http://www.globeinvestor.com/servlet/story/RTGAM.20070206.wrrso0206/GIStory/

Breaking News from The Globe and Mail

RRSP contributions lag income growth, inflation
Globe and Mail Update


Tuesday, February 06, 2007

Canadians are expected to contribute nearly $33-billion, a record high, to their registered retirement savings plans for the 2006 tax year. But even so, CIBC World Markets Inc. says contributions haven't kept pace with income growth or inflation.

As a result, unused RRSP contribution room has ballooned to $491-billion. That works out as $23,700 of unused contribution room, on average, for each of the 20.7 million Canadians who have RRSP room for 2006.

“At the same time, the contribution gap between high income Canadians and the rest of the population is widening and the declining relative importance of employer-sponsored pension plans is doing little to remedy this gap,” said Benjamin Tal, senior economist, in a report this morning.

Not surprisingly, given the low interest rates, RRSP contribution levels are highly correlated with the performance of the S&P/TSX composite index. Therefore, Mr. Tal said it “is very likely that the 14-per-cent gain in the TSX in 2006 will translate into 6 to 8 per cent growth in RRSP contributions in 2006, building on an already impressive 6.2-per-cent gain in 2005.”

He expects that at least half of the new RRSP money will go into mutual funds, and that balanced funds are likely to be the most popular choice among funds.

Mr. Tal noted that despite the strong overall growth in RRSP contributions in 2005, only 38 per cent of Canadians between the ages of 25 and 64 actually contributed during that year. Moreover, “the size of the contribution has hardly changed in the past few years, with a median contribution of $2,030 per household in 2005 — roughly the same amount seen in 2003 and 2004,” he said. Adjust for inflation, and the median amount is actually falling.

Contributions have also not kept up with income growth. The median contribution as a percentage of the median income has “been on a clear downward trajectory since the beginning of the decade,” he said.

The low and falling median contributions mean that the median amount of RRSP investments per household is just $30,000. Naturally, older Canadians have the largest amount of RRSP savings, but there the median was only $60,000. But older Canadians — those between 55 and 64 — have sharply increased their RRSP contributions since 1999, while younger Canadians have in fact reduced their overall contributions, Mr. Tal noted.

For the 2006 tax year, Canadians can contribute 18 per cent of their earned income, up to a maximum of $18,000, less any pension adjustments. Earned income includes salary or wages, rental income and alimony received among other income sources, but not investment income.

© The Globe and Mail


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Don't lag behind, jump on the bandwagon- contribute to your RRSP.

http://www.torontosun.com/Money/2007/02/07/3549093-sun.html

Wed, February 7, 2007

To RRSP or not RRSP...Depends on your income and who you talk to
By LINDA LEATHERDALE, MONEY EDITOR




We're in the height of RRSP season, so here come the warnings that Canadians are not investing enough for retirement.

The latest is from CIBC World Markets -- who yesterday in its report entitled Retirement: Ready or Not? -- said Canadians are expected to invest a record $33 billion this year.

That's the good news.

The bad news, according to these experts, is $33 billion is "miniscule" when compared to the $491 billion Canadians have in unused RRSP contribution room. And, with the median amount of RRSP investments held by Canadians aged 55 to 65 at only $60,000, it may mean a meagre existence in retirement, the report warns.

"In today's low interest rate environment, the interest payments on such savings would amount to an income flow of only a few thousand dollars a year," said Benjamin Tal, senior economist at CIBC World Markets.



He points out 90% of tax filers have contribution room in their RRSPs, and a breakdown of Canada's 20.7 tax filers shows that, on average, Canadians have room to contribute $23,700 to their RRSPs this year, up from $15,000 in 1999.

Deadline to contribute for the 2006 tax year is March 1.

Tal also points out that despite strong growth in RRSP contributions in 2005, fewer than 40% of Canadians aged 25 to 64 actually contributed during the year.

More, the dollar value has hardly changed in the past few years, with the median contribution of $2,030 per household in 2005 -- roughly the same amount in 2003 and 2004.

"This means that when accounting for inflation, the median amount of RRSP contributions made by Canadians is, in fact, falling," he said. "Low and falling median RRSP contributions translate into insufficient overall RRSP savings."

The CIBC report also showed most of the contribution growth was made by Canadians who earn over $80,000 a year, while only 20% of Canadians between age 35 and 64 with year incomes of less than $30,000 contributed.

So, let's take a closer look to see why:

According to Ottawa statistician, consultant and author Richard Shillington, RRSPs may not be the best financial plan for low-income Canadians.

Here's why: Low-income Canadians, who let's say earn less than $30,000 a year, get a relatively modest tax break on their initial RRSP investment because of their low income tax bracket, said Shillington.

He went on to say that when they go to cash in after retirement, their RRSP income counts against their Guaranteed Income Supplement (GIS), which is clawed back 50 cents for every dollar of retirement income.

