By Jon Chevreau National Post FP Investing, Personal Finance Wednesday, January 22, 2003

Say thanks to higher RRSP limit by maximizing yours

It would be a welcome start but raising the annual RRSP contribution limit to $21,000 would only begin to restore pension parity with other countries and our own political class.

If the upcoming budget boosts limits as is being contemplated (see page A1), beleaguered middle-class investors should respond quickly and show their gratitude for this overdue measure -- they should maximize their Registered Retirement Savings Plans by this year's March 3 deadline.

Beg or borrow to do so but don't steal; as tax lawyers joke, the government hates competition. And granting extra RRSP contribution room would indeed "cost" Ottawa in the short term. Every $1,000 increase in RRSP contribution room "costs" the government $200-million in tax revenue, says Department of Finance spokesperson Andree Houde, citing 1999 data. She would neither confirm nor deny that limits are slated to rise.

"From the political input we have been receiving, the politicians are onside," says Charlie Pielsticker, chair of the Retirement Income Coalition.

Keep in mind RRSP limit s are already scheduled to rise to $14,500 next year and to $15,500 in 2005, after which limits will be indexed to average wage growth.

So if a $21,000 limit is confirmed by the budget, the extra "cost" would be just over $1-billion, based on current RRSP take-up patterns.

Furthermore, the foregone revenue would ultimately be recouped by taxing forced minimum annual withdrawals of Registered Retirement Income Funds (RRIFs). This is another issue which needs redressing. RRIFs of today's retirees are being depleted too quickly because withdrawal rates were set when interest rates were far higher.

Higher RRSP limits would be welcomed by ageing Baby Boomers who have lost retirement savings in the bear market and with it precious RRSP contribution room, says actuary Malcolm Hamilton. Many Boomers are "beginning to suspect markets may not recover any time soon."

It's possible the contemplated increase is a trial balloon floated pre-budget in the hopes the usual anti-RRSP camps will shoot it down. They argue the 50% capital gains inclusion rate and dividend tax credit allow non-registered savings to effectively supplement RRSPs.

Financial author Gordon Pape disagrees. "The combination of the tax refund and the long-term sheltering the RRSP offers are still the better bet. The limit has been frozen far too long. Canadians need more room, especially with the decline in defined benefit pension plans."

The Canadian Alliance has been calling for an increase to at least $18,000 and wants to raise the foreign content beyond 30%.

Boosting the absolute RRSP contribution limit would raise foreign content, anyway: 30% of a bigger pie is a larger slice.

An alternative to raising the absolute limit is to adjust the alternate maximum of 18% of earned income. This could be bumped to the 20% it used to be, or beyond. That would help lower and middle-income earners who don't earn the $75,000 needed to get the $13,500 maximum, says Adrian Mastracci, a Vancouver-based fee-only planner with KCM Wealth Management Inc.

Hamilton, of Toronto-based Mercer Human Resource Consulting, doesn't agree. "There's no need for normal incomes to save more than 18% in order to retire at a reasonable age with a reasonable pension. There's no harm giving them the extra room but they'd be silly to use it." Lower income workers need to put aside only 6% to 9% of earned income, since government pensions like Canada Pension Plan and Old Age Security provide half their retirement income.

The 18% maximum constrains few, but the $13,500 limit unreasonably constrains the small percentage of the population who pay a significant portion of Canada's income tax, Hamilton says.

Raising RRSP limits also helps those in employer-sponsored Registered Pension Plans, whether defined benefit or defined contribution. Those in DB plans with limited RRSP room may find themselves constrained by the Pension Adjustment, but employers could put aside more on their behalf and pay out a larger pension, Hamilton says.

Those in other types of pensions "may get part of the improvement in higher pension benefits and part in increased RRSP room."

Assuming pension limits are boosted in line with RRSP limits, employers would be on the hook for higher contributions to employees. Hamilton believes most employers would welcome the opportunity to boost tax-assisted pensions for their workers.

With political priorities shifting daily, I'll believe the higher limit when I see it on budget day. But it's reassuring that senior Finance officials are at least seriously contemplating the move.

Get out your chequebooks...

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.