A Fresh Look at RRSPs for 2021: A Roundup of Key Strategies for Accumulation and De-Accumulation

“Will you still need me, will you still feed me, When I’m sixty-four” – The Beatles

By David Lush, CFP

When Paul McCartney and John Lennon wrote that lyric in 1967 for one of their most beloved tunes, the Canadian Registered Retirement Savings Plan was a fresh-faced amendment to the Income Tax Act, at only ten years old. Now, in 2021, sixty-four years later, the plan is a centrepiece of Canadian retirement plans: occupying the dominant position once held by venerable vehicles such as the Defined Benefit (DB) pension plan. Now, with the TFSA increasingly becoming a favoured option for Canadian savers, RRSPs are sometimes being put on the back burner. In this article, we re-examine some key features of RRSPs, and examine some critical accumulation and de-accumulation strategies that Canadians should factor into their long-term financial planning.

A Review

What are Registered Retirement Savings Plans (RRSPs) really for? Crucially, they are plans designed for retirement. Given the steady decline of employer sponsored pension plans in the Canadian landscape, most Canadians should expect that of the big three components of retirement income (employer pensions, government benefits and self-directed), self-direct savings plans such as RRSPs, TFSAs, and non-registered savings will be required to occupy about a third (or more) of their retirement paycheque.

Accumulation: How do we build that generous retirement paycheque?

The short answer is… you have to save. Early, regularly, and often is best. Why do we say early? Well, both RRSP room and time are two precious resources that, once used up, cannot be recovered. Procrastination is to be avoided when it comes to setting up and regularly contributing to an RRSP plan. After all, an investor that starts an RRSP plan at age 20 and saves for only 10 years is significantly better off at age 65 than an investor that saves almost three times as much, but only starts saving at age 40.

Cost of Procrastination	Early Investor (starts age 20)	Late Investor (starts age 40)
Savings per month	$100	$100
# of years contributing	10	25
Total invested	$12,000	$30,000
Return	6%	6%
Portfolio value at age 65	$135,638	$70,000
	Early Investor invests a total of $100 x 12 x 10 years = $12,000. They achieve a portfolio of $16,697 at age 30. This amount, compounded tax free for 35 years = $135,638	Despite the Late investor investing a total of $30,000, they achieve a portfolio of only $70,000

This example assumes a return of 6%. Is that normal? Can I get more or less than that?

The short answer is yes. Investment returns are not guaranteed of course, but most financial planners use a range of between 3 to 7.5%, to reflect a return ranges from low to high volatility portfolios. Your portfolio might exceed this range, but planners tend to be conservative and to not count on heightened investment returns when modelling out your financial future. Ultimately, it is part of the job of your planner to ensure your RRSP funds are invested in a well-designed portfolio which balances your risk tolerance, time horizon and investment objective.

For most Canadians, even those facing retirement in the next few years, the best benefits of RRSPs or RRIFs happen when long-term funds are allowed to compound over many market cycles – generating long-term returns. A good rule of thumb is to look at well-managed pools of money such as the Canada Pension Plan (CPP) and note that the fund managers there virtually never panic sell anything, are invested for the long-term, and keep a diversified asset mix in place at all times. They carefully assess what percentages of more volatile, but growth-oriented assets (such as equities) they should have in the portfolio vs more stable asset classes (fixed income, real estate, etc) and make small adjustments from time to time.

Investment research firm DALBAR estimates most investors make radical changes too often, thereby losing out on an astonishing 3-4% of long-term market returns due to poorly timed sale and purchase decisions. The lesson is consistent: pension fund managers and successful individual RRSP investors generate the best returns when they let markets work for them over time. As the old saying goes, it’s time in the market, not timing the market that matters.

When should you put money into your RRSP?

Although there are still some Canadians that wait until the deadline to contribute to their RRSP, and this is certainly preferable to doing nothing, this is not the most effective way to contribute to your plan. Although these late contributions still generate a tax refund based on the individuals marginal tax bracket and contribution amount, there are two drawbacks from this approach.

Tax refunds: money that isn’t working for you for a year.

When Canadians work for an employer, that employer attempts to remit the correct amount of tax to the CRA each time you get paid. The goal is for these regular monthly remittances to eventually add up to the total amount due to the CRA for the tax year. However, it doesn’t always work perfectly. Bonuses paid at year end may not be perfectly factored into that remittance schedule. In that event, you may have a tax bill due when you file in that case (the amount remitted was too low for how much income you actually made).

In an alternate case, if you make a large RRSP contribution after the conclusion of the tax year, the amount you remitted already to the CRA will not have factored this in yet. Remember that each dollar contributed to an RRSP reduces your taxable income by that same amount. How can you address this? Simple! Don’t wait until next year to make a lump sum contribution.

