a year. That’s less than a dollar a day. Are you seriously trying to convince me that you don’t haven an extra $6 a week?

If you can up your contribution to $2780  (which was the median for 2007) and you give yourself 35 years, you’ll have $263,573. Trim your spending back so that you can find $232 a month for your retirement savings and that’s how much money you’ll end up with. Sure, it’s not a b’zillion dollars… but it’s nothing to sneeze at either.

And what if you were a little more adventurous and could earn even 1% more on your money? Well you’d end up with almost $67,000 more!

Now here’s the typical question I get about earning a 5-6% return: Gail, where do I find anything paying that much interest? Rates are so low right now! Yes they are, and if you use now as your benchmark for the next 35 years you might get a little depressed. But when I quote 5-6%, I’m talking about your return (not just interest) over the very long term. Anybody remember when interest rates were at 18%? Anybody? How about learning more about investing so you can spread your wings and look at other types of investments: stocks, bonds, ETFs.

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 $25 a month, and grow your contribution from there. You can use your tax refund, part of your next raise, or the money you were wasting on some stupid habit to build a future.


Gail Vaz-Oxlade

Gail Vaz-Oxlade wants YOU! Join 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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42 Responses to “How much to Your RRSP?”

  1. I use to contribute but I’ve heard that it will just catch up with me on the other end at tax time when I retire since I’m a teacher. I will have pension and my income won’t drop enough when I retire that when I withdraw my RRSP it will just push me up in the tax bracket so that I get hit with taxes. Not sure what to do. Have stopped contributing and started with the TFSA instead.

  2. I’m doing the same. I make so little (under 35K) now that two people have advised me to invest in my TFSA. One is a GF whose a financial planner and the other is my financial planner. Granted I lose my tax deduction now, but I also won’t be paying tax when I withdraw my money in my retirement. I do have about 25K in an RSP so far but have turned my focus to my TFSA.
    Guess we”ll see how that goes.

  3. I also can no longer recommend the RRSP program. It’s true that contributions will reduce your taxable income, which usually results in a tax refund in your working years. On the other end, in retirement, taxes are payable on any amount you withdraw, and it is all taxed as income. This includes any compound gains you have accumulated.

    Take your example of $2780/year over 35 years. The total contribution would be $97,300. Assuming an Ontarian’s annual income of $40,000 and using today’s tax rates for sake of simplicity, the total tax reduction over 35 years would be a little less than $28,000. If that investment had indeed grown to $263,573 and was withdrawn in such a way to provide $20,000/year of income in retirement, the taxes owing over 10 years would be approximately $32,000 (depending on available deductions) or even more if you needed to take a lump sum or upon death of the member, where up to half can be lost to taxes.

    If someone can contribute the same $2760/year into a TFSA and be able to make do without the $800 tax reduction, they would achieve the same growth without any of the negative aspects of the RRSP. This is in addition to the fact that withdrawals from a TFSA are not shown in taxable income and as such, are not included in calculations for subsidized nursing home care.

    I have switched to TFSAs (with the exception of my wife’s employer-matched RRSP plan) as I would much rather take the tax “hit” when we have a steady source of income, rather than watch our savings be whittled away when we need them the most.

  4. When I started investing in RRSP’s I was only investing $50 a month. That helped me to purchase a property, so everything really does count.

  5. I max out my RSPs every year now, although not a large $ amount now that my PA from my defined pension plan takes up a lot of my room (that’s another topic I guess). But, I have pondered the same thing as to why people do not utilize this vehicle.

    The family I have talked to about this usually have 2 obstacles. One is that they can not get into the saving for tomorrow/enjoy now mentality. This is hard to explain intellectually to this type of person. The only way they may finally get this is if they stumble upon really hard times and by then, it may be too late.

    The second is what the posts above mention – isn’t the taxes just going to catch up with you later and possibly even penalize you with reduction of OAS, etc? However, I think the missing piece to this is that this is a vehicle where your money grows tax free (ie. any interest, dividends and capital gains do not get taxed). Of course, if you are not maximizing your TFSA, possibly use this tool first in this scenario.

    Gail has discussed this before for more detail.

  6. And I find that RRSPs benefit us greatly. We max out DHs RRSPs each year- in part using a spousal RRSP for me. We keep the balances in both equal so that when we retire- we can still have a decent income- but both with be earning less instead of one high ( more highly taxed) income. We actually get back at income tax time more than 50% of what we contributed which we then reinvest- not a bad return right off the bat. The next step is to squeeze more into the TFSA- but unfortunately- not yet. We don’t have matched plans or pensions- it’s all up to us. I “heard” somewhere that the savings rate of Canadians is at 3%- kinda scary.

