No one wants to drop the ball with their RRSPs but experts say pitfalls are common. Here are some mistakes to avoid with your RRSP:
The last-minute rush
Tom Hamza, president of the Investor Education Fund, says too many people see contributing to their RRSP as an end-of-year chore when, in fact, it should be a regular ritual. Waiting until the last second to dump money into your RRSP is a recipe for disaster as deadlines can pass and money you were planning on putting away might get diverted for emergencies.
“The RRSP is a critical tool for your long-term savings and in order to save effectively you have to do it consistently,” Hamza said.
Spreading yourself thin
Nadine De Palma, a financial adviser with brokerage firm Edward Jones, says forcing yourself to max out your RRSP contribution might not always be the best option. While keeping your RRSP fed is important, sometimes it might be more prudent to invest elsewhere, such as back into your mortgage. Get professional advice to see how you can maximize your financial efficiency.
Digging in the cookie jar
Accessing RRSP money before retirement can be costly because of withdrawal taxes usually ranging from 10 to 30 per cent of the amount you withdraw. Worse yet, you pay tax on the full amount of the withdrawal — so if you take $10,000 out of your RRSP but pocket only $8,000 after paying the withdrawal tax, you’ll still pay tax on the full $10,000 amount. No matter how badly you may want to pull money out of your RRSP, take a good long look at whether taking the money out will be worth it.
“Taking money out of the RRSP should be considered a last resort,” De Palma said.
Taking it all at once
Hamza says many people make the mistake of trying to take their whole RRSP out early as a lump sum, rather than partitioning it out as a stream of regular income payments because higher taxes on a lump sum will likely mean less money in your pocket overall.
“If you take a lump sum, that sum can be taxed heavily, and after tax, the value will be much less,” Hamza said.
Aiming too high
Lastly, don’t take unnecessary risks with your RRSP. You aren’t trying to strike it rich — you’re creating a steady income stream for your retirement.
“As we mature and reach that retirement phase, it’s important to reduce exposure to the market. We shift from the saving mode to the income mode. Focus on quality investments for the long term,” De Palma said.