Posted by Tim Stobbs on April 9, 2014
While I was having coffee the other day with some co-workers it came out that I was maxed out…no, not on credit cards, but rather RRSP contribution room and last year my wife and I maxed out of TFSA contribution room.
Until that moment I had forgotten how unusual that state of being is for most people. The older people around the table all had unused RRSP contribution room of $30,000 to $50,000 and all of them make an healthy salary. So it wasn’t the fact they couldn’t save, but rather they had chosen not to.
In total Canadian’s have $600 billion in unused RRSP contribution room, which is a lot of tax savings people are leaving on the table. Put it another way, if everyone used that up in a single year at a mere 26% tax rate the government would be out $156 billion in revenue. That doesn’t even touch the used TFSA contribution room out there as well.
So why is saving such a difficult thing to do? After all the amounts aren’t huge in the case of RRSPs it is 18% of your previous year income (less pension adjustments). So if you had a defined contribution pension you could likely get 5 to 10% there, which leaves anywhere from 13 to 8% left to be saved. Yet you get a tax refund on that money, so as long as you keep putting your refund back into RRSPs you really only have to save around 10% or less. Can you not live on 90% of your income?
Granted if you don’t have a pension plan this takes a bit more planning to really pull off. 18% of your income can seem a big difficult, but that is why you need to get the tax refund at once rather than waiting until tax season. How? You can use that handy tax form T1213 Request to Reduce Tax Deductions at Source. By having a regular contribution plan setup, you can fill this out and send it in then a few weeks later you can start getting your refund on each paycheck rather than waiting the full year. This helps keep your cash flow up while saving. The downside of this trick is you do have to file it every year (in most cases).
I should also point out I also had extra RRSP contribution room for a number of years (~$30k). It was only between some planning and adding extra money for years that we managed to catch up. Yet it can be done and when you put your mind to it.
So have you ever maxed out some contribution room? If so, how did you do it? If not, what is preventing you?