  7. My wife and I are fortunate enough to have employee matches in our rrsp, which we max out (so in effect I save 9% of salary and she saves 15%). What absolutely amazes me is the large number of people I work with who do not partake of the employee match. For the sake of 30 minutes of paperwork – if that – you can bump up your income and people don’t do it! Absolutely blows my mind. I don’t know if I’d have the discipline to keep doing it if it didn’t just come off my paycheque before I get it. I even try to convince coworkers hey just start with the minimum amount matched (1%) and go from there. I run about a 40% success rate. Unbelievable. – and these are university educated, intelligent people. Sigh.

  8. 2013 will be the last year that I can contribute to my RSP, after 1000 years (it seems) of putting money in. I never worried about being hit with taxes when I finally start taking it out next year. Even with the mandatory withdrawals, I won’t be making any more than I was when working. Frankly, I would rather live on $40,000 and pay the taxes, than live on $25,000 and pay fewer taxes.

    Even so, projections have told me that my RIF will start to run dry about 2027, and I wouldn’t be able to cover semi-private nursing home costs (should that happen). So my TFSA savings will cover the shortfall later on.

    I learned a long time ago that I will never be ‘rich’ and I will always have to live within my means. Once I accepted that fact, it was easy to plan ahead for the future (mine, my husband’s and something for the children).

  9. I’m in the same position as a couple of the above posters. My husband has a defined benefit pension (at least for now) and I have a defined contribution as well as a work RRSP.
    With the advice of my financial advisor, since I don’t plan to reduce my income by much in retirement I contribute to the TFSA before my RRSP. I just contribute enough to the RRSP to get my employer to match it (4% for 4% match).

  10. Here’s how RSP’s have worked, and will be working for me:

    1. Early 30’s, when owing debt, I took out a carryforward loan to catch up on my RSP contributions that I missed in my 20’s – the loan was for 20K at 6% interest, I received a 7K cheque from the government (all the taxes I had paid that year), and paid off credit card debt that was at 18 or 19% interest.

    2. Mid 30’s, maximized RSP contribution as I was in a higher tax bracket, (still had to get an RSP loan however), with refund paid off majority of loan, and paying the loan was a type of “forced savings” – although I didn’t have the self-control to save for an RSP, I was able to always find ways of paying for the loan.

    3. Late 30’s, same as mid 30’s, except in even higher tax bracket.

    4. Early 40’s, I opened a TFSA when they became available, and have automatic savings each month taken from account. Also still maximize my RSP contributions, except now I have 1/2 the amount saved throughout the year, and I only required a smaller loan.

    5. 43 – This year, will be the first year, that I will have saved 100% of the RSP contribution without requiring a loan (most of the loans were paid off way early… but pretty confident feeling with this).

    6. Early 50’s – There will be a career change – I will not be able to maintain my current position due to the nature of the business… I anticipate being in a tax bracket much lower.

    7. Mid 50’s – Hopefully at this juncture, I will still be earning an income of 30K or so in some fashion, but will begin to slowly withdraw my RSP money to avoid having to withdraw as 1 lump sum.

    8. Late 50’s – Hopefully at this juncture, I am only working part time for play money, and withdrawing my RSP money at a rate that makes my income 30K

    I am fairly confident that at the time I will need to make the withdrawls, I’ll already be singing “RSP’s have been very, very good to me”.

    I would agree that the TFSA is a great tax free vehicle… but RSP’s is still free money when you’re younger and need every bump up you can get. I never turn down free money….

  11. We do all our contributions in the form of spousal contributions from my husband to my account. I also have a regular account build up in the past when I had an employer who had a matching program. I no longer contribute in my own name. We make sure he contributes enough to my account to get him down a tax bracket – he’s in the tax bracket one higher than I am. This doesn’t quite use up his annual allocation so his headroom continues to creep up a tiny bit each year. Mine headroom is massive from lack of use. Several years ago he received a large severance package during a layoff, which we rolled directly into his RRSPs. This put his account way ahead of mine. Ever since then we’ve made only contributions by him to me, to maximize his refund and eventually rebalance our accounts.
    The rest of our unallocated income goes to maxing out our allowable mortgage payments every year. Once the mortgage is done in ~3yrs, we’ll play catchup on our TFSAs putting the full amount of our old mortgage payments (regular and extra payments) into the TFSAs. I expect we’ll have used up all our carried forward contribution TFSA headroom in 18mths. With what we have in our RRSPs already, and a small pension my husband gets at his new job (will only have ~15yrs service at retirement) we figure we can back off on the RRSP contributions. Contributing just enough to get him down down one tax bracket and no more seems to be the most effective at this point. We should have our account values rebalanced in about 3yrs. We too don’t want to wind up with too much in our RRSPs, so we’ve eased off and are instead wacking down the mortgage and then moving on to the TFSAs.

