If the economic recession is hitting consumers’ pocket books, it didn’t seem to have too much of an impact on Canadian’s ability to invest in their registered retirement savings plans and tax-free savings accounts.
Exit polls conducted by Investors Group found that there was only a modest decline of six percentage points in the number of Canadian adults who say they made RRSP contributions during the 2008 tax year. Thirty-one per cent said they made RRSP contributions, and of those who did, 83 per cent contributed the same or more than they did last year.
“Despite this modest decline, RRSP contributors appear to be committed investors,” said Debbie Ammeter, vice-president of advanced financial planning support with Investors Group. “Most people recognize the RRSP is one of the greatest tax shelters available to them in good times and bad.”
The study found that 17 per cent of Canadians took advantage of the new tax-free savings accounts (TFSAs), contributing an average of $3,471 —- less than the maximum yearly eligible contribution of $5,000.
“Given that they are new on the scene, they are being well-received,” Ammeter said. “TFSAs and RRSPs are a great one-two punch for tax reduction and growth. TFSAs can be an important complement to RRSPs and give Canadians a boost in their ability to save for any financial goal they choose.”
Financial experts almost universally agree that the TFSA is one of the most revolutionary savings vehicles to come along in decades.
You can put your money in any sort of investment allowed in an RRSP and you pay no tax on the income earned or any capital gains when the investment is withdrawn.
Even better, TFSA contributions can be carried forward. If you can only contribute $2,000 in 2009 you are allowed to carry forward that $3,000 under-contribution to future years.
If you withdraw money in one year from the account, you are allowed to put it back, but only in the year after it was withdrawn.
TFSAs also can have some nifty financial and tax advantages, such as holding fixed income investments to shelter what would otherwise be highly taxed income.
Financial advisers say RRSPs are generally a longer term investment strategy compared to TFSAs, and are more attractive to people in a higher income tax bracket who can take greater advantage of the tax refund you get from investing in an RRSP.
TFSAs, on the other hand, are more suitable as a short-term investment strategy and they are a lot more flexible than an RRSP because you can take your money in and out. If you withdraw money from an RRSP before its maturity, you pay a heavy tax penalty.
The Investors Group poll found that 16 per cent of Canadians decided to “park” their RRSP contributions by investing in short-term and typically low-risk financial instruments, such as bonds and money market funds, up from 14 per cent last year.
Of those who did park their money, 36 per cent said they will do it for one year or less, while 39 per cent said they will do it for more than a year.
“Many Canadians may be unsure what to do with their savings at this time and have a natural tendency to be too risk-averse in challenging times,” Ammeter said. “But the basics of investment planning remain constant despite circumstances.”
“Having a long-term plan, and sticking to it, is a cardinal rule of sound planning,” Ammeter added.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at boggsyourmoney@rogers.com.