Should Canadians Make RRSP Contributions After 60?

Date

February 23, 2024

Date

February 23, 2024

Date

February 23, 2024

By Harvest ETFs

RRSP, RRIF, LIRA, CPP, OAS: for younger Canadians, these letters may not mean much. But for those around 60 years of age, these letters start to mean a lot as they get closer to their age of retirement.

By the time Canadians get to the age of 60, they may have a lot of questions about their retirement finances. How can they contribute towards their retirement in the best possible way, while also making sure they are paying the least amount of taxes?

Below, we’ll explore whether Canadians should make RRSP contributions after 60. 

What Is an RRSP?

A Registered Retirement Savings Plan (RRSP) is a retirement savings plan for Canadians where individuals can save and invest for their retirement. A key differentiator between an RRSP and a general savings or investing account is that the contributions into the Canadian RRSP are exempt from taxes and investments grow tax-free until its time to withdraw from it.

In the RRSP, Canadians can hold various investment instruments like guaranteed investment certificates (GICs), bonds, stocks, mutual funds, and exchange-traded funds (ETFs) for retirement which employ various strategies like growth and income ETFs and covered call Canadian banks ETFs.

How much could an individual contribute to this retirement savings plan? For 2024, individuals can contribute up to 18% of their earned income, or the maximum annual contribution limit of $31,560, whichever is lower.

Also, an individual can carry forward the contribution room in these retirement savings plans until they turn 71 years of age. So, for example, if a person contributed $1,000 this year in their RRSP, in 2024, they could contribute whatever the limit is for the year, plus $29,780 (what’s left from 2023’s contribution limit). 

Contributing to an RRSP After 60

To say the least, there isn’t a cookie-cutter answer to whether a person should contribute to their RRSP after the age of 60. However, there are a few factors people should consider when it comes to contributing to Canadian retirement savings plans.

Ultimately, the goal is to figure out where they can get the most tax savings by contributing to their RRSP. 

Marginal Tax Rate

Hands down, one of the biggest factors in deciding if an individual should contribute to their RRSP after 60 is the marginal tax rate.

The marginal tax rate is how much an individual pays on every additional dollar of income they earn. If someone has a marginal tax rate of 10%, it will mean that $0.10 of the next $1.00 earned will be paid towards taxes.

The general rule of thumb is the higher the marginal tax rate after 60, the higher the contribution should be.

Here’s some more clarification: Let’s say a person in their 60s works as a consultant in Ontario earning an annual salary of over $130,000 and their marginal tax rate is 43%. It would be a wise idea for them to contribute the maximum amount to their RRSP as it would lead to the biggest tax benefits.

Compared to a person who earns $25,000 and has decided to take their Canadian Pension Plan (CPP) and Old Age Security (OAS) with a marginal tax rate of 20%, the impact of an RRSP contribution would be negligible. In fact, if over the years this individual has built up large sums in their retirement savings plan, it might even be advisable for them to take money out of their RRSP and take advantage of their lower marginal tax rate. 

Spousal RRSP

For some individuals, it might even be possible to contribute to their spousal retirement savings plan rather than their own after the age of 60.

How does this work? A spousal RRSP allows a person to contribute towards their spousal retirement savings plan up to their contribution limit. When they contribute to their spousal RRSP, they get a tax deduction and that could lower their tax bill. This works very well in cases where there is a huge difference between incomes between spouses.

Furthermore, contributing to the spousal RRSP could lead to a lower marginal tax when the time comes for withdrawals from the retirement saving plan at the time of retirement. 

Age

It’s worth noting again that there’s a limit on how long Canadians are allowed to keep an RRSP. The age limit is 71 years. After the age of 71, the RRSP turns into a Registered Retirement Income Fund (RRIF) of which a certain amount must be withdrawn every year. That amount is set by parliament.

If a person is 69 years old, for example, it might be wiser for them to start thinking about how to withdraw from their RRSP and what to do with their savings rather than contributing more to their income retirement plan. Regardless of a person’s marginal tax rate or how much they can contribute to their spousal RRSP, age is a large factor.