  12. Combined, my husband and I contribute about 17.5% of our income to retirement savings – through RRSPs ($100/week), my pension (5% w/ match), and share purchases at the company I work for.

    We’re 28/29 years old so are happy with our commitment now. My husband has to remind me that it’s also okay to have a life now 🙂

  13. avatar Lovin' the West Coast Says:
    January 15, 2013 at 12:37 pm

    Where do you folks get work that you get pensions that will give you a retirement income close to your pre-retirement income???

    My husband has worked for the same company for 33 years (32 of those full time hours) and he is projected to get a maximum 52% of his current income in a pension.

    By the way, he is currently 49 years old and will have to work 11 more years to get that maximum.

  14. I have a question about TFSAs. If I have $5500 in a TFSA savings acoount and want to invest that money into a TFSA GIC, will this count as an additional $5500 contribution?? I can’t find anything online. Any insight would be helpful. Thanks,

  15. @ Madison – as long as you ensure that you are doing a TRANSFER (not withdrawal) from TFSA savings account to TFSA GIC you’ll be fine. Ask a lot of questions of your bank / provider just to ensure. What must NOT happen is the money goes from tfsa account to your chequing account and then into TFSA GIC. It has to all remain in teh ‘tfsa’ bucket the entire time.

  16. I have to confess that I have not enrolled in my company RSP plan – they don’t match contributions – just take care of the deductions for you. The reason is that I am completely baffled by the fund choices. I got Gail’s book on retirement savings and still I remain confused, so my half of our retirement savings has been sitting in the bank since I took this position last year.

    Fortunately, my husband has the OMERS plan at work. This was much easier for us to sort out – sign up and hand over the cash. We also have a healthy TSFA which I consider to be our Emergency Fund.

    I have a feeling that my tax return will be the wake up call I need to get this figured out one way or another.

  17. Madison –> No. If you’re transferring money from your TFSA into a GIC at the same institution, it’s just a transfer. You’re allowed to do that. If you want to move it to another institution, however, you’re best to take it out of your account in December and put it in the other bank’s GIC in January. (Whatever you actually remove from a TFSA, you’re allowed to put back in the following year and it doesn’t count as an additional contribution.)

    Example: Say you’ve maxed out your TFSA for the year by August. But then you take out $2000 in September. You have to wait ’til the next year to put the money back. Come January you’re allowed $5500 (that current year’s room) + $2000 that you took out the year before = $7500.

    Hmmm… I can’t believe the number of people that are taking the advice of their girlfriends and “financial planners” over Gail’s advice when it comes to RRSPs. Most of these “planners” (*ahem*, used car dealers) are meant to sell or steer you towards products. Gail’s run the numbers, done plenty of research, and she’s straight up. The planners don’t even need to show that they went to school in finance. (And most of them didn’t!!)

  18. avatar psychsarah Says:
    January 15, 2013 at 2:12 pm

    Since I don’t have a crystal ball, I always wonder about how the rules might change in 35 years when I’ll be retiring, so I prefer to take the deductions now, make use of them, and roll with whatever punches come down the road. For instance, when we were making substantial contributions, we would figure out what our tax return was going to be based on those contributions, take out a short term loan for that amount to contribute to the RRSP and then pay it back when we received our tax return. It cost us about $10-15 in interest, and increased our contribution substantially. Now that additional contribution is compounding annually of course.

  19. Right now I contribute to a TFSA so that when I retire I don’t get less OAS (We are mostly in a low income bracket). But I am considering an RRSP for two reasons.

    1. I think that contributing to an RRSP will lower my income and increase my CCTB

    2. My husband is self employed and this will decrease the amount owing at tax time.

  20. Please don’t chastise those whose financial planners recommend a Tfsa over RRSP. I suspect in most cases they have looked at the specific situation of the poster, and provided the correct advice.

