When should you stop contributing to an RRSP?


Q. I live in Toronto and I’m a single person in my early 50s. I have $165,000 in investments (mutual funds in an RRSP) and $15,000 in savings.

About five years ago my financial advisor at one of the Big Five banks advised me to stop contributing to my RRSP and start contributing to a TFSA instead. Since I have easy access to my TFSA money, I have contributed little to my TFSA and withdrawn much of what was there because there is a real temptation to withdraw from it when I need extra money. My salary is $51,000 annually and I would have to work until age 75 to get my full employee pension.

I have several questions. First, do I need a new financial advisor? I have no idea how much I pay my financial advisor at the bank right now and find bank statements very hard to decipher. I could use some help learning a bit about that. And is it a wise decision to stop contributing to my RRSP?
–Denis

A. This a common question: “Should I contribute to my RRSP? Or to my TFSA?”

Any RRSP withdrawal is taxed as income. That means in retirement your total income, boosted by withdrawals from RRSP, could trigger clawbacks that decrease what you receive in Old Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits. If your working income is not high, it may be that your retirement income will also not be high.

If it seems that you will qualify to receive the GIS in retirement, then it might be more prudent to contribute to your TFSA now instead of your RRSP*. When you withdraw from your TFSA, the withdrawals are not taxed as income and, because of that, will not cause any decrease in your benefits.

In order to overcome the temptation of withdrawing from your TFSA* when you need extra money, you may want to consider opening two TFSAs; use one for savings, allowing for the occasional withdrawal for spending on short-term expenses, and the other for longer-term savings like retirement. (Remember, your annual TFSA contribution limit stays the same even if you are dividing it up between two separate TFSAs.) You could even hold your retirement TFSA as a Guaranteed Income Certificate (GIC) where the rate is guaranteed but the funds are locked in for a specific period of time, such as one or two years, so you wouldn’t have easy access to the money. Such an approach can help your TFSA money to continue growing over the years.

As to your question of needing a new advisor, only you can answer that question—but here are some comments to consider. People may sometimes find themselves questioning the advice provided and feeling somewhat uncomfortable with the experience. There is often no fault on the side of the advisor, nor on the client’s side. Financial services is a highly regulated industry, which explains the paperwork required and the statements received. The regulators control what information the client must receive about their investments; but you are right, it is often hard to decipher.

It’s important, then, to find an advisor who can help you with this. As in all industries, some people are better communicators than others. Look for an advisor who is experienced, reputable and has industry credentials—and who is also able to speak to you at a level you understand and that makes you feel “heard.” When meeting with your advisor, feel free to bring along a list of your prepared questions so you can ask what you want.

Of course, you can find a new advisor if you really want a change, but I would first try to work with your current advisor. Ask them for simple explanations of your statements and the recommended strategy. Tell them what your concerns are about your TFSA. Ask them how you pay them for their services. You can up your game by learning more about your investment choices and financial strategies. This will lead to an increased level of discussion between you and your advisor, and that can bear fruitful results.

Janet Gray is a fee-for-service Certified Financial Planner with Money Coaches Canada in Ottawa. 


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