This article first appeared in the Toronto Star, Feb. 14, 2015

 

Financial advisers take you to task on what to do with your RRSP contribution

CAMILLA CORNELL

Special to The Star

As the gold-clad, defined-benefit pension plan increasingly goes by the wayside, your RRSP may be the only thing you’ve got to ensure a cushy retirement. But investing in an RRSP requires you to have at least a foggy idea of what you’re doing. Here, several financial advisers share their insights into the most common mistake people make when it comes to their RRSPs.

 

1.  Not completing a retirement plan with an adviser.

“Regardless of your age, you should still set a realistic goal for how much you think you need to retire,” says Paul Shelestowsky, CFP, a senior wealth adviser with Meridian Credit Union. That includes hammering out a budget so you have a clear idea of your income requirement now (and in retirement), then settling on realistic savings goals and choosing the right investments.

2.  Underestimating the boost you’ll get from even a small increase in monthly contributions.

“Most people tell me that saving an extra $50 a month won’t make a difference,” says Janine Purves, CFP, CPCA, a senior financial adviser with Assante Capital Management.  But consider this: if you put away an extra $50 monthly in your RRSP and increase that by just 2 per cent a year over 40 years, you’ll have an extra $99,237 in your RRSP.

3.  Wasting your tax refund.

“Part of the effectiveness of the RRSP is the tax deduction, as long as you use it correctly,” says Kurt Rosentreter, CA, financial adviser, Manulife Securities in Toronto. Use the refund to contribute to next year’s RRSP, pay down the mortgage or top up your child’s RRSP, he suggests. “When you blow it on trip or on ‘fun’, you lose one of the main benefits.”

 4. Betting big on a hot tip.

Your RRSP is no place for risky investments. “When you have loss inside of a registered account, you can’t claim it against your taxes, says Rosentreter. If you’re going to buy “lottery ticket” stocks, he advises, do it in a non-registered (open) account. What should be in your RRSP? Blue chip stocks and fixed income products (GICs, safe government or corporate bonds) that take a ‘slow and steady win the race’ approach.

5. Letting market worries torpedo you plan.

“Markets go up and down over time,” says Shelestowsky. Unless your overall plan has changed- for example, you’re retiring five years sooner than expected- keep making your retirement contributions, even in the face of market volatility. “In a perfect world, people should actually contribute more during downturn,” Shelestowsky says. “But behavioural investing biases usually ensure that won’t happen.”

6. Contributing regardless of your income.

If you make less than $20,000 a year, don’t make an RRSP contribution, advises Rosentreter. “Because of our progressive income tax system, at the lowest income level you pay little or no tax at all,” he says. “If you don’t have a corresponding amount of tax to recover (in the form of a tax refund), there’s no point in making a contribution in the first place.

7.  Over-contributing to an RRSP.

“People don’t understand how to read the notice of assessment,” says Rosentreter. His advice? Don’t forget to subtract this money you’ve already contributed (which shows up as B on your notice of assessment) from the actual contribution room (A). The Canada Revenue Agency will charge you 1 per cent per month on the excess contribution above $2,000 over your lifetime.

8. Paying fees and commissions inside your RRSP.

Your goal should be to preserve your tax-sheltered money. Most financial advisers can offer you investment products that are structured so that you pay the fees and commissions outside the RRSP. “If you like mutual funds, buy the F Class,” suggests Rosentreter.

9. Using money you’re going to need some time soon.

“Don’t waste your contribution limit by contributing and then withdrawing the money,” says Jennifer Black, senior financial adviser with Dedicated Financial Solutions in Mississauga. Why? First of all, you can’t get that contribution room back. And second, depending on your income, there could be tax consequences.

10.  Make savvy use of your contribution to lower your taxes.

Let’s say you’re lucky enough to receive an $85,000 inheritance and your already earn $100,000 per year. You could use up all your unused contribution room in one year and net a tax refund of $27,000 says Black. Or you could contribute over three years- strategically topping up your RRSP by $30,999 in the first and second years, and by $25,000 in the third year. The result would be total tax savings of $33,000.