Some common RRSP mistakes we all need to avoid
August 4, 2022
Those of us who don’t have a workplace pension – or want to augment it – are pretty familiar with what a registered retirement savings plan (RRSP) is. However, there can be tricky things to watch out for when investing your RRSP savings. Save with SPP had a look around the Interweb to highlight some RRSP pitfalls.
The folks at Sun Life identify five RRSP no-nos. First, they tell us, is the mistake of putting cash in your RRSP to meet the deadline, and then not putting it into an investment of some kind. Be sure you invest the money in something – “stocks, guaranteed investment certificates, mutual funds, bonds and more” so that your RRSP contributions grow. Your money grows tax-free until you take it out, so you need to have growth assets, the article says.
Another problem identified by Sun Life is raiding your RRSP cookie jar.
“Making RRSP withdrawals before retirement to, say, cover bills or make big purchases can have lasting consequences. For one, you’re giving up the years of tax-deferred growth your money would have generated inside your plan.” As well, the article continues, you’ll face a double tax hit – a withholding tax is charged when you take money out of an RRSP, and then the income from the withdrawal is added to your overall income at tax time. Double ouch.
Other things to watch out for, Sun Life advises, are overcontributing (be sure you know exactly what your limit is), spending your tax refund instead of re-investing it, and not being aware of RRSP/RRIF tax rules on death.
The Modern Advisor blog cautions folks against making their RRSP contributions “at the last minute.” If you spread your contributions out throughout the year, you will get more growth and income from them, the article advises.
Other tips include making sure your beneficiary selection is up to date, and knowing that contributions don’t have to be made in cash, but can be made “in kind,” such as by transferring stocks from a cash account to an RRSP account.
The RatesDotCa blog adds a few more.
On fees, RatesDotCa points out that many RRSP products, typically retail mutual funds, charge fairly hefty fees. “Canadians pay some of the highest fees in the world,” the article notes. “Over many years, these fees can add up, further reducing your retirement plan. Be sure to ask for a thorough explanation of the fees you can expect, and how they will affect your retirement plan,” the article advises.
Other ideas from RatesDotCa include not repaying your RRSP if you do borrow from it, not taking “full advantage” of any company pension plan (meaning, contribute as much as you can to it), and retiring too early (the article notes that both the Canada Pension Plan and Old Age Security pay out significantly more if you wait until age 70 to collect them.
Save with SPP can add a few more, gleaned from our own “welts of experience” over 45 years of RRSP investing.
Don’t frequently move your RRSP from one provider to another. This is called “churn,” and can result in hefty transfer fees and generally reduces the long-term growth needed for retirement-related investing.
If you borrow to make an RRSP contribution, do the math, and make sure the loan amount is affordable. Sometimes the bank or financial institution will want the money repaid within a year.
Be sure your investments are diversified, and include both equities and fixed income, plus maybe alternative investments like real estate or mortgage lending. Typically, if one sector is down, others may be up.
If you don’t want to think this hard as this about RRSP investments, consider the Saskatchewan Pension Plan. Contributions to SPP are treated exactly like RRSP contributions for tax purposes. You can’t run into tax trouble by raiding your SPP account because contributions are locked in until you reach retirement age. SPP offers a very diversified portfolio in its Balanced Fund, and fees charged by SPP are low, typically less than one per cent. Since its inception in 1986, SPP has averaged eight per cent returns annually – and although past results don’t guarantee future performance, it is a noteworthy track record. Check out SPP today!
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Written by Martin Biefer
Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.
> As well, the article continues, you’ll face a double tax hit – a withholding tax is charged when you take money out of an RRSP, and then the income from the withdrawal is added to your overall income at tax time. Double ouch.
I feel like I’m missing something!
Calling this a “double tax hit” seems odd to me. By similar logic, couldn’t I say that employment income faces a double tax hit? After all, a withholding tax is charged when my employer pays me, and also all my income from employment is added to my overall income at tax time. Double ouch!
But in both cases, the withholding tax is just a prepayment of the taxes I would owe at the end of year. If too much is withheld, I’ll get a refund. If too little, I’ll have to pay to top up.
It seems further odd because this is in the context of withdrawing from your RRSP prior to retirement…but isn’t the withholding tax the same regardless of whether you are employed or retired? I suppose if I’m married, and my spouse is over 65, we can pension split the income, which would allow us to pay less tax overall… but again, I don’t think the withholding tax piece really changes?
Thank you for taking time to read our blog and to comment. When you withdraw funds from and RRSP and pay the tax, the gross amount of the withdrawal is added to your other income. If this bumps you into a different tax bracket, you could end up paying additional tax. This is an important aspect to consider if withdrawing from RRSPs.