On the other hand, if a person is 60 years of age, they might still have some time to contribute to their RRSP. It becomes important for them to figure out how to contribute most efficiently. They will have to consider their marginal tax rates, income, and other factors. 

Key Pointers on Contributing to an RRSP After 60

While there isn’t one clear-cut answer for whether a person should contribute to their RRSP after 60, speaking to an experienced financial advisor or financial planner could help. They could run several scenario analyses to guide you in the right direction.

Beyond this, financial professionals could help you by building a plan that not only focuses on contributing to the RRSP, but how to manage what’s in the retirement savings plan—where to invest, how to allocate the funds, and what to do when the time comes for withdrawal.

Canadian should be considering their retirement plans. Early decisions can make a huge difference over time. They could invest a large amount of money tax-free and have the savings they need for when the time comes to use it. 

Where should you make your RRSP contributions in 2024?

Harvest ETFs offers investment products focused on generating consistent monthly cashflow, a source of income in retirement. After all, those nearing retirement, and retirees, both depend on steady monthly cashflow to live well, travel the world, and leave a legacy that they can be proud of.

The Harvest Diversified Monthly Income ETF (HDIF:TSX) is built to deliver consistent monthly income and diverse growth opportunities that Harvest ETFs are known for. The ETF holds a portfolio primarily of Harvest’s equity income ETFs, a multi-sector portfolio capturing a large and diverse set of high-quality companies. This ETF last paid out a monthly distribution of $0.0708 per unit, which represents a current yield [1] of 10.4% as at February 22, 2024.

Canadians preparing for or in retirement may also want to consider Harvest’s fixed income offerings. The Harvest Premium Yield 7-10 Year Treasury ETF (HPYM:TSX) is the “happy medium” for retirement investors who want stability and attractive tax efficient monthly cash distributions. It achieves this by writing covered calls on a portfolio of US Treasury ETFs, that primarily hold mid-duration U.S. bonds with average maturities of 7-10 years. 

Disclaimer:

Commissions, management fees and expenses all may be associated with investing in Harvest Exchange Traded Funds (managed by Harvest Portfolios Group Inc.). Please read the relevant prospectus before investing. The funds are not guaranteed, their values change frequently, and past performance may not be repeated. The content of this article is to inform and educate and therefore should not be taken as investment, tax, or financial advice.
[1] This does not represent the ETF’s historical performance.  It represents an annualised number based the most recent distribution multiplied by 12 and divided the closing market price of $8.16 as of February 22, 2024. It is the yield an investor should expect if the ETF, was purchased at the price of $8.16; and paid the same amount of distribution of $0.0708 for the next twelve consecutive months.

Disclaimer

For Information Purposes Only. All comments, opinions and views expressed are of a general nature and should not be considered as advice and/or a recommendation to purchase or sell the mentioned securities or used to engage in personal investment strategies.

You will usually pay brokerage fees to your dealer if you purchase or sell units of the Fund(s) on the TSX. If the units are purchased or sold on the TSX, investors may pay more than the current net asset value when buying units of the Fund(s) and may receive less than the current net asset value when selling them. There are ongoing fees and expenses associated with owning units of an investment fund. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in these documents.

Certain statements in the Harvest Blog are forward looking Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS.

FLS are not guarantees of future performance and are by their nature based on numerous assumptions, which include, amongst other things, that (i) the Fund can attract and maintain investors and have sufficient capital under management to effect their investment strategies, (ii) the investment strategies will produce the results intended by the portfolio managers, and (iii) the markets will react and perform in a manner consistent with the investment strategies. Although the FLS contained herein are based upon what the portfolio manager believe to be reasonable assumptions, the portfolio manager cannot assure that actual results will be consistent with these FLS.

Unless required by applicable law, Harvest Portfolios Group Inc. does not undertake, and specifically disclaim, any intention or obligation to update or revise any FLS, whether as a result of new information, future events or otherwise.