Maxed Out

While I was having coffee the other day with some co-workers it came out that I was maxed out…no, not on credit cards, but rather RRSP contribution room and last year my wife and I maxed out of TFSA contribution room.

Until that moment I had forgotten how unusual that state of being is for most people.  The older people around the table all had unused RRSP contribution room of $30,000 to $50,000 and all of them make an healthy salary.  So it wasn’t the fact they couldn’t save, but rather they had chosen not to.

In total Canadian’s have $600 billion in unused RRSP contribution room, which is a lot of tax savings people are leaving on the table. Put it another way, if everyone used that up in a single year at a mere 26% tax rate the government would be out $156 billion in revenue.  That doesn’t even touch the used TFSA contribution room out there as well.

So why is saving such a difficult thing to do?  After all the amounts aren’t huge in the case of RRSPs it is 18% of your previous year income (less pension adjustments).  So if you had a defined contribution pension you could likely get 5 to 10% there, which leaves anywhere from 13 to 8% left to be saved.  Yet you get a tax refund on that money, so as long as you keep putting your refund back into RRSPs you really only have to save around 10% or less.  Can you not live on 90% of your income?

Granted if you don’t have a pension plan this takes a bit more planning to really pull off.  18% of your income can seem a big difficult, but that is why you need to get the tax refund at once rather than waiting until tax season.  How? You can use that handy tax form T1213 Request to Reduce Tax Deductions at Source.  By having a regular contribution plan setup, you can fill this out and send it in then a few weeks later you can start getting your refund on each paycheck rather than waiting the full year.  This helps keep your cash flow up while saving.  The downside of this trick is you do have to file it every year (in most cases).

I should also point out I also had extra RRSP contribution room for a number of years (~$30k).  It was only between some planning and adding extra money for years that we managed to catch up.  Yet it can be done and when you put your mind to it.

So have you ever maxed out some contribution room?  If so, how did you do it?  If not, what is preventing you?

11 thoughts on “Maxed Out”

  1. It physically hurts me to not have my retirement accounts maxed out. Last year ING Direct screwed up with reporting my TFSA withdrawals and I was overcontributing by around $20K as a result. O_o

    For all of 2013 I was gnashing my teeth because I was paying taxes on gains that I should not have been paying taxes on, and I had to eventually consider the plan of selling $20K of what I put in my margin account or eat into my current emergency fund, knowing I’d max out my TFSAs this year once everything got sorted out.

    I guess it is very unusual to have retirement everything maxed out.. although in my case it’s easier because I don’t have an earned income so I don’t have RRSP room and don’t get it any more. Only my TFSA needs to be maxed.

    I get paid with dividends and that doesn’t count for the CRA.

    Still even with that disclaimer, a lot of people my age and much older would be surprised at someone having maxed out anything.

    All said and done, I have about $80K in “retirement” accounts, maxed out. The best way to max out accounts or save money is to not see it at all. Just as you said, have it automatically deduct from your paycheque and you’ll learn to get used to living on less.

  2. Once it became apparent that my ER plan was going to materialize soon, I stopped contributing to my 401k because I needed to place an emphasis on my current account, not my tax-deferred account. I need to live off my current accounts for 15 years before I will have unfettered acces to my tax-deferred account.

    It was important to contribute up to the company match in the 401k because the match is basically “free” money. That advice is pretty common. Coincidentally (or not),when I was coming down the home stretch toward my ER in 2007-08, I had reduced my weekly hours worked and became ineligible for any company match dollars, so I was not faced with what might have been a tough choice between the match and the current account.

  3. You have to keep in mind that of the about 26 million income earners in Canada only about 12 million earn more than 35k. Median total income for 2011 per individual was $30,180 (according to Stats Can).

    People who earn that little would probably be better served using a TFSA or taxable account so as to have less income in retirement so that they get the maximum amount of assistance in retirement.

    Not everyone can be rich and have huge amounts of disposable income to choose to spend or invest.

