TFSA contributions are trouncing those of RRSPs. Why that’s a concern

TFSAs are beating up on RRSPs.

The tax-free savings account has only been around since 2009, while registered retirement savings plans were created in 1957. But age and experience count for little in today’s savings world. Data from the Canada Revenue Agency shows that TFSAs have been drawing in more money than RRSPs in recent years, and the growth rate in TFSA contributions makes RRSPs look kind of sad.

We should celebrate saving in whatever form it takes – TFSAs, RRSPs or cash under a mattress. But there’s reason for concern in the numbers on RRSP and TFSA flows. While people are saving increasing amounts from year to year, they’re also pulling out a lot of money. This may help explain why TFSAs are usurping RRSPs – it’s way easier to withdraw money from a TFSA.

Registered retirement accounts, including RRSPs, remain vastly larger than TFSAs in terms of the total assets. In 2012, the most recent year that Statistics Canada has tracked, total assets in RRSPs as well as registered retirement income funds and locked-in retirement accounts was almost $960-billion. The most recent TFSA tally shows a fair-market value of $151.6-billion in 2014.

But TFSAs surpassed RRSPS in annual contributions by a hair in 2013 and then zoomed ahead, CRA data show. About $40.5-billion went into RRSPs in 2014, while TFSAs took in $45.8-billion. TFSA contributions jumped 14 per cent that year, while RRSP flows rose just 2.8 per cent.

TFSAs have become more popular because they’re seen as being more flexible and forgiving than RRSPs, said Janice Holman, a principal at the consulting and actuarial firm Eckler Ltd. Many people like the idea that income from TFSAs in retirement will not cause a clawback of Old Age Security benefits, or the Guaranteed Income Supplement. Some also appreciate that you can replace money withdrawn from a TFSA. When money is taken out of an RRSP, that contribution room is lost.

As well, money can be withdrawn instantly and tax-free from a TFSA using online banking or an online broker, while RRSP withdrawals involve paperwork and taxes. There are withholding taxes on withdrawals, and it’s likely you will have to pay more tax when filing your income tax return. The tax hit from income generated by RRSPs and RRIFs is a top complaint of seniors.

While $45.8-billion was contributed to TFSAs in 2014, a total of $18.4-billion came out. “My surprise is that TFSA withdrawals weren’t higher,” Ms. Holman said. “Money is stickier in a TFSA than I thought it would be.”

RRSPs, on the other hand, are leaking like a sieve. The CRA numbers show that in 2015, RRSP contributions came in at very close to $41-billion and withdrawals came to $15.4-billion.

Some RRSP withdrawals are made by people who are retired, but haven’t yet converted their savings into a RRIF (this has to be done by the end of the calendar year in which you turn 71). But people do seem to be getting more comfortable with the idea of using their RRSPs as a source of cash before they retire. Over the six years from 2009 to 2015, RRSP contributions rose an average annual 2.8 per cent while withdrawals increased 4.6 per cent.

Ms. Holman said that among the workplace group RRSPs she follows, almost all withdrawals are done in cash. There is minimal use of the federal Home Buyers’ Plan, which allows the withdrawal of up to $25,000 for a down payment on a first home. We know a lot of home buyers are using the HBP – clearly they’re dipping into their personal RRSPs as opposed to their group RRSPs at work.

Someone making a cash withdrawal from a group RRSP has to explain why to the plan administrator, Ms. Holman said. The excuses she’s heard come down to the fact that people want to spend money they had earlier committed to savings. “It’s really for consumption,” she said. “People have become so short-term focused. It worries me a lot that they are not going to have sufficient RRSP savings.”


Growth in TFSA contributions is a testament to this savings program’s huge value in getting Canadians to save more for both short- and long-term goals. But the leakiness of RRSPs is a worry. RRSPs are fake savings if you’re going to dip into the money before you retire.

July 5, 2017
The Globe and Mail
Rob Carrick

ByVision Financial Solutions

Certified Financial Planner

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