    I am an accountant (so no benefit to selling products) – and I agree with those who suggest that for some people it is preferable to put your investments in a TFSA rather than an RRSP.

    I won’t get in to the nitty gritty details here – you can do a google search if interested.

    That said, in my view the key is to do SOMETHING.

  21. A return of 5-6% over the long term is very attainable. I calculated our portfolio return for last year at 9.58%. It’s made up of predominatly dividend paying stocks which have consistently done well over a number of years (except the recession of course). RioCan REIT sports a 5% dividend yield alone!

    For dividend paying stocks in an RRSP, enroll in a dividend reinvestment plan (DRIP) for even better long term results.

  22. @ Michelle – if your company doesn’t match rrsp it’s a little less imperative in my opinion to sign up! Since they don’t match, you should be sure the funds they offer are low cost index funds, they likely aren’t. In my wife’s case we’re limited to a few somewhat expensive managed funds (2.5% fees) but the employee match takes a big sting out of it.

  23. @Geoff…I totally understand! I have a part-time (yes, a part-time) job that offers all of its permanent employees a pension plan. My other half and I started our contributions as soon as the plan was announced as the company MATCHES our contributions! We can currently give 6% of our income and they match it! It’s a raise in and of itself!
    We were vested in the plan after two years, so as of 2010 if we left the company, we could have taken all of the money with us and locked it into an RRSP account. Thankfully, we are both still employed there and will be able to increase our contributions this year (as there are certain thresholds in terms of years that have to be met to increase the amount).
    It’s great to think that I have an extra $6,000 in my pension plan and I have only contributed $3,000!
    The stunning thing? Out of a staff of almost 75 people, we are the ONLY TWO people who are participating in the plan!
    I’m thankful that even if I don’t work there until I am 67 (I do have a full-time job as well that has a pension plan I contribute to), I have something small to fall back on. I have 37 more years to get me to the 67…every little bit helps!

  24. @ Geoff tahnk you for your response. I will definitely call…

  25. @ Edward – thank you as well.

  26. I agree with L and Donna. I am in the same situation as L. @ L – my financial advisor told me the same thing and I am going with TFSAs.

    @Lovin’ the West Coast – as L had stated: “income won’t drop enough” – it’s not that the same amount of $ will be made but that it will be in the same tax bracket. We are also currently contributing 12% of each paycheque into our pension plan which will only increase and that is part of the reason why the pension is good.

    Coming from a different perspective, my parents (who are now in their 70s) took out RRSPs and said they wished they had never done so because of certain restrictions and penalties.

    I think different situations work better for different circumstances and I hope everyone finds the proper fit!

  27. Edward & Madison:
    For clarification: it is incorrect that you can only transfer a TFSA within the same institution. You can have a TFSA transferred between institutions without it being considered a withdrawal, provided that it goes directly from one TFSA to another. Good luck Madison!

  28. I forgot to add – for my hubby, RRSPs make total sense! He doesn’t have a pension plan and his company contributes (don’t know how much) when he does. Good way to save for retirement!

    Like I said, different situations work better for different circumstances! 🙂

  29. FYI…at the bank I work at, you can’t buy a TFSA GIC from your cheqing account…it has to first go into the TFSA account…good safety measure in place…also, as long as your bank requests the transfer on your behalf it can be done leaving the funds registered…make sure you speak with your bank rep before transferring to another institution to ensure it’s done properly

  30. p.s. it’s the bank rep at the RECEIVING institution that puts the transfer into motion..

  31. I have always had a low income, under $35, 000, and have lived alone. I have contributed to RRSP’s over the past 23 years. I will have a low pension of approximately $18 000 per year. I will be retiring within the next year, it appears. I have contributed to TFSA since it’s inception. I live a very frugal life. I have an appointment with my bank rep this Friday. Can I transfer money from the RRSP account to the TFSA without penalty? Should I contribute to RRSP’s, TFSA, or pay down my mortgage?

  32. @ MCA – no, you can’t transfer from RRSP to TFSA without penalty. You could withdraw from your RRSP (and pay taxes) and then takes what left and put in TFSA but I wouldn’t recommend it.

    Personally I would probably pay down mortgage in your scenario, as any tax benefits you get from the rrsp / tfsa choices will probably be less than the interest you’re paying on the mortgage.

