RRSP season is in full swing and millions of Canadians are planning to make a contribution. But how can advisors help their clients get the biggest bang for their buck this year? WP spoke to the Director of Tax & Estate Planning at Investors Group
, Todd Sigurdson, to find out.
The first thing that Sigurdson urges advisors to do is find out the marginal tax rate that their clients fall into this year. “Make sure your client is taking the deduction in a year in which they’re in a higher tax bracket,” he says. “I generally like to see clients use it when they’re in a 30% tax bracket or higher, that definitely gives a bigger bang for your buck.”
Advisors should also be encouraging their clients to reinvest their refund into their retirement savings, although that can be difficult in practice. Everyone likes to receive some ‘play money’ from the CRA and it’s much more tempting to spend the money on a vacation or a new TV. However, clients who are disciplined enough to reinvest a portion their refund – or, even better, all of it – can give their retirement savings a decent boost.
Sigurdson gives the example of a client in the 40% bracket making a $5,000 contribution into an RRSP, which will generate a $2,000 tax refund. If that client was persuaded to reinvest the full amount into a TFSA, over a 30 year horizon the before tax value of that RRSP contribution would be about $16,000 (after tax is $11,350 if we consider the client to be in a 30% tax bracket in retirement).
If the client put the full $2,000 into a TFSA and left that alone for a 30 year period, that TFSA would be worth about $6,500. “So, effectively, their after tax retirement savings are increased by about 57% when they reinvest their refund,” Sigurdson says. “Even if they saved half of it, $1,000, they would increase their after tax retirement savings by about 28%.”
Put simply, if advisors can demonstrate the value of reinvesting that RRSP refund, they can help significantly increase their client’s retirement income. Clients talk, and advisors who help achieve those sorts of saving boosts are sure to be at top of mind when a friend or family asks for an advisor recommendation.
Ultimately, advisors need to help build a plan that focuses on what a client wants their retirement to look like, and doesn’t just consider the hard numbers. Canadians are healthier in retirement than ever before and, especially in the early years of retirement, most want to be active. In order to do that, they need to build up a healthy nest egg. “Determining what the client’s goals are and what they want from their retirement is an important first step,” Sigurdson says. “Once you determine that, you can take a step back and plan how to help them achieve that. RRSPs, because of their tax advantages and ability to defer tax, play an important role.”
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