Money It may be time to rethink RRSP contribution limits

22:11  13 february  2018
22:11  13 february  2018 Source:   MSN

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If you’re like many Canadians, you’re hoping you’ve paid enough tax for 2016 and may even be looking forward to a hefty tax refund cheque. You can help ensure that happens by knowing the details of your Registered Retirement Savings Plan ( RRSP ), what sets them apart, your contribution limit and a

Rethinking RRSPs for Business Owners: Why Taking a Salary May Not Make Sense. Subject to an annual cap, the annual RRSP contribution limit is calculated as 18% of the prior year’s Naturally, the value of this deferral will depend on the length of time the funds can be left in the corporation and

The Registered Retirement Savings Plan (RRSP) has been one of the mainstays of saving money for retirement since it was introduced in 1957.

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If you diligently maximize your RRSP contributions each and every year but have this nagging feeling that you may end up worse off in retirement than In the report, authored by the Institute’s president and CEO, William Robson and titled “ Rethinking Limits on Tax-Deferred Retirement Savings in

Can I carry forward my Unused RRSP Deduction Limit ?" What is an Unclaimed RRSP Contribution ? A taxpayer may contribute an amount up to the RRSP deduction limit .

39.48
-0.76
-1.89%

Since then, the popular tax-deferred savings vehicle has undergone changes, perhaps the most significant being in the early 1990s when the government tried to equalize retirement programs and changed the maximum allowable contribution to the lower of 18 per cent of previous year's earned income, or $11,500.

Since then the maximum allowable contribution has slowly crept up to where it currently sits at $26,010 in 2017 but the 18 per cent of earned income has remained the same over the years.

The 18 per cent contribution limit percentage came about from an obscure equivalency test for saving in various retirement savings plans known as the factor or rule of nine.

The factor of nine was devised as a way to try and equalize the savings opportunities in defined benefit (DB), defined contribution (DC) and registered retirement savings plans.

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The Income Tax Act allows members of defined benefit pension plans to accrue a maximum annuity of two per cent of final earnings on a tax-deferred basis in the year of accrual. Over a working career of 35 years this would provide a pension equal to 70 per cent of pre-retirement earnings.

The factor of nine limits contributions in DC and RRSP plans to 18 per cent (the factor of nine multiplied by the maximum annuity of two per cent -- 9 x 2 = 18). This is based on the assumption that in 1990 it would have cost $9 in order to provide a life annuity of $1.

While the formula may have helped to level the playing field between DB, DC and RRSP plans in those days, a lot has happened in the ensuing almost three decades.

Most notably, people are living longer, and therefore generally will need more money to see them through their retirement, and yields on fixed income are much lower than they were in the past.

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Financial advisors now need to rethink how best to use the TFSA. While high-earning investors can still save more in their RRSP (the RRSP contribution limit for 2015, not And now, in certain cases, it might even make sense to pull some money out of an RRSP and put it into a TFSA, says Mr. Bowen.

Contributions under an RRSP . Under Canadian income tax rules for RRSPs , each individual’s. contribution room is calculated based on: • The current tax year’s allowable contribution limit , plus • Any carry-forward of unused contribution room

"It's a lot harder for people to save enough for their retirement than it was in those days," says Dave Ablett, director of tax and estate planning with Investors Group. "The rule of nine is outdated and needs to be adjusted for longevity and yields."

Ablett says the factor of nine is understated for younger Canadians and overstated for older ones. This means that the formula gives more contribution room for younger people than they often can use and the contribution limits for older people are not high enough — which could partially explain why Canadians had more than one trillion dollars in unused RRSP contribution room at the end of 2015.

Two recommendations made by the C.D. Howe Institute are that contribution limits be changed to a lifetime limit of $2.5 million instead of annual limits based on annual income or the amount of unused contribution room be indexed.

"These are good ideas but the government has some objections because they could reduce tax revenues due to the fact that higher contribution levels tend to benefit higher income individuals," Ablett says.

What’s your RRSP contribution limit?

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For older Canadians approaching or into retirement , RRSP withdrawals may be a matter of necessity. WatchHow to build a million dollar RRSP — it isn't as hard to get there as you think. WatchWhy it 's time to rethink the 'outdated, unfair' RRSP contribution limit .

Total contributions to a Group RRSP and an individual RRSP must be within the employee’s RRSP contribution limit . Employee can withdraw contributions at any time , but may have to repay the CESG. Withdrawals of income are restricted and subject to tax plus additional penalty unless

The introduction of the Tax Free Savings Account (TFSA) in 2009 provided Canadians with a tax-free retirement savings option, particularly for younger people in lower income tax brackets who can't maximize and/or take advantage of the tax-deferral benefit of an RRSP.

"The TFSA is a lot more flexible than an RRSP in that you can take money out tax free to fund your RRSP or for other purposes and then replenish it," Ablett says. "It's like double tracking."

Ablett recommends that people who have an employer pension plan contribute to it to take advantage of the company's matching contributions, and generally to take advantage of any and all other savings opportunities including non-registered savings plans, Registered Education Savings Plan (RESP) and Registered Disabled Savings Plan (RDSP) for the disabled.

"We favour providing more incentives for people to save for their retirement, but from the government's perspective what may make sense from an actuarial or economic point of view may not make as much sense from a political one," Ablett says.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

Copyright 2018 Talbot Boggs

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