  33. @Geoff Thank you for your suggestions. My mortgage rate is 2.3%, flexible mortgage. My RRSP rates over the past 2 years have been 2%, 2.05%, 1.0% escalating over 5 years, pretty bleak percentages. I have one TFSA-GIC with a rate is 1.2% escalating for 5 years maturing in 2017. Can I transfer these small principal investments into one large amount and therefore receive a better interest rate? Are there other investments you can recommend for these savings rather than RRSP’s and TFSA’s, or are they the best way to go?

  34. @ MCA you’re asking complicated questions and I’m not a financial planner, though I am pretty educated in it. It sounds like your returns are balanced with your appetite for risk (which is low) which I believe is appropriate for your income and inferred age. you may be able to break some of your rrsp commitments and combine them into one thing (keeping them all in the rrsp bucket) for a better rate, although you will likely forfeit any gains you’ve made. Before you do anything, ask a lot of questions including fees and forfeiture penalties and ask for answers in writing.

    If you’re asking what I would do, I wouldn’t touch the other investments but instead of contributing to rrsps, I’d put that money into extra payments into into your mortgage. Even if your tax rate is only 20%, prepaying your mortgage will give you a guaranteed return of about 3% which is a lot higher than the returns your getting otherwise. And given that rates will go up and your about to retire with a mortgage owing, you really want to try to get that monkey off your back asap. But talk to someone else for a second opinion. Then talk to someone else. And then do your own research online. Rarely is there a penalty in life for asking too many questions or holding off on rushing to do something. In fact the opposite is almost certain to be true.

  35. Good response Geoff. In general I believe the idea of putting extra funds into prepaying mortgage rather than rasp is a good one. I don’t think the concept of first paying off mortgage gets enough air time because it doesn’t benefit the financial industry.

  36. Sorry – meant rather than *rrsp*

  37. I am putting the full amount into my RRSP and my employer matches 33%, so it’s free money. I will be withdrawing in a lower tax bracket when I retire so I am not worried. Am also putting in full TFSA contribution so I can have access to money when I retire early. Hopefully this will cover all my bases, as I have no pension.

  38. I am so glad I read this today, it was payday and I had a small raise (about $120 after tax/mo) – I took advantage of our group RSP to have the pre-tax amt taken off as a contribution plus a few extra bux so I will contribute at least $3000 this year

    It feels good to do that- it needs to be more at my age but baby steps

  39. Thank you Geoff and Jen. I need to buy $280 to get my full RRSP deduction when I do my income tax returns for 2012, as I am allowed a deduction limit of $911. My income for 2012 was low and 2013 is starting out to be even lower. They are trying to force me into retirement. I do have a small pension coming then of less than $20 000 per year. I will now concentrate on paying down my mortgage more. When I cash my RRSP’s as needed after retirement, with my pension being low, how much income tax will I have to pay on the RRSP amount that I cash in only when needed? How does all of that work? What strategies do I need to be aware of at this point in my financial life? Not to mention some reno work that needs to be done in my home, that is not urgent…

  40. @ MCA – you really need to talk to a professional(S). Get some specific to you advice, and then talk to some other people at different companies. DO NOT make any changes until you’ve gotten confirmation what you’re doing is right from a few different people. Try googling ‘canadian capitalist’ for a good blog on money too.

  41. Thank you so much, Geoff! I have visited my bank to buy the RRSP balance that I need for my full RRSP 2012 tax reduction amount on Schedule 7, and I just used telephone banking to contribute to my TFSA, which will take two business days to take effect, for gaining interest. I will now begin to pay down my mortgage, as I am allowed to contribute to that as often as I wish for any amount that I wish. Previously, I was allowed to pay it down only once a year. I will google ‘canadian capitalist’ to check it out also. I greatly appreciate all of your responses and concern, Geoff.

  42. What do you suggest I do if my husband and I already max out our TFSAs? My husband will retire with a federal government pension, but I will not. Right now we are also contributing to RRSPs each have own individual ones ($6000 total) , and I have a spousal ($3600/annually) but plan on stopping the contributions in a few years because we don’t want them to get too high upon retirement. We are both in our mid 20s and are making great salaries. We currently live in government housing (our rent is covered through isolation pay) so we don’t have any housing costs. We do carry a mortgage on a rental property, which is covered by our tenants.
    It’s a bit confusing.. not sure what we should be doing with our money. I guess we will continue to dump into RRSP and get the tax benefit and re-invest…. We also have an non registered mututal fund account that we plan on using as a future down payment on a home. We don’t plan on buying for another 5-6 years though..

    Also.. if anyone can recommend a financial planner in the Guelph/Waterloo/Kitchener area that would be great.

    Thanks in advance.

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