Changing attitudes towards RRSP contributions in Canada: It’s complicated

“I don’t care about my retirement right now, I care about staying alive.”

Walter Schultz, who is in his 40s, lives in Kitchener, Ont., and through his employment as a technician at a lab, he has a deferred profit-sharing plan and an employee Registered Retirement Savings Plan (RRSP). For now, at least, he says that’s as much as he’s willing to invest towards his so-called golden years.

“I watched how the markets were tanking last spring and while you want to do the right thing, you don’t want to throw money down a rat hole,” says Schultz of his decision to hold off on individual contributions to his RRSP early in 2020. 

On top of the effect COVID-19 was having on the market, he worried about the virus itself. “Without going into detail, I’m classified in the at-risk category when you do the screening for COVID,” he says. “Seeing how the economics of the world was going and as my life could be in jeopardy here, I thought ‘OK, it’s time to suspend putting that little bit extra that was being stashed away and not having access.’ I stashed away some cash separately to have it on hand in case of dire need.”

Schultz isn’t the only one who has changed how he saves; the pandemic has been giving us all the financial feels. Canadians’ savings habits are always examined during the tax season but this year, we have the health concerns surrounding the pandemic, growing inequality and an unemployment rate of 9.4% motivating us to take an extra-close look at our money. 

In its 2021 Investor Sentiment Report, Scotiabank found that while 32% of surveyed Canadians plan to contribute to an RRSP, more than half—56%—won’t be contributing. It also found that almost half of Canadians (47%) plan to contribute to their Tax-Free Savings Account (TFSA) this year. When it comes to savings and managing risk, 33% of Canadian investors are moving into lower-risk options or holding off on investing altogether, while 15% prefer to keep their money in savings accounts.

Survey results tend to exist in a semi-vacuum, often not revealing the financial circumstances of the people who answered. The survey raised questions like: Why are we saving or not saving money? What has made us change our spending habits? And have those habits really changed? The short answer is yes, we all want to be more liquid (with easy access to cash should we need it), and financial insecurity has informed where we’re putting our money. 

Worried about paying tax on CERB

Some of this is behavioural, says Shannon Lee Simmons, Certified Financial Planner, Chartered Investment Manager and owner of The New School of Finance. She says one-third of Canadians contributing to their RRSPs is in keeping with the year-over-year average—but this year, there is a lot more anxiety. 

We asked MoneySense Twitter followers what they’re doing with their RRSPs this year (they’re well above the average):

According to a new Scotiabank investor sentiment report, 56% of Canadians will not be putting $$$ into their RRSPs. With the deadline fast approaching, we wanted to ask:

Will you (or have you already) made an #RRSP contribution for the 2020 tax year?

— MoneySense (@MoneySense) January 27, 2021

“I’ve never [witnessed] this much apprehension about RRSP season,” Simmons says. “One reason is because people are trying to get it right. People are really worried about the tax consequences of CERB [Canadan Emergency Response Benefit]. [Some] people who were laid off last year collected CERB and are employed again, so they have a little bit of money, which they’re putting into their RRSP to try to combat that looming tax bill.”

People who aren’t as financially stable are feeling frustrated that they won’t be able to contribute to their RRSPs to offset the tax payable on CERB and CRB payments, says Simmons. 

She is also seeing people who are fortunate to have continued income put their emergency fund into their RRSPs: “I keep telling people don’t do that!” 

Saving in an emergency fund

When it comes to why people aren’t contributing to their RRSPs, Simmons has a theory and it comes down to uncertainty. “When you put money into an RRSP, it’s in there and you have to pay tax to get it back out. People are really worried about money right now and I think the whole world got one big lesson on emergency funds.” 

She says financial professionals have been talking about emergency funds for years but the topic was so unsexy, no one was paying attention. The widespread financial uncertainty COVID-19 has brought about changed it. “Now, it’s like ‘damn, I wish I had one,” she says. “I feel that now people are taking it seriously and rebuilding their emergency funds, so it’s not that they’re not saving; it’s just that they’re not saving specifically in their RRSP. They want flexible money.” 

That was the reasoning behind Schultz’s decision to pause his RRSP contributions. “I live clean, I don’t drink or smoke, but I have to be careful of other people. Right now, I want to stay alive and have money in case I get ill and can’t go to my work. I need to eat and bills need to be paid.”

It should be noted that Schultz’s employer takes the pandemic very seriously and practises good hygiene—but he’s a pragmatist and wants to be prepared for the worst-case scenario.

Inequality and a lack of financial pressure mean nothing changed

For some, the pandemic hasn’t had any real financial impact. Darryl Brown, an independent investment consultant at You&Yours Financial, found there hasn’t been a huge difference in his clients’ financial situations and didn’t think the survey results reflected them. “People who have income to contribute to their TFSAs and RRSPs haven’t really been affected by the pandemic,” he says. “It is a luxurious place to be—to not be struggling to pay your bills.”

He has noticed, though, that liquidity has become more important for his clients. And the pandemic has highlighted the need for a financial plan. 

Opening RRSPs and TFSAs during COVID-19

Last year wasn’t entirely negative for some Canadians who started saving money in RRSPs and TFSAs for the first time. KJ Aiello, a freelance writer based in Toronto, started her retirement accounts due to the pandemic. “I am worried about a recession, which I think is coming, and since my husband and I are both self-employed, I don’t want to be in a position where bank accounts run dry.” 

She started an RRSP because she thought at 41, it was about time, and also started a TFSA for protection when work dries up. “One of my clients isn’t sending too many briefs at this point because they’re in the construction industry in the U.S. That prompted me to start these accounts.”

The TFSA is her emergency account. Despite its name, a tax-free savings account lets you hold a wide variety of investments, including cash, bonds, securities, ETFs, mutual funds and GICs. The best part? Interest, dividends and capital gains earned on investments you hold inside a TFSA are not taxable, even when you make withdrawals.  

Among the many benefits of contributing to an RRSP and TFSA is that interest compounds over time, so the earlier you start contributing, the more time you have to take advantage of compounding. Schultz does plan to get back on the RRSP wagon once he feels physically safe. For now, he says, pausing contributions “wasn’t a hard decision to make. You have to be strategic with your money but you also have to be tactical in the present.” 

Despite receiving less work from her existing clients, Aiello has managed to fund her new TFSA and RRSP by spending frugally (she and her husband have been spending less because they’re not buying clothes or travelling) and proactively chasing down new work. 

Like Schultz, she’s comfortable with her financial decisions. “I should have done this a long time ago before the pandemic,” she says. “I don’t know why I waited so long.”

MORE ON RRSPS:

• What to consider if you still have RRSP contribution room
• When are tax-deferred and tax-free accounts actually taxable?
• How to maximize your last-minute RRSP contribution
• What’s my RRSP contribution limit for 2020?