The traditional, permanent full-time job is dying a slow death in Canada, and precarious work in the new “gig economy” is taking its place. This story is part of Precariously Taxed, a HuffPost Canada series that looks at how gig economy and contract workers can optimize their finances when it comes to tax time.
So you’ve got a part-time office job during the day, you’re driving an Uber in the evenings, and maybe you’re even renting a room in your home on Airbnb to pick up some extra cash.
Welcome to the world of work in Canada today. According to soon-to-be-published research carried out for TurboTax, fully 15 per cent of adult Canadians today have a side gig, and more than half of them — 55 per cent — landed that side gig within the past two years.
All of a sudden, we are living in a world of precarious work and part-time gigs. And for many out there, that reality means saving for retirement is just out of the picture. It’s not a part of the agenda. Which is a shame, because starting up a long-term savings plan early on in life can make an enormous difference in how well you live later on.
Save what you can — it will add up
When you start saving is one of the big determining factors in how wealthy you are later in life, said Laurie Campbell, CEO of Credit Canada.
If you start at 25 as opposed to 45, “my goodness, this is where you can excel,” she said. The savings “will grow exponentially over the 40 years if you work. It’s a benefit to (save some money) even in lean times.”
Watch: Canada’s federal taxes are changing this year. Here’s what you need to know. Story continues below.
Warren Orlans, an advisor and blogger with tax software company TurboTax, offers an illustration of just how much of a difference saving early on in life can make.
Assuming a typical rate of return, someone who starts saving for retirement at age 25 will have $900,000 in savings at age 65, provided they put aside $600 a month.
But someone who starts at age 45 will end up with just $600,000 at age 65 — and only if they save way more money, some $1,500 a month.
Simply put, when you start saving can determine whether or not you can afford to retire at all.
“Anything you can do to invest which is low risk, to preserve your money, is something you should be doing,” Orlans said. He cautioned not to “put all your eggs in one basket” but noted the important thing is to save.
RRSPs may not be right for you
The problem is, the financial instruments out there designed to help people save for retirement or education or anything else weren’t designed for gig workers and all the precarious jobs that are coming to dominate our economy.
They were meant for the traditional worker with a permanent, full-time job (remember those?). And for many low-income, part-time or temporary workers, the keystone of Canadians’ private retirement savings — the Registered Retirement Savings Plan (RRSP) — may not be right.
That’s because of how it’s designed. The money put into an RRSP is exempt from taxes in the year you squirrelled that money away. For this reason, putting money into an RRSP can get a salaried worker a large tax return the following spring. But if you’re an independent worker responsible for paying your own taxes, an RRSP contribution will only lower what you owe next spring.
That can help in the short term, but you might end up paying more money in taxes in the end. If you are earning a low income today, your tax break for an RRSP contribution will be relatively small. If your income is higher in retirement — you may be drawing on an employer pension, as well as CPP and Old Age Security — you might pay higher taxes at that time than you would have today.
“People are pushed into products that may not always benefit them,” Campbell said in an interview.
While an RRSP may not always be wrong for people in precarious work, many low-income earners should be looking at the TFSA instead — the Tax-Free Savings Account, Campbell and other personal finance experts suggested. While money in those accounts won’t get you a tax refund like an RRSP, the money you earn on those investments won’t be taxed, and when you take it out of your account, it won’t be counted as income for tax purposes — after all, you already paid taxes on that money before you put it in a TFSA.
And the other thing about a TFSA is that, unlike an RRSP, you can withdraw at any time without incurring a penalty. (The government charges a hefty “withholding tax” of up to 30 per cent on money you take out of an RRSP before age 65.)
And that makes the TFSA a much better savings instrument for someone in precarious work — who may in fact be able to keep their savings through to retirement, but could just as easily need money much sooner to make it through lean times.
The TFSA “is a huge blessing for low income people, and that’s something that is not being stressed enough,” Campbell said.
You are currently limited to putting no more than $6,000 into a TFSA in a given year, but the limit is cumulative over the years you’re in the workforce, so you may have tonnes of room from previous years if you’ve been in the workforce for some time.
But HOW do I actually save?
If you’re living hand-to-mouth in the precarious work economy, you may assume you don’t have enough to save for the long term. In many cases, you’d be wrong, but to realize it requires a change of mindset, Orlans says.
“You have to budget and be fiscally responsible.You have to cut a little now to take into consideration that you want to be alive for a long time,” he said.
Prepare for “unstable” earnings
Many people in gig-economy work or seasonal work, such as Uber drivers or fishers, will see much larger paycheques at some point in the year than at other times. Don’t make the mistake of blowing all your money when the cheques are fat. Make sure you set aside money to get through the lean times. If you don’t do that, you won’t stand much of a chance of saving for the long term.
Prepare for taxes
The first thing is to make sure you have saved enough for the tax hit you’re going to face in the spring, Orlans says. If you don’t have deductions taken off your paycheque, you need to set aside a percentage of your income to hand over to Canada Revenue — that’s taxes plus deductions like Canada Pension Plan contributions.
There are online tax calculators that can help you figure out how much that should be.
Equally important: File your taxes on time, because penalties and late fees to Canada Revenue are just a waste of your money. The tax-filing deadline for self-employed Canadians is June 15, but any money you owe is due earlier, on April 30. That’s when the CRA will start counting interest on what you owe. So do your taxes before April 30, even if you’re self-employed.
Maximizing your tax deductions is very important — it could actually get you the cash you need to put money towards savings. Everything from car expenses to some medical expenses can be deducted from your taxes. If you suffer from celiac disease, you can actually deduct the additional cost of buying gluten-free alternatives.
Tax preparation software like UFile, H&R Block and TurboTax can take you through the available deductions. Don’t gloss over this part if you’re self-employed.
Watch out for fees
When choosing a retirement savings product like an RRSP or TFSA, many people gloss over the fees their bank charges for those products. After all, it’s just one or two per cent, so who cares?
It can actually make all the difference, because that small percentage is charged again and again, year after year. Let’s say your retirement portfolio earns 5 per cent per year. If you pay a 1 per cent fee, you lose a fifth of your gains every year. If you pay 2 per cent, you lose two-fifths to fees — a whopping 40 per cent of the gains from your savings go to the bank.
So please, pay attention to fees.
And finally, institute a simple principle: No matter how little wiggle room you have, put something — anything — aside every year.
“Even if it’s a small amount, it all adds up at the end of the day,” Orlans said.