Instead, if your total RRSP contribution target for the year is $12,000, for example, consider making that contribution on a biweekly ($462) or monthly ($1000) schedule. Canadians who are making their RRSP contributions during the same year they are remitting regular payroll tax to the CRA can file a Form T1213 Request to Reduce Tax Deductions at Source. Instead of receiving a refund of $3000-4000 a year later, they can avoid having these amounts sent to the CRA in the first place. Assuming normal inflationary conditions, money in your pocket now is generally more valuable than money in your pocket later.

Lump sum vs. Regular investments?

It’s possible for lump sum investments to be better once in a while if you’re lucky and happen to buy at a trough in the markets. However, as we’ve outlined above, retail investors have a terrible track record of doing this successfully over the long term. What does work is to start a disciplined strategy of purchasing regularly (biweekly, monthly).

Cash Flow Benefit of Regular Savings Plans

As planners we’ve regularly pointed out the wisdom of RRSPs to clients, and yet the number one reason why Canadians under-save is the negative cash flow impact on their personal budgets. Tax savings are great but saving 18% of one’s income is not an easy task for many Canadians. This is another area where dollar cost averaging plans / regular contribution plans are so important. It’s a heck of a lot easier to save $500 a month than it is to suddenly come up with $6,000 all at once.

Experts say it’s best to figure out what you can save in advance and setup your contribution schedule to happen a few days after you get paid. That way, you can spend whatever remains without worrying about whether you will have money left over to save.

The Wisdom of Dollar Cost Averaging (DCA)

Beyond cash flow benefits, regular savings plans are also a proven method of guaranteeing that you will always be buying some securities when they are on sale, and that you will avoid putting all your eggs in one basket when markets are expensive. Buying a bunch of securities at a ‘top’ is a wonderful way of depressing returns.

The wisdom of Dollar Cost Averaging also applies when it comes to withdrawal as well. Retirees with sizeable RRIF portfolios sometimes imagine that they need to embrace an ultra-conservative asset mix as soon as they are in de-accumulation mode (age 71). In reality, most Canadians in their early 70s can expect to live until well into their late 80s, and possibly much longer. Although the assets within a RRIF should factor in some level of conservatism due to the regular withdrawals that must be funded, the fact that the time horizon may be quite long suggests a portfolio with some capital appreciation potential is wise.

It is not as though these retirees are withdrawing all of their RRIF principal at age 72, right? By keeping their portfolio invested in the markets, the negative impact of their regular withdrawals on the total principal is minimized. Remember, the best time to contribute (investments are on sale) exactly matches the worst time to withdraw from a portfolio (crystallizing losses). Regular systematic contributions for accumulation, and regular, systematic withdrawals are sensible approaches – reducing the impact of market timing on the impact of these contributions/withdrawals.

RRSP Loans: Better late than never, and trust us, the benefits almost certainly outweigh the costs.

Although many Canadians in the COVID-19 era may be strangely saving more (less eating out, less travel), others may have suffered income interruptions or other unexpected challenges. In such a situation where cash-flow is tight, an RRSP loan can be a fantastic way to reduce your income taxes, generate a tax refund and bolster your future retirement savings at the same time.

Province of Alberta (2020 Tax Year)	Business as Usual Scenario	RRSP Loan Scenario ($10,000)
Income	$45,000	$45,000
RRSP Loan Amount (e.g. $10,000)	$0	$10,000
RRSP Contribution (e.g. $10,000)	$0	$10,000
Taxable Income	$45,000	$35,000
Tax Amount Due (Tax % * Taxable Income)	$7,329	$4,829
Tax Refund Amount	$0	$2,500
Loan Interest Cost	$0	$200
RRSP Investment Return ($10,000 x 6%)	$0	$600
Net worth gain on a deferred basis	$0	$2,900

Who doesn’t want an extra $2,900 in their life? We should also point out that this example is conservative. The long-term benefits of that $10,000 compounding on a tax-deferred basis are several multiples of $2,900, depending on the investor’s portfolio performance and the years spent compounding. Remember our early investor example above, with $65,638 in extra wealth from just starting their savings plan earlier in their life. The goal is always getting more money compounding for you as early as possible, for as long as possible.

Large RRSP Catchup Loan: Does the math still make sense? Client earns $100,000 and has $50,000 of RRSP room

One of the important factors that should be reviewed in years where large contributions are being considered is the clients expected income in future years. If we have a client earning $100,000, are they expecting to earn this amount going forwards, or is this a temporary situation and they expect their income to drop in a year or two? If the income is expected to drop, and the high income is being earned now, the client should most likely be advised to make large RRSP contributions now in order to reduce the impact of the high marginal tax brackets that apply to higher tiers of income.

