More Opportunity to Save

Federal and provincial governments encourage taxpayers to save for their retirement by granting tax relief for savings contributed to and held in a Registered Retirement Savings Plan (”RRSP”). Contributions are tax-deductible and the income earned is tax deferred. And yet, as attractive as the tax incentives may be, relatively few taxpayers avail themselves fully of the opportunity.

In 2010, just under six million tax filers contributed about $34 billion to their RRSPs for an average contribution of $5,686. While the average seems fairly high, the median was only $2,790. The median is the point where half of the six million tax filers are below the amount, and half are above. These six million tax filers represented 26% of the number of tax filers who were eligible to make RRSP contributions and
had available contribution room. About 93% of all tax filers are eligible to make RRSP contributions.

While $34 billion sounds like a significant amount, it represents only 5.1% of the total RRSP room available in the system across all tax filers. It is the limited use of this type of retirement savings vehicle that creates concern that Canadians are not saving sufficient amounts to truly fund their own retirements.

To be eligible to contribute to an RRSP, a taxpayer must have either new RRSP room as a result of qualifying income from the previous year, or unused room from earlier years. The limit is 18% of the previous year’s earned income, to a fixed maximum, less any pension adjustments, plus any unused room carried forward.

The fixed maximum RRSP contribution limits are $22,450 for the 2011 tax year, and will be $22,970 for the 2012 tax year. Individuals can locate their unused RRSP contribution room, which is prepared and tracked by the Canada Revenue Agency, on their most recent Notice of Assessment.

Individuals can make contributions, up to their available RRSP room, into their own RRSP or into a spousal RRSP. When making a contribution into a spousal RRSP, it is the contributor who is eligible for the deduction for the contribution while the spouse or common-law partner is the actual owner/annuitant of the RRSP. It should be noted that the rollover of retirement allowances or registered pension plan amounts can only go into the individual’s RRSP and not a spousal plan.

The RRSP rules can be difficult to understand, even though they have been available to Canadian taxpayers for several decades. Taxpayers need to educate themselves about RRSPs and other tax-incented savings plans (such as Tax-Free Savings Accounts and the newly announced Pooled Retirement Pension Plans) if they hope to be able to maintain comfortable lifestyles when their income-earning years come to an end and they have to rely on accumulated savings.

E.O. & E.

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Contributors to this edition:

James W. Kraft, cpa, ca, mtax, tep, cfp, clu, ch.f.c.
Deborah Kraft, mtax, tep, cfp, clu, ch.f.c.