As a Canadian savings program, Registered Retirement Savings Plan (RRSP) has helped millions of Canadians plan their life and lifestyle before their working career comes to a close or starts to wind down. However, getting the most out of your RRSP contributions requires a thorough understanding of this tax-advantaged investment vehicle.
Read on to learn more about some of the common RRSP mistakes and how you can avoid them.
Are You Making Some of these RRSP Mistakes?
1. Withdrawing Funds Early: While it is possible to withdraw from your RRSP account at any time, withdrawing funds before retirement would mean:
- You lose the contribution room and tax-deferred growth.
- You will pay a withholding tax of 10% to 30% depending on the amount withdrawn.
- The withdrawn amount will be added to your taxable income for the year, and you will likely pay a higher marginal tax as per your applicable income tax bracket.
Ideally, you should aim to use RRSPs as the last resort for any unplanned expenses. You may pay lesser for the interest on using a credit line than the tax that you will incur for early RRSP withdrawal.
2. Overcontributing: Overcontributing to RRSPs essentially means you have invested more than the maximum contribution limit set by CRA in your previous year’s Notice of Assessment. While there is a buffer of $2,000 overcontribution that you can use over your lifetime, any contribution in excess of that will attract hefty penal taxes of 1% per month until you withdraw the excess or build additional contribution room to accommodate the surplus.
3. Only Putting Cash in your RRSP: Although a less-known fact, you can hold many types of investments in an RRSP. This includes mutual funds, bonds, guaranteed investment certificates, stocks, and more. Remember, your money grows tax-deferred until your RRSPs mature, or you withdraw from your account. In order to extract the maximum benefits of the tax-deferred, tax-sheltered RRSPs, look at investing your contributions in financial vehicles that offer more returns instead of relying on cash alone.
4. Procrastinating or Getting Sidetracked: Contributing early and regularly is key in extracting the most benefit out of your RRSPs. Whether you contribute weekly, biweekly, monthly or once a year, regular contributions will boost your savings due to compounding growth, enabling significant accumulation by the time you reach your golden years. While the past couple of years has caused disturbances in the economy and employment, don’t let the market swings deter you from making regular RRSP contributions.
5. Not Reviewing the Plan: An RRSP plan is not about just opening an account and making periodic or lumpsum contributions. At the end of each year, take the time to review your current and potential income and long-term financial goals. Revisiting the plan will help you adjust your RRSP contributions, as well as plan the right deduction amounts for the appropriate years based on expected earnings.
Let Us Help You Make Smart Plans for RRSP Contributions
At Nour Private Wealth (NPW) , our elite team of investment planning advisors serves clients across seven Canadian provinces. We can help you create smart retirement finance strategies that ensure a longer-term perspective and diversified approach to investing while remaining aligned to your risk tolerance and applicable time cycles.
Get in touch with our knowledgeable and experienced wealth advisors for the best possible assistance with RRSP contributions and other retirement finance plans.