Written on February 18, 2013 at 12:19 pm, by Rhonda Sherwood
RRSPs can be a great savings vehicle to fund the retirement lifestyle you envision. However, there are pitfalls that have financial consequences that you want to avoid. When making choices about your investing for your retirement be aware of the 5 most common pitfalls:
Not regularly Reviewing your RRSP beneficiaries
If you started contributing to your RRSPs many years ago it’s probably time to review your beneficiaries on the plan. If you had named a parent or your estate and have since gotten married or are in a common-law relationship, it makes good tax sense to name your spouse as beneficiary. If you have been divorced, you may need to remove your spouse as the beneficiary. In a situation where you have a financially dependent child or grandchild, you might consider naming them. Naming the right beneficiary is important to ensure the funds are transferred without incurring taxes.
Putting Your Government Pension Benefits at Risk
One major disadvantage of RRSPs is the tax consequence when you withdraw money from your plan. If you have a high level of pension income coming in already in retirement you may want to assess with your financial advisor whether you should be putting money into a TFSA versus an RRSP. If you have too much income in retirement not only will you be taxed heavily with RRSP withdrawals you might also lose some of your Government Old Age Security pension. Low-income earners also qualify for the Guaranteed Income Supplement which would be at risk if RRSP withdrawals brought your overall income above the minimum threshold.
Paying Too Much Tax in Retirement
If you will have a sizable amount of pension income in retirement you will need to assess whether an RRSP is the right savings vehicle for you. It may provide a tax incentive today but in retirement withdrawals from your plan will raise your overall tax bracket on all your income. A TFSA may be the better option.
Withdrawing Money from Your RRSP Early
Taking money out of your plan before you retire should be a last resort. The funds are counted as income for the year in which they are withdrawn and may be heavily taxed. You also lose out on the opportunity grow your savings over time.
If you are looking for a savings account you may need to access for an emergency, a TFSA may be a better option. You can access your money as needed without any tax consequences.
Claiming the Deduction in a Year that Provides Little Tax Advantages
You don’t have to claim your RRSP contribution in the same year you made it. If it doesn’t provide any tax relief it’s often better to hold off using the deduction until you are in a higher tax bracket. Your accountant or financial advisorcan provide help with this.
Do you have questions about the RRSP pitfalls and how to avoid them? As an experienced financial advisor, I can explain how to get the maximum benefit from retirement savings plans. Please contact me today for your personal consultation.