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Not having an RRSP just years before retirement is a situation many people find themselves in. For any number of reasons, they never opened and contributed to an RRSP. Maybe they didn’t have the funds because they were paying off a mortgage. Maybe they were busy covering their children’s higher education expenses. Or perhaps they were unfamiliar and a bit intimidated with how RRSPs work and just never got around to making a contribution.
The good news is it’s not too late for to open and contribute to an RRSP. At 60 years old, you’d still get a good 11 years to enjoy the tax and investment benefits of having an RRSP.
Why an RRSP?
Why will older adults benefit from having an RRSP? There are a couple key advantages. First, assuming they’re still working, they can contribute 18% of their earned income (salary or wages) or a set amount, (whichever is higher) to their plan every year. The RRSP contribution limit for 2017 is $26,010. This amount can then be used as a tax deduction, which will reduce the tax they owe and may actually result in a refund. Note that the 2017 RRSP deadline is March 1, 2018.
The other benefit of these plans is that the government allows money to grow tax-free while it’s within an RRSP. This means that any interest income and capital gains accumulate without having to pay a portion of it to the Canada Revenue Agency.
Keep in mind, however, that RRSPs are tax-deferral plans—you do have to pay tax when you start withdrawing money from them. However, for most Canadians, their income in retirement is likely to be less than when they were working. As a result, they will be in lower tax bracket when the time comes for making an RRSP withdrawal.
The other two advantages of RRSPs are: You get to contribute when you are in a higher tax bracket, reducing your taxable income; and when the money is withdrawn in your golden years, it’s taxed at a lower rate (though this isn’t true for everyone).
Do they have a generous pension?
Having a pension through an employer will make a big difference. Why? Pension plan contributions reduce the amount Canadians can contribute to their RRSPs. If they do happen to have a generous pension (for example, if they’re a long-time civil servant), that’s another consideration because they may not absolutely need an RRSP.
The upside
There’s one definite upside for those over 60: Because they’ve never contributed to an RRSP, they’ll probably have a lot of unused contribution room. In other words, they can make large contributions to a plan and enjoy some healthy tax deductions in the process.
Another thing to keep in mind is that even at 60, compounding still works. That is to say, when your investments start to grow, it feeds on itself. To use a simple example, if your portfolio increases by 5% in year one, the starting point for year two is higher, so if you keep earning 5%, the value of your holdings will keep rising at an accelerated rate.
Thinking about risk vs. reward
The amount of risk you should take in an RRSP is usually proportional to your age. For instance, if you’re 25, you can afford to take more risk (for example, have more exposure to the stock market) because there are decades to make it up if the market has a big tumble in the interim). For those 60 and over (close to retirement age), they may want to have a more conservative portfolio that’s comprised mostly of bonds.
