The privileges enjoyed by labor-sponsored funds, namely the tax credits to which their contributors are entitled, are not unanimous. From the point of view of the saver, it remains a considerable advantage.
The result is a 30% or 35% tax credit, depending on whether you choose the Solidarity Fund of the FTQ or Fondaction of the CSN. This is called “starting with a head start”.
The big question: in a regular RRSP, what return should I get on my investment and how long does it take to catch up and beat an RRSP investment that starts with a 30% advantage (itself net of tax)?
I will focus here on the FTQ Fund whose performance history goes back much further. I emphasize that we can no longer contribute to it during this RRSP season, the fund has already closed its doors to lump sum contributions for the year 2020.
The Solidarity Fund has enjoyed excellent returns for ten years, and during this period it even outperformed the main index of the Canadian stock exchange, the TSX. Its compound return is 6.97% over ten years, compared to 5.82% for the Canadian stock market (not including dividends, which give the stock market the advantage).
Over the past five years, the fund has posted an even higher compound return of 7.49%. In fact, you have to look back over a period of twenty years to find it faulty. The value of the shares hardly advanced during the 2000s, in particular because of the financial crisis that occurred at the end of the decade. For twenty years, its compound return therefore seems less brilliant, at 3.46%.
We must take all these figures with a grain of salt, I remind you of them as an indication. In investing, the past does not guarantee the future.
It takes time !
To carry out this analysis, I received a helping hand from Benoit Chaurette, tax expert and financial planner at the center of expertise of Banque Nationale Gestion privée 1859.
For our calculations, we compared two very simple scenarios: a single contribution of $ 1,000, in the Solidarity Fund on the one hand and in an ordinary RRSP on the other.
In both cases, we have assumed that the contribution qualifies for a 40% refund. This money and, where applicable, the loan from the workers’ fund (30%) are reinvested alongside, in a non-registered account that provides the same return as the ordinary RRSP.
This detail is fundamental. If the tax credit serves instead to enhance the vacation package in the South, the labor-sponsored fund RRSP loses its main financial benefit (although, in material terms, it may open up access to a better buffet in Cayo. Coco for a short week).
We have assumed a compound return of 4% for the Solidarity Fund RRSP and 6% for the ordinary RRSP.
Ordinary RRSP 6% return
||Not registered (6%)
||After tax RRSP
Labor-sponsored fund RRSP, 4% return
||Not registered (6%)
||After tax RRSP
So what is going on? With these parameters, it will take 20 years for the one who opts for the ordinary RRSP to catch up with the other who has chosen the labor-sponsored fund. If we lower the return on the Solidarity Fund to its 20-year return (3.46%) and if we go back to 7% (double) that of the ordinary RRSP, the latter will catch up for 13 years, and if ‘he has breath. Maintaining a 7% return over a long period of time after paying management fees is no small feat!
Other advantages and disadvantages
- Fund returns are not guaranteed, nor is that of a balanced portfolio in a regular RRSP. At the time of contribution, the only insured element is the 30% tax credit. The closer you get to the investment deadline, the more difficult the tax credit becomes to beat.
- Over the longer term, however, it can be frustrating to have assets tied up in a labor-sponsored fund. Someone who develops investment skills over time cannot repatriate that money to manage it himself, unless he pays a penalty.
- Withdrawing your money from a labor-sponsored fund is more complicated. It’s irritating, but it’s good. It protects the investor from impulsive and unfortunate decisions, as we saw last spring.
- Investments in these funds are also much less volatile than stock market investments. One can wonder about the methods of valuation of the assets of labor-sponsored funds, but the fact remains that their variations are less nauseating to the investor.