Marginal Tax Rate

Lower Limit	Upper Limit	Marginal Tax Rate
$0	$13,299	0%
$13,230	$19,369	15%
$19,370	$48,535	25%
$48,536	$97,069	30.5%
$97,070	$131,220	36%
$131,221	$150,473	38%
$157,465	$209,952	42.22%
$209,953	$214,368	43.22%
$214,369	$314,928	47%
$314,929	And up	48%

However, if we had a client earning $40,000 this year who is expecting to earn $100,000 going forwards next year, they might be best advised to make a modest RRSP contribution this year, or potentially bank their contribution entirely this year, in order to make a larger catchup contribution in future years where they are earning $100,000. This type of “what if” modelling is another major reason to review your RRSP contribution strategies with a financial planner.

Province of Alberta (2020 Tax Year)	Business as Usual Scenario	RRSP Loan Scenario ($50,000)
Income	$100,000	$100,000
RRSP Loan Amount (e.g. $50,000)	$0	$50,000
RRSP Contribution (e.g. $50,000)	$0	$50,000
Taxable Income	$100,000	$50,000
Tax Amount Due (Tax % * Taxable Income)	$24,070	$8,660
Tax Refund Amount	$0	$15,410
Loan Interest Cost (5% interest cost and 12 month amortization)	$0	$1,639
RRSP Investment Return ($50,000 x 6%)	$0	$3,000
Net worth gain on a deferred basis	$0	$15,410 + $3,000 – $1,639 = $16,771

Not too bad! We’ve boosted the net worth of our client, on a deferred basis, by somewhere in the range of $15,000-$17,000. However, the client has RRSP loan payments of $4,280.37 to manage over the next 12 months. Many financial institutions would happily agree to a longer loan repayment period to lessen the cash flow impact, but we’re assuming the client wants to pay back the loan as quickly as possible.

What if they used their refund amount to repay their loan amount? This is easily accomplished, and serves to save the client money on interest, and rapidly accelerate their RRSP loan repayment, if that is their priority.

RRSP Loan Repayment with RRSP Refund	Business as Usual Scenario	Using proceeds to pay down the RRSP Loan
Original Advanced Amount	$50,000	$50,000
Original Advanced Amount reduced by RRSP Refund	$0	$50,000 – $15,410 = $34,590
Loan Amortization	12 Months	12 Months (re-calculated after refund repayment)
Interest Cost (assume 5%)	5%	5%
Monthly Payment	$4,280.37	$3,038.21
Total Interest Paid	$1,364.49	$968.51

De-Accumulation: From Education to Homebuyers Plans to more conventional Retirement Strategies

So, you’ve got all this money inside an RRSP. Well done. Now, what about using it to actually benefit your life? What are the best and most appropriate, tax efficient uses for your hard earned RRSP cash? What should an RRSP be used for? Well, three things that should represent worthwhile investments to almost every Canadian:

• Financing an education. Education continues to be expensive, but worthwhile. Each year of post-secondary education is generally associated with higher annual income (although some exceptions apply, based on the field in question). 
• Financing the down payment on your first home. It is no secret that Canada has one of the world’s most expensive housing markets. That first down payment is often difficult to come by, and sometimes an RRSP funded withdrawal is the only way to make it happen.
• Providing at-least a third of your overall retirement paycheque. Retirement is expensive. A Canadian that wants to draw $3,000/mo starting from age 65 to age 90 should reasonably expect to save between somewhere between $700,000 to $800,000 to avoid exhausting their capital while they are still alive (the amount required varies depending on the return generated by the portfolio).

Life Long Learning Plan (LLP) Withdrawals

The cost of an education is not cheap, and four-year degrees can easily cost upwards of $120,000 – just for tuition alone (Statistics Canada, 2019). The LifeLong Learning Plan (LLP) is designed to help defray some of these costs, allowing Canadians to reap the benefits of RRSP contributions during working years while also allowing them to withdraw amounts tax free if they are used for qualifying educational expenses. The fine print is key here, and there are important limits on how much can be withdrawn per year:

• A maximum of $10,000 can be withdrawn in a calendar year.
• A maximum of $20,000 can be withdrawn in total (over subsequent years).
• Contributions made to the RRSP must stay in the plan for at least 90 days in order to count towards a tax deduction on an income tax return for that tax year (similar to the HomeBuyers Plan withdrawal program).
• Withdrawn amounts must be paid back over a 10-year time frame starting within five years of your LLP withdrawal, or the first year where the individual does not spend three months as a “qualifying student.” What would this look like? For an individual that withdrew $10,000 in 2019 and a further $10,000 in 2020 to fund their education goals, and assuming they were no longer a student during the 2020-2024 period, they would need to repay 1/10^th or $1,000 each year from 2025 to 2035 to complete their repayments under the LLP program. Any RRSP contributions you make prior to your first repayment year reduce the first required payment. If your first repayment year is 2020 and $1,000 is your required payment and you make an early repayment of $500 in 2019, your required repayment for 2020 is $500. If, on the other hand, you make less than the required repayment, you will have to include the difference in your income on line 12900 of your Income Tax and Benefit Return. The amount you include in your income is equal to the amount you are scheduled to repay minus the amount you designate as a repayment for the year. 

