Canadians who experienced pandemic-induced layoffs and wage reductions or saved while working from home are facing a new challenge as March approaches: what to do about their RRSPs.
“Certainly with the pandemic, it’s a tricky year and it’s caused a lot of confusion for people juggling a lot of priorities,” said Wilmot George, the vice-president of tax, retirement and estate planning at CI Global Asset Management in Vancouver.
“A lot of investors are asking questions such as what do I prioritize first versus second and if I have money to invest, where are the best places to invest money? Do I invest in an RRSP or a TFSA?”
Deciding what to do by the March 1 deadline isn’t simple because everyone’s financial situation varies, but experts said developing an RRSP strategy you’re comfortable with doesn’t have to be tough — even in a pandemic.
The first step should be determining whether an RRSP contribution is right for you, said George.
RRSPs can be attractive because they reduce your taxes, especially if you pull the money out later when you’re in a lower tax bracket.
If you’re in a higher tax bracket than your spouse, you can even contribute to a RRSP in your partner’s name and claim the tax deduction, reducing your tax rate for the year, he added.
But in a year with mass layoffs and wage reductions, an RRSP contribution isn’t always prudent.
“Certainly there are going to be some folks who are really in a cash flow crunch, and they’re really going to have to make some hard decisions because if the decision is between trying to save for the future versus putting food on the table, most people will elect to put food on the table,” said George.
Canadians are generally eligible to contribute up to 18 per cent of their previous year’s earned income or $27,230, whichever is less, to their RRSPs.
About 52 per cent of Canadians will not be contributing to their RRSP this year, a study of 1,516 people from financial services firm Edward Jones found in February.
Almost 45 per cent of Canadians forgoing an RRSP contribution say they made that choice because of the pandemic, but 56 per cent say they are prioritizing other investments like real estate or a TFSA.
A TFSA may make sense for younger Canadians who are newer to the workforce, have smaller taxable incomes, but expect to be in a higher tax bracket by the time they need to use this money, said George.
“While you don’t get your tax deduction today, you’re going to get tax free income going forward.”
If you’ve decided to go the other route and contribute to your RRSPs, start planning early and be realistic, said Caroline Dabu, BMO Financial Group’s head of wealth planning and advisory services
“Really take a look at what your overall objectives are and get a good understanding of what you need to retire because ... over 50 per cent of Canadians don’t actually know how much money they’re going to need to retire,” she said.
Once you’ve determined what amount you need based on how many years you plan to be retired and what lifestyle you want to lead, work on calculating how much you can afford to set aside and consider saving that money in monthly, biweekly or quarterly intervals, said Dabu.
Budgeting, which will help you reach your goals, and stress testing, which can help you prepare for dealing with low interest rates and other dramatic changes, also come in handy, she said.
Jared Jarman, TD Bank Group’s associate vice-president of specialized advice and acquisition, said it’s important to consider adjusting your plan with the pandemic — even if you haven’t suffered financial losses this year.
Many have been working from home and are saving because they are not buying lunch or commuting to work, but haven’t changed their retirement plan to account for the windfall.
“What I found surprising is almost two-thirds of households with $100,000 or more haven’t adjusted their savings in retirement plans, even though they’ve come into more cash,” he said.
Regardless of what choice you make, Jarman encourages people to seek help from a financial professional because he knows RRSPs can be confusing.
Despite 70 per cent of 1,002 Canadians surveyed by TD in November saying they feel confident managing their finances during this time, almost 60 per cent are worried about the effect of COVID-19 on their savings and retirement plans.
“Every Canadian has a different path,” he said.
“You can seek out advice and figure out where you are versus where you want to go I think that brings confidence.”
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