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Dance student Madison Quirk, right, speaks with dance studio owner Nancy Van Buskirk in her Mississauga studio. (J.P. MOCZULSKI FOR THE GLOBE AND MAIL)
Dance student Madison Quirk, right, speaks with dance studio owner Nancy Van Buskirk in her Mississauga studio. (J.P. MOCZULSKI FOR THE GLOBE AND MAIL)

Retirement and RRSPs

I’ve maxed out my RRSP. Now what? Add to ...

Statistics consistently reveal that few Canadians contribute anywhere near what they’re eligible to put into their registered retirement savings plans. What’s less well publicized is the other end of the spectrum.

Some diligent savers such as Nancy Van Buskirk have not only managed to sock away all they can in RRSPs, they have additional savings earmarked for retirement.

“I try to do everything to save taxes the best I can,” said Ms. Van Buskirk, 64, who owns a dance studio in Mississauga and hopes to keep working about another five years.

Ms. Van Buskirk puts additional retirement savings into her tax-free savings account (TFSA), the contributions to which she also maximizes, and then a diversified portfolio of other investments such as stocks, mutual funds and corporate and government bonds in multiple currencies.

She has a long-term strategy for her retirement earnings. For example, “the bonds become due at different times. So when I retire, probably every year I’m going to have different bonds come due. That will help with my income,” she said.

Canadians who are seeking alternate investment strategies after they’ve contributed the maximum amount into their RRSP (in 2014, that’s up to 18 per cent of the previous year’s earned income, less certain pension adjustments, to a maximum of $24,270) have a number of options at their fingertips.

The first thing taxpayers with a spouse need to determine is whether any additional contribution room exists in a spousal RRSP. “Let’s say your spouse has [room for] another $10,000, there’s $34,000 [covered],” said Jason Safar, a tax partner with PricewaterhouseCoopers LLP in Mississauga.

The widely touted TFSA offers the potential for saving up to another $5,500 a person, or $11,000 for a couple, in 2014. The TFSA is structured differently from the RRSP because it involves after-tax money. Unlike the RRSP, plan holders don’t enjoy immediate tax savings upon investing the proceeds. Nor are there tax consequences for removing TFSA funds at any time.

“It does give you an awful lot of flexibility in your retirement years in drawing down income,” said Jack Courtney, assistant vice-president of advanced financial planning for Investors Group Inc. in Winnipeg.

Unlike the registered retirement income fund, there is no age limit at which TFSA funds need to be drawn down. And regardless of age, individuals with the capacity to save can still put money into their TFSAs every year. “Those are huge benefits [that are] often underutilized as part of an overall retirement strategy,” said Brett Strano, a financial adviser with Edward Jones in Mississauga.

Furthermore, investing in a TFSA can provide opportunities to invest in the same type of securities as exist inside their RRSP. “It’s a really powerful tool,” Mr. Strano emphasized.

Another strategy to consider once the RRSP has been maxed out is to earmark proceeds for retirement in non-registered instruments such as individual stocks, bonds, mutual funds and other savings vehicles in Canadian or other currency.

Moreover, individuals who have the luxury of a retirement savings portfolio that consists of both an RRSP, as well as investments based outside the plan, can structure their portfolio to provide certain tax efficiencies.

“You usually want to arrange your assets so your interest bearing assets are inside your RRSP, and the dividend paying investments, and the investments that you’re going to realize capital gains on, are outside,” said Cheryl Mont, a certified general accountant with Harris & Wright LLP, chartered accountants in Toronto.

The reason for this is because when investments such as equities are sold at a profit, capital gains trigger only half the tax rate paid on interest income. In contrast, keeping fixed income investments, which generate interest income inside the RRSP, means the plan holder can shelter and defer tax that would otherwise be payable at a higher rate.

However, cautions Ms. Mont, you really have to look at your overall individual investment situation rather than rely on rules of thumb. “It’s important not to let the tail wag the dog. Ultimately you’re going to want to maximize your return in your RRSP,” she emphasized.

Another important potential savings strategy that might have a tendency to be overlooked because the benefits aren’t immediately apparent is to use extra money to pay down or eliminate outstanding debt. That can include, for instance, high credit card debt, or even a mortgage.

“By putting money aside for the principle, you’re effectively saving the interest that you would otherwise be paying. You’re paying down that mortgage, so it’s paid off faster and not incurring those interest charges,” Mr. Strano said.

Another option for entrepreneurs who view their business as a vehicle that will help sustain their eventual retirement is to reinvest in the enterprise in order to help build up its value. Many experts caution, however, that RRSP contributions should be maximized first before this option is used.

“I like the idea of having a little bit of diversification – that the entrepreneur should try and build up some pools of wealth outside of their business, just in case things don’t go the way they’re hoping,” Mr. Safar said.

Certain middle-aged high-income earning individuals who consistently find they have more annual savings available than the RRSP allows them to utilize might want to consider contributing to an individual pension plan (IPP) in place of their RRSP.

There are important structural differences between an RRSP and the IPP.

“An RRSP is a defined contribution pension plan. You put in money, and, regardless of whether it grows or shrinks, the part that’s limited is how much money you put in. An IPP is a defined benefit pension plan, which is actuarially computed,” Mr. Safer said.

IPP holders need to calculate how much money they require for investment purposes in order to achieve a certain payment level when they hit their expected retirement age. If they discover their investments are doing poorly along the way to that goal, they need to put in more money. If their investments are doing well, they don’t need to put in as much. It’s a different philosophical approach to saving for retirement, Mr. Safar explained.

“Particularly when you’re beyond the age of 45, you get this threshold at which you begin to contribute more to an IPP than you contribute to an RRSP,” Mr. Courtney said.

“IPPs tend to be very complex. So you definitely want to explore the options of working with a financial adviser [or] accountant that can help set up [an IPP] if the individual circumstances warrant that,” Mr. Strano said.

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