HomeBuyers Plan (HBP) Withdrawals

Just as with the LLP withdrawal program, Canadians can withdraw from their RRSP to purchase a first-time home. Also, it is possible to make LLP and HBP at the same time, provided all withdrawn amounts have been contributed and vested for at-least 90 days prior to any withdrawals.

• A maximum of $35,000 can be withdrawn from RRSPs for a first-time home purchase.
• You must be a resident of Canada, and intend to occupy the qualifying home as your principal place of residence within one year of buying/building the property (no investment properties allowed!)
• Again, the withdrawn funds must have been within the plan for at-least 90 days in order for the initial contributions to count for income tax refund purposes.
• HBP withdrawals must be paid back to your RRSP over a predefined minimum schedule. You may elect to repay amounts earlier if you wish, but at a minimum you must commence repayments on the 2^nd year after you first withdrew funds from your RRSP plan. You have up to 15 years to repay these amounts. Therefore, in the example of a person that withdrew $15,000 from their RRSP under the HBP in 2020, they would need to commence paying a minimum of $1,000 per year back into their RRSP starting in 2022.

Retirement! Converting your RRSP into a RRIF

Yes, you will eventually get older, and you may eventually even become sixty four (or perhaps such a date is already in your rear view mirror). Either way, you will want to your savings to help “feed you” and take care of you in your golden years! Just like our song, the “typical” age in which retirees draw money from their RRSP or convert it into a RRIF is often around age 65.

At this age, the minimum payout percentage is 4% of the initial plan value. Some Canadians feel that they don’t actually require this income at this time, and some even continue to work well into their 70s. In which case, they may wish to continue to keep their RRSP plans open to continue to receive 18% of their earned income over those years. However, eventually you must start drawing down your retirement savings, even if you continue to work, volunteer, travel full time or do a million other things with your time. RRSP’s must convert into Registered Retirement Income Funds, or RRIFs, by age 71, with your first withdrawal happening at age 72.

The following table is a summary of some key dates along the minimum RRIF withdrawal journey, showcasing how much additional income (from the starting plan value in that year) must be withdrawn as plan participants age. Remember, no tax is withheld on the minimum amounts withdrawn, although regular RRSP-style withholding taxes do apply on any amounts above these minimums per month. Clients are advised to talk to their advisor and setup their RRIF to fit their life and goals. Statutory minimums don’t necessarily fit every client situation, and if it makes sense to withdraw more and it suits your financial plan, don’t worry about the minimums.

Age at Start of Year	RRIF Minimum Payout Percentage	Approximate Monthly Income $250,000 Portfolio	Approximate Monthly Income $500,000 Portfolio
65	4%	$833	$1,666
70	5%	$1041.67	$2,083
75	5.82%	$1,212.50	$2,425
80	6.82%	$1,420.83	$2,842
85	8.51%	$1,773	$3,545.83
90	11.92%	$2,483	$4,967
95	20%	$4,167	$8,333

Generally speaking, it is difficult for most RRIF plans to achieve consistent returns above 8.51%, even with a highly aggressive (100% equity) asset mix. The expectation is that these plans deplete close to when annuitants achieve their life expectancy – and to provide extra income in the event that additional living and care costs are incurred in one’s late 80s and 90s.

Conclusion

RRSPs are incredibly powerful vehicles and yet even for households with a major income earner aged 35-54, only 46.4% contributed to RRSPs according to data from the last census in 2016. As we’ve reviewed here, Canadians should seriously consider establishing and setting up a regular contribution plan into an RRSP at level that is as close to 18% of their income as possible. They should also strive to do so as early in life as they can manage. The costs of procrastination are, as we’ve examined here, quite real.

An RRSP can be a flexible savings vehicle as well, helping to defray significant expenses for that first home purchase or higher education costs. As well, they should see a qualified financial planner or advisor and ensure their portfolio is growing in the right way and has the right level of capital accumulation potential, even as they hit those golden years past age 64. Last but not least, investors should consider their de-accumulation plan, and review when to convert their RRSP into a RRIF. When do they really need that extra retirement paycheque? If RRSP plan holders don’t need to draw that income right at age 65, it may be best to let the plan compound a few more years until the statutory maximum age of 71. For Canadians that use the RRSP plan strategically, it is the indispensable ingredient in a finely tuned financial plan.