April 30 is the deadline for you to file your taxes this year. While it’s still a ways away, it’s already high season for Registered Retirement Savings Plan (RRSP) marketing for Canada’s major banks, which, for the past several weeks, have been rolling out surveys and reports on how Canadians aren’t saving enough for retirement.
Their solution, obviously, is to suggest that you open up an RRSP.
Why are RRSPs such a hot product during tax season? Because, in addition to being a repository for your retirement funds, they also function as temporary tax shelters: any of the income that you deposit in your RRSP is exempt from taxation (as well as any gains you make from investment products inside your RRSP — with a few exceptions).
Let’s say you make $60,000 a year. If you contribute $20,000 of that income into your RRSP, you’ll have $40,000 left over — and when it comes time to file your taxes, only that $40,000 counts as your income. That puts you in an entirely different tax bracket than if you hadn’t contributed to your RRSP at all, which also means that you’ll have to pay less in taxes.
RRSPs are a temporary tax shelter because as soon as you withdraw that money (and you likely won’t until you’re retired, or if you’re buying a house), any money you withdraw will count as income, and will become taxable.
Pointing out Canadians can’t save enough for retirement is like pointing out everyone at a hospital is sick
Banks like to champion RRSPs as the best way to both lower your taxes and build your retirement fund, but preparing for retirement is not always that simple.
The language around retirement coming from the banks has focused on the failure of Canadians to adhere to savings plans. On Thursday, RBC released a survey showing that while nearly half of the millennials they polled considered retirement their top savings priority, only 38% actually contributed to a savings fund in 2017. A CIBC survey, also released Thursday, reported that women had a tendency to save less than men for retirement, and that neither men nor women seem to be saving enough for them to live comfortably. On Monday, BMO put out a study showing that more than a third of Canadians didn’t plan to contribute to their RRSPs at all in 2018.
Because banks sell financial products, RRSPs are offered as an ideal solution to all of the bad savings habits that they point to in their reports. But an RRSP won’t solve any of the issues that spawned those bad habits in the first place. A good half of millennials want to build their retirement funds, but can’t? Maybe it’s because they’re mired in debt. Women have less saved for retirement than men? Is that because of the wage gap? A third of Canadians won’t be contributing to their RRSPs this year? A majority of the BMO respondents said that they simply didn’t have enough money to do so.
Maybe start asking questions about why Canadians can’t save for retirement
Pointing out Canadians can’t save enough for retirement is like pointing out everyone at a hospital is sick. The banks should point to the underlying issues behind this and champion solutions. Like tackling stagnant wages, the ongoing disappearance of traditional workplace benefits such as health and dental, precarious employment and the growing gig economy, and runaway housing prices that have made major cities in Canada playgrounds for the rich rather than sustainable economic hubs.
Moreover, RRSPs aren’t for everyone. If you’re in a low income bracket and pay few taxes to begin with, getting a Tax Free Savings Account (TFSA) might be a better option: unlike an RRSP, when you withdraw money from a TFSA, the money you withdraw won’t be subject to taxation.
So a note to banks: enough with the retirement surveys. Maybe start asking questions about why Canadians can’t save for retirement, and start using your vast influence to do something about it instead.