  4. I have a pension, but still max out my RRSP and TFSA every year. There are some goofs (with no savings usually) around work who say things like, “I don’t think you should–it could eventually put you into a higher tax bracket when you retire.” My answer, “Oh, don’t worry about that–I plan to be in a way, WAY higher tax bracket than any of you people. …Millionaires usually are.” …At which point I get confused, angry stares.

    I *love* the rumours that the TFSA maximum could increase substantially in the next year or two. Gath Turner says $10K is possible. (And he’s usually right about things.)

  5. There are worse problems to have that being in a higher tax bracket.

    My TFSA is maxed, but I’ve got tons of RRSP room left. I had a lot of years when I was younger and making less money that it didn’t really make much difference tax-wise to put the money in. Now I’m making a very good salary and over-contributing to bring my taxable income down.

    My plan for tax avoidance later on is to draw out my RRSP gradually, and early, so that the taxable portion of my income (RRSP and dividend) is near the marginal rate, and top up with TFSA.

  6. Older friends keep telling me to invest in taxable accounts until my income is higher so that I get a bigger tax break once I put more money in. Still not convinced one way or the other. Been contributing to RRSP but not maxing it out due to lucrative share purchase program at work as well as TFSA.

  7. The dividends generated in our taxable account produce enough cash now to fully contribute to our TFSA’s and RRSP’s. Though, because of my DB pension, the pension adjustment severely limits what I can do with my RRSP… my wife however maxes hers every year and gets a very large refund, which we use to buy even more dividend stocks. We are really in a groove now.

    I know it is a reality for many, but I cannot imagine being in a position to not be able to take advantage of the gifts that are the TFSA, RRSP, etc…. if the do jack the TFSA limit to 10k per person, I’ll be smiling like the proverbial Cheshire Cat.

  8. Median income by family was $72,240 in Canada in 2011. I could (and did) save in an RRSP earning that.

    I find the same thing at work. Out of a group of ~10 *finance* people (earning about the same), only about 2-3 of us max anything out. The others max out their houses and vacations. One very smart lady ~ 10 years younger than I am just bought a house valued at about double what mine is and double what her previous (perfectly nice one) was.

    People there are depending on the pension I guess? Different priorities. Those are also the people who tell me they can’t envision themselves not working and urge me to keep working 🙂 – so maybe that is the right choice for them?

  9. My RRSP and TFSA are maxed out and I often forget how unusual that seem to be for most people. I just make them a priority. After putting money in them, if there is money left, that’s my fun money for the coming year. If not, well, too bad. But I always choose retirement first.

  10. Tour question: “So why is saving such a difficult thing to do?”
    I think with many, that they don’t give retirement much thought until it is too late. That and their priorities of satisfying their ‘wants’ as well as their ‘needs’.

    Your other questions: “So have you ever maxed out some contribution room? If so, how did you do it?”

    I am now 65, took an early(defined benefit) retirement package at 56. By retirement, I had used up all my contribution room and I left the RRSP’s untouched since then. I just lived within my means, rather modestly actually and managed to do it regardless of my divorce at age 41. It hasn’t produced great returns over the long stretch, I only started RRSP’s after I divorced when I was in my early 40’s, it is currently valued at $191,000. I never dug in to find out my total contributions though I can considering I have all my copies of my income taxes since I started work full time in 1973. I only plan to start withdrawing from my RRSP’s when I drop down from the 2nd to the 1st tax bracket or when I am forced to do so by law when I reach 71, whatever comes first. I assume that is a good tactic.

  11. My wife and I are both 31, and we both have maxed out RRSPs and TFSAs. Granted we both earn healthy incomes, but the biggest contributor BY FAR for us to max out our contribution room was we got married and moved in together. Sharing household expenses was the easiest way to give a boost to our savings.

    I started my career earning 35K/year as an auditor, knowing that my income would increase year by year. During my first 2 or 3 working years I didn’t contribute anything to my RRSP (no TFSA back then), as my income was not high enough (I wanted to max out that tax deduction). When my income was above $100k/year, I started putting money in, then I just plowed my tax refund right back in for the following year. Its pretty easy to max out your RRSP room if you pretend you never got a tax refund. I also never buy anything with bonuses that I receive, I just put them in my RRSP/TFSA/Margin account and pretend I never got them.

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