Show me the money!
While that saying was made famous in the 1996 film, Jerry McGuire, 16 years later it still has significance for Canadians and their ability to contribute to their registered retirement savings plans (RRSPs).
A recent poll by Investors Group found that about 62 per cent of Canadians say don’t have any money to invest in their RRSPs after they meet their basic living expenses. Other studies and statistics reveal that Canadians’ contributions to their RRSPs are well below the allowable limits.
Statistics Canada reports that just fewer than six million Canadians who filed an income tax return contributed to their RRSPs in 2010, down 0.2 per cent from 2009, and while total contributions increased 2.6 per cent to $33.9-billion, those contributions represented only 5.1 per cent of the total contribution room available.
RRSP contribution rates are low for several reasons.
“A lot of people may make contributions, but not to the maximum, and then you’ve got people who don’t contribute at all,” says Murray Pituley, director of tax and estate planning with Investors Group. “With the tax free savings account [TFSA]people have another option to an RRSP while others might decide to use any extra money they have to pay off debts. So while some people are not saving at all, a lot may be saving but using it in other ways and investing in other places.”
Mr. Pituley offers some tips for Canadians to reduce expenses and save so they can show their RRSPs some money.
He suggests people track their spending more carefully to identify areas where they can cut back and make efficiencies to free up money for their RRSPs. “Eating out and having those coffees every day are expenses that add up over time,” Pituley says. “That’s why you’ve got to track to see what you spend and where, so you can budget or cut back to free up some money.”
The next strategy is to pay yourself first. Set up a preauthorized savings or RRSP contribution plan so money is automatically taken out of your account every month, and prepare a budget based on what is left over.
“This provides the regimen to save that a lot of people need, because once the money is in your RRSP you tend to leave it there because of the tax implications if you withdraw it,” Mr. Pituley notes. “It’s also an efficient way to invest because you can continue to buy into the market when it is down.”
If you get a lump sum payment such as a bonus, a tax refund or even an inheritance, put some or all of it into your RRSP if you have the contribution room.
If you intend to maximize your RRSP contributions, you can apply to the Canada Revenue Agency to have your employer reduce the amount of tax withheld at source, which will put more disposable income into your pocket during the year to put into your RRSP instead of waiting until the end of the year.
Many tax refunds are the result of too much employment income being withheld at source. The only reason you get a refund is that you have overpaid your taxes the previous year. In essence you gave the government an interest-free loan and the refund only returns the principal amount of that overpayment.
In some cases, it may make sense to borrow to contribute to your RRSP. In general, it may be practical to borrow if you are in a high tax bracket because you will get a larger tax refund, which then can be used to pay off the loan.
Because the interest on the loan is not tax deductible, it’s important to pay off the loan as soon as possible.
“There are a lot of variables which are unique to people’s individual circumstances, but it’s important to work with a financial adviser to see if an RRSP loan is appropriate for you,” Mr. Pituley says.
For tips, stories, videos and live chats ahead of this year's RRSP contribution deadline, check the Globe Investor 2012 RRSP season section for daily updates.