10 Jan Partner Editorial: RRSP Season and Navigating Your Saving Options
By Grant T. Smith
At my age, you think about your RRSPs this time of year. I have noticed something different with some of my younger clients.
If you have ever wondered about your RRSP choices this article may be for you. More directly, if you self-identify as a millennial this piece is meant to engage you.
Every day, I am meeting young people who are starting their careers determined to stand out and build new opportunities and new enterprises. They are risk takers who have goals and targets. They are driven.
They are not seeking the same things my generation sought, for many seem not to care about achievements that were foundational in the 70s and 80s:
- Many do not understand why they should own a car (blasphemy my compatriots cry).
- Many are uncertain about home ownership, partially because of the obvious challenge to enter the west coast market, but not solely.
Some of their shared characteristics are:
- They care about the world around them – environment, poverty and health – with a commitment, as I recall, few carried in my time.
- They are thinking about their future and asking us to help them understand their saving choices, with an eye to the future.
So, let me briefly share some facts about savings programs in Canada.
Canada Pension Plan
We pay into CPP based on our wages with the employee and the employer each contributing 4.95% of a salary to a maximum salary cap of $51,800 or a maximum 2017 contribution of $2,564.10 (if you are self-employed the maximum will be double that because you are both parties in the transaction). This money contributes to the government investment pool and when you retire, it provides you a pension.
The maximum benefit at age 65, in 2017 is about $1,135 per month but most people will get less than that because of lower income years. The calculation is complicated, but watch for my full discussion on LinkedIn in February. The other key factor, because there are always doubters in every crowd, is, “Will it be there when I am ready for it?” The short answer is yes, the government’s chief actuary says that CPP is sustainable for the next 75 years.
This is the retirement plan you get to contribute to, based on earned income, every year to build your own pension fund. In our business, we are often saying that the best tax is a deferred tax and this is simply the best tax deferral plan available. You do not pay tax on the money you put in an RRSP until you take it out – this means it grows on before tax dollars. In 2017, you can contribute up to 18% of your earned income from 2016 – to a maximum of $26,010.
You can use RRSP moneys, within thresholds, to pay for education or the purchase of a home, but there are pitfalls that should be understood before making that choice. The other key fact is the deadline – you have until 1 March 2018 to make a contribution to apply against the 2017 tax year and your notice of assessment should detail your maximum contribution.
- Work with your CPA to maximize the contribution to your RRSP as we build together for your retirement.
- Watch for my LinkedIn article this month for further details – or ask us to send it to you directly.
This is a tax-free savings account. The money you put in here is after tax, which means you have already paid tax on it, unlike the RRSP. That feels like a negative, but not so because this account never pays tax again. For me, that means I want to use it for higher risk assets that might grow exponentially. This year, 2018 (WOW!), you can contribute up to $5,500 into your TFSA. I said that the RRSP was the greatest tax deferral plan available, well this is the best tax free growth option you will ever get. There are some serious risk in the way you handle this account so do check out my follow-up conversation on LinkedIn this month.
So back to the idea that entrepreneurs need to think about these issues and the young millennials that I see starting businesses, engaging in their communities, and demanding better choices are anxious to lead the way. As a business owner/leader, as a person launching a new enterprise, or as I am fond of saying, as a launchrepreneur, understanding and developing these savings options is critical.
You will be working without the net of a pension or security that many employed people will get and your retirement is not secure. You could have chosen to be a teacher, but you chose to run a business. You need to think about your future as you are building it. I believe your future is unlimited but a hedge is still a great idea.
It is 2018 – let’s get a cup of coffee. 604.639.0909