RRSPs: what’s fact, what’s fiction, and what’s specific to education members
For most education members, saving for retirement begins with that very first pension contribution.
While having the benefit of OTPP or OMERS should, in theory, provide you with financial security in your after school years, just under half of you (47%) don’t think your pension will actually be enough to fund your retirement (according to those surveyed as part of the Educators Financial Kickstart Challenge).
That’s where the Registered Retirement Savings Plan (RRSP) comes in to fill the gap—or does it?
A survey conducted by the Canadian Imperial Bank of Commerce has discovered that 67% of Canadians believe the Tax-Free Savings Account (TFSA) trumps the RRSP when it comes to saving for retirement because of its ‘tax-free’ status.
But is the TFSA really a better investment vehicle for retirement than the RRSP?
That’s not entirely the case.
While the TFSA makes a great investment vehicle to save for goals where you plan on taking the money out sooner rather than later (because you’ll be able to withdraw that money tax-free), making it your sole investment vehicle for retirement may not be your best option. This is particularly true as you move higher up the pay grid, since the more money you make, the higher rate you’ll be taxed.
This is where RRSPs offer you your biggest tax break, because every RRSP contribution you make is tax deductible.
TFSA contributions, on the other hand, are not tax-deductible.
Besides getting an instant tax deduction the year you make your RRSP contribution, another RRSP advantage is the fact that by the time you start withdrawing funds (once you’ve retired), you will likely be in a lower tax bracket—which means getting a better after-tax rate of return.
Fact: Your RRSP can be transferred, tax-deferred, to a beneficiary spouse should you pre-decease them.
General facts about RRSP contributions:
- They reduce your taxable income by the amount you contributed
- Before-tax contributions (directly from your paycheque) are not taxed
- After-tax contributions will reduce the amount of tax you have to pay at the end of the year and you will receive a tax benefit
- Each year, the lesser of 18% of your earned income or up to a maximum of $30,780 (this year’s contribution limit; $29,210 for the 2022 tax year) is added to the amount you can contribute to your RRSPs
- Over-contributions are subject to a tax penalty of 1% per month
- Unused contributions are carried forward to the following year
- You can contribute to an RRSP up to December 31st of the year you turn 71
Educator-specific facts about RRSP contributions:
- Your Ontario Teachers/OMERS pension benefit is linked to your RRSP contribution room
- The greater the value of your pension, the less available RRSP contribution room you will have
- As a member of a registered pension plan, you receive an annual pension adjustment, which appears on your T4 and reflects the value of pension benefits earned in a year
- Refer to your Notice of Assessment, provided by the Canada Revenue Agency (CRA), for your exact RRSP contribution room
Fact: With the Canadian Home Buyers’ Plan, you can withdraw up to $35,000 from your RRSP, tax-free, to put towards your first home. If you’re buying your first home with your partner or another first-time homebuyer, you can withdraw a combined maximum of $70,000 (withdrawals must be paid back to your RRSP within 15 years to avoid a tax penalty)
Investments that can be held in RRSPs include:
- Guaranteed Investment Certificates(GICs)
- Equities(Canadian and foreign stocks)
- Mortgage-backed securities
- Canadian mortgages
- Savings bonds
- Income trusts
- Mutual funds
Fact: You can withdraw up to $20,000 from your RRSP, tax-free, to use towards furthering your education under the Lifelong Learning Plan. It must be paid back to your RRSP within 10 years.
Learn more about the Lifelong Learning Plan and other ways to finance continuing education.
Looking to put the right investment strategy in place to add to your pension income in retirement? Call on Educators Financial Group.
No matter where you are on the pay grid, or how far (or close) you are to retirement—we can put you on the right track to achieving your ultimate financial goals.
Have one of our financial specialists reach out to put your retirement plan into motion.
Be sure to ask us about our Educators Monitored Portfolios for easy, convenient, and hands-free investing.