Three RRSP Mistakes to Avoid

It’s that time of year: Minimize taxes and maximize returns.

Ashley Redmond 15 February, 2024 | 2:16AM
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PylonDon’t blink, or you’re going to miss it: February 29, 2024, which is the Registered Retirement Savings Plans (RRSPs) deadline for contributing to an RRSP for the 2023 tax year. And December 31 of the year you turn 71 years of age is the last day you can contribute to your own RRSP.

In terms of contribution limit, it’s 18% of the income you earned in the previous year. The maximum contribution you can make to your RRSP is 18% of the previous year’s income. The current fixed contribution limit for 2023 is $30,780.

With the looming deadline in mind here are three common RRSP mistakes and how best to avoid them:

1. Treating RRSPs Like an Investment, Not an Account

“I find this one happens more often when people are dealing with the banks. People will walk into their local branch in late February and do an RRSP contribution because they need to save money,” says Scott Sather, Founder and Planner at Awaken Wealth Management Ltd. The problem is that they don’t have a plan. And they’ll buy the fund of the month.

“I have seen almost every single fund in a single portfolio,” he adds. Bigger banks are notorious for this. Sather* emphasizes: “Please don’t wait until the end of February to make a random contribution.”

Call your financial advisor now and figure out what the plan is for this year. Or if you’re a DIY investor – get organized today to minimize tax implications and maximize returns.

2. Getting Tangled in Contribution Room Drama

  • Unused Contribution Room – All Canadians should have access to CRA My Account for Individuals. Once you’ve logged in your Unused Contribution Room number is available.
  • Cumulative Contribution Room – If you’re not maxing out your RRSP every year, your RRSP contribution room carries forward. These numbers are also available on CRA My Account for Individuals. Unused Contribution Room and Cumulative Contribution Room are essential to consider in your 2023 tax return and overall financial plan. RRPS are tax-deductible, it’s wise to utilize this vehicle and allow compound growth to work its magic.
  • Excess Contribution Room Penalty- There is a $2,000 buffer offered by the CRA.Meaning, you can over-contribute a cumulative lifetime total of $2,000 to your RRSP without incurring a tax penalty. This feature is designed to create a buffer in case an unintended calculation error in your contributions is in breach of the RRSP rules. However, a tax penalty of 1% per month applies to amount that was overcontributed (more than $2,000).

3. Not Taking Advantage of Lifelong Learning Plan and HBP

And let’s be honest, as the housing market currently stands, this is necessity for many young Canadians looking to purchase a home. Spouses or common-law partners may each withdraw up to $35,000 in the same year thereby gaining access to $70,000 in total. The amount borrowed from your RRSP under the Home Buyers’ Plan must be paid back to your RRSP in full over 15 years. Similar to the LLP (below) you are using pre-tax dollars, which is advantageous. Plus, if you pool your RRSP savings with other sources of funds you have a good shot at accumulating a down payment of 20% of the purchase price and avoid paying for mortgage insurance.

  • Lifelong Learning Plan (LLP) - The Lifelong Learning Plan (LLP) allows you to withdraw up to $10,000 in a calendar year from your RRSPs to finance full-time training or education for you or your spouse or common-law partner.

As outlined by the government - As long as you meet the LLP conditions every year, you can withdraw amounts from your RRSPs until January of the fourth calendar year after the year you made your first LLP withdrawal. You cannot withdraw more than $20,000 in total.

What’s so special about this program is that you’re using pre-taxed money to begin with, while not paying taxes or interest on the borrowed amount; you’re essentially borrowing it from yourself.

The downside is that you’re losing out on cumulative retirement savings and the money must be paid back. Any amount that isn’t paid back by the deadline is included as income for the year it was due.

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Ashley Redmond

Ashley Redmond  is a writer for Morningstar Canada.

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