Why RRSPs may not be right for Canadian gig workers

The long-respected retirement solution offers benefits that were mostly designed with full-time workers in mind

Why RRSPs may not be right for Canadian gig workers

There’s a lot of good to be said about the gig economy. Aside from helping people get secondary streams of income — a definite plus when inflation outpaces wage growth — it can also help retirees stretch out their nest eggs as they continue to work through their prime post-workforce years.

But for those whose sole source of income is gig work, there are plenty of drawbacks. For one thing, their income tends to be unpredictable, which exacerbates the already-thorny problem of financial planning. They also don’t get to enjoy the benefits enjoyed by full-time workers, such as employer-provided health and savings plans.

One other thing they can lose out on: the benefits of RRSPs. As a recent article on Huffington Post Canada noted, “[T] he financial instruments out there designed to help people save for retirement … weren't designed for gig workers and all the precarious jobs that are coming to dominate our economy.”

In the case of the RRSP, the advantages that come with contributions are better suited for the traditional worker with a steady, full-time job. While money put into an RRSP is exempt from taxes during the year that it was stored away, the results differ between permanent workers and low-income, part-time, and temporary workers. Specifically, a salaried worker can expect a large tax return the following spring, while independent workers paying their own taxes can only expect their contributions to lower what they’ll owe at that time.

That spells uneven tax benefits over time for low-income earners: those pulling in modest income today get a correspondingly modest tax break for their RRSP contributions. Meanwhile, a higher income in retirement — supplemented by CPP and Old Age Security, for instance — might mean higher taxes at that time compared to what would be owed today.

That’s why struggling low-income gig workers should consider the TFSA instead, explained Laurie Campbell, CEO of Credit Canada. Unlike contributions to an RRSP, money placed in such accounts doesn’t earn the contributor a tax refund. But on the plus side, the money earned on those investments won’t be taxed, and withdrawals from TFSAs won’t count as income for tax purposes.

In addition, TFSA withdrawals can be made at any time without penalty; RRSP withdrawals before age 65, on the other hand, are subject to a “withholding tax” of up to 30%. That’s a major consideration for gig economy workers who tend to go through cycles of feast and famine in terms of their income earned.

And a friendly reminder for all TFSA users: the current contribution limit stands at %6,000 a year, but any unused contribution room can be carried over to the next year. For gig workers, that’s especially good to know whenever they have a good year and want to maximize the benefit they get from TFSA contributions.

Also, just as people must pay attention to fees in investments, they should also look at the fees charged by their financial institutions for RRSPs or TFSAs, especially as those fees can take away a big chunk from their retirement portfolios’ returns.


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