The pension is also taxed, meaning the senior sees only 25 cents of each dollar saved. Shillington also warns that many seniors programs, like subsidized retirement homes, prescription drugs, home care, etc. -- may also be income-based, depending on the province. And that could mean the effective tax rate on RRSP income could hit as high as 100%.

Now, here's an interesting point found in tax tips by the Institute of Chartered Accountants of Ontario.

According to Jim Lockhart, partner, BDO Dunwoody in Kenora: "You need at least $105,556 of earned income in 2006 to maximize your 2007 contribution."

He also points out you're allowed to contribute up to 18% of your 2006 earned income to a maximum of $19,000 for 2007, minus any pension adjustments.

In his book Smoke and Mirrors, Toronto chartered accountant David Trahair advises don't get caught in financial myths.

Yes, we all need to save for retirement -- but how much depends on your retirement inflation rate, if you have a company pension plan and how much you'll get from government plans, like the Canada Pension Plan, Old Age Security and, if you're eligible, the Guaranteed Income Supplement.

Trahair points out the industry line is you'll need a nestegg big enough to give you 70% of your pre-retirement income to live comfortably in retirement -- but depending on your retirment inflation rate, you may be able to live on as little as 40%.

Bottom line: "The more money some financial advisers can convince you that you will need, the more money they make," he said.

JUST THE RRSP FACTS

- Canadians to contribute a record $33 billion for 2006.

- Canadians have $491 billion in unused RRSP room, meaning they could contribute, on average, $23,700.

- The median contribution was $2,030 per household in 2005, almost the same as 2003 and 2004.

-- CIBC World Markets.

I have a question about first time home buyer's program - my situation is that I have never contibuted to my RRSP account and I currently have approx $6000 room as per my 2006 TAX NOA. Now how much can I put in my RRSP account if I plan to buy a home after 90 days from now, can I contribute $6000+ 18% estimated gross earnings for 2007+$2000 (one time above RRSP contribution limit) ?

Thanks in advance

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Kind Regards
Shah

Hi Shah,

Yes you can, but your deductibility for this year will depend on the deductible limit on your NOA, which I believe from your post is approx $6000.

Where does the $6000 appear? alongside the DEDUCTIBLE limit?

Please note as mentioned before, deductible limit and contribution limits are 2 different things altogether.

From the way your post is worded, I do believe you realise that and are only making "assurance doubly sure" as The Bard would say.

Hi Investpro,

This $6000 is my deduction limit for 2007 as per the 2006 Tax return assessment.

Can you please confirm if I'm right with my assumptions stated in the original post, i.e. amount I can put into my RRSP account to use under first time home buyer's plan.

Thanks for your help

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Kind Regards
Shah

Quote:

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Originally posted by Shah

Hi Investpro,

This $6000 is my deduction limit for 2007 as per the 2006 Tax return assessment.

Can you please confirm if I'm right with my assumptions stated in the original post, i.e. amount I can put into my RRSP account to use under first time home buyer's plan.

Thanks for your help

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Hi

I do not understand this.

Example of how much income to report on each spouse's return In May 2004, Joshua started contributing to his wife Keri's RRSPs. He contributed the following amounts to her RRSPs:

Year Amount
2004 $2,000
2005 $2,000
2006 $1,000
Total $5,000


In 2006, Keri withdrew $4,000 from her spousal RRSP. Before 2006, she had not withdrawn any amounts from her spousal RRSP.

Joshua has to include $4,000 in his income on line 129 of his 2006 return, since the amount Keri withdrew is the lesser of:

the amounts Joshua contributed to all spousal RRSPs in 2004, 2005, and 2006 ($5,000); and
the amount Keri withdrew from her spousal RRSP in 2006 ($4,000).
Keri does not include any amount in her income for this withdrawal.

This is from the CRA website. http://www.cra-arc.gc.ca/tax/individuals/topics/rrsp/withdrawals/example-e.html


Now if have a deduction limit of 6.5K and and my wife has a limit of 3 K, and I contribute 3K to her spousal plan and 3 K to my personal plan, I can claim 6 K from my 2007 taxes. Is that Correct? And if she withdraws from he spousal plan in 2008 will I have to include that as my income for 2008? My understanding from the CRA web page above is that I shall have to, can you confirm this.

Quote:

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Shah,

What Investpro was saying in his post was that what you put in (contribution limit) and the tax break you can get (deduction) are two different things. Yes, you can put the amount $ 6000 this year (till Dec 31st.) You will get a deduction for it when you file your tax returns in Feb or Mar 2008. You can also contribute the extra $ 2,000 but you will NOT get the deduction for it. Next year (starting Jan 1st) you can put in the 18% of gross income for 2007 as well. You'll get that deduction in 2009 when you file your taxes.

In 90days, we will be in Feb 2008. You can withdraw "tax-free" the $6000 plus the 18%. You will get deduction for the $ 6,000 in 2007 tax filing ( feb-mar 2008). The deduction for the 18% amount will happen in 2008 tax filing (feb - mar 2009). You will never get the over-contribution deduction.

Does that make sense?

V

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