No matter what the markets are doing, RRSPs are still one of the best ways you can save for long-term goals like retirement. So take full advantage of them, and avoid making the following mistakes:
Skipping just one annual contribution of $5,000 could reduce the value of your RRSP by almost $17,000 at the end of 25 years (assuming a 5% annual rate of return). So, it’s important to contribute every year to take advantage of tax-sheltered compounding growth.
If you’re rushing to meet the deadline, it’s easy to make a bad investment choice or none at all. So choose a variable-rate option for your RRSP contribution. Then, later, when you’ve carefully evaluated your options, transfer your ‘parked’ money into an appropriate investment.
Waiting until the last minute
Life is busy, so you may end up scrambling to contribute just before the RRSP deadline. A smarter approach is to put your savings on autopilot and have smaller pre-authorized amounts deducted from your chequing account regularly throughout the year. You’ll get the advantage of dollar cost averaging, improve your chances of maxing out your RRSP every year and get the advantage of tax-deferred compound growth working for you earlier.
If you don’t have enough cash on hand to contribute, then consider moving investments from your non-registered plans to your RRSP. This ‘in-kind’ contribution can be made with various investments deemed eligible. Remember, you’ll have to report any capital gains earned on your investments up to the date of the transfer.
You’re allowed a $2,000 lifetime over-contribution. If you exceed this, you may be subject to penalties of 1% per month. So before making a contribution, check the Notice of Assessment the Canada Revenue Agency (CRA) sent you for your allowable contribution room.
Cashing in a portion of your RRSP has significant tax consequences unless you’re doing so through the Home Buyers Plan or Lifelong Learning Program. First, your financial institution is required to immediately withhold between 10% and 30% of the amount withdrawn and forward it to the CRA on your behalf. Plus, your total withdrawal must be reported as income and taxed accordingly. In the end, the cash you’re left to spend may only be half of the amount initially taken out. So, cash in your RRSPs only as a last resort.
Forgetting to update beneficiaries
If you’ve had any major changes in your life, be sure to update who you’ve designated as a beneficiary.
Spreading your RRSP accounts across multiple investment firms may result in additional account fees and over-complicate the tracking of your investments. Plus, in order to make proper recommendations, anyone advising you should have a full understanding of all your holdings and their combined diversification and risk. So consider consolidating all your RRSPs.
Not income splitting with your spouse
If you’re the family’s higher income earner, you can invest some or all of your contributions in your spouse’s RRSP and claim the tax deduction. The big benefit comes at retirement, when more equalized nest eggs can reduce your combined tax bite and mean more cash to live on.
Talking to an investment expert on a regular basis can help you stay on top of your progress, your investments and your options. If you find yourself making any of these mistakes, contact the Credential Asset Management Inc. Mutual Funds Investment Specialist* or Credential Securities Inc. Investment Advisor** or Credential Financial Strategies Representative*** associated with your SCU branch. They’re here to help you take a fresh, smarter look at your investments.
Mutual funds are offered through Credential Asset Management Inc. The information contained in this article is provided as a general source of information and should not be considered personal tax advice, investment advice or solicitation to buy or sell any mutual funds.
Mutual funds and other securities are offered through Credential Securities Inc. The information contained in this newsletter is provided as a general source of information and should not be considered personal tax advice, investment advice or solicitation to buy or sell any mutual funds. Credential Securities Inc. is a Member of the Canadian Investor Protection Fund.
Credential Financial Strategies Inc. is a member company under Aviso Wealth Inc., offering financial planning, life insurance and investments to members of credit unions and their communities.
Everyone’s saving situation is unique – and there are many strategies that work for different circumstances. The advice in this article is meant to provide general information only, and does not constitute financial, accounting, tax, legal, or other professional advice. We encourage you to seek personalized advice from qualified professionals regarding your unique savings needs and goals.