8 pitfalls to avoid in RRSP investing
Missing deadlines, over-contributions, poor tax planning are mistakes not to make
Each year, the weeks up to the end of February bring a flurry of marketing aimed at getting Canadians to put money into their Registered Retirement Savings Plans. Here are some things to keep in mind before investing your savings.
1. Don't miss the deadline.
This is the obvious one. You have until Feb. 29, 2016 at 11:59 p.m. local time to contribute to an RRSP for the 2015 tax year. It's a leap year, so you even get that extra day to get it done.
2. Don't rush into the wrong investment
Yes, there is a deadline you need to meet, but that doesn't mean you should just throw money into an RRSP without care. Consult an expert for a better idea of what investments are right for you at this stage in your life.
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3. Don't let the wrong partner in the relationship make the contribution
Many couples operate as two separate economic units and so they don't optimize the tax relief of the combined economic unit, says Rose Raimondo, a certified financial planner and the founder of Raimondo & Associates Ltd. in Calgary.
"The higher income earner should always be the one that is optimizing [the tax relief] before the lower income earner, in my view," she says. "Get the plan together."
If you both can maximize an RRSP contribution, then do it. But if you only have enough for one, make sure you've crunched the numbers for maximum tax relief.
4. Don't exceed your contribution limit
Your past year's tax assessment will tell you how much contribution room you have for the 2015 tax year.
Know that if you do go over the limit, you could end up owing money. The maximum lifetime over-contribution is $2,000 (or up to $8,000 if you had an over-contribution prior to Feb. 27, 1995). If you go over this, you could face a penalty of one per cent per month of the over-contribution while it exists.
If you accidentally go over the limit, ask your bank to fill out the paperwork to withdraw the money as soon as possible, preferably before you file your tax return.
5. Don't forget to appoint a beneficiary
We all have to go sometime. If you die when your RRSP hasn't matured, its full value will be taxed in your hands unless you have designated a spouse, common-law partner or your financially dependent child or grandchild as beneficiary.
If you name any of them as your beneficiary, your RRSP assets will be taxable in their hands in the year they get them, unless they are transferred into the beneficiary's own tax-deferred plan, according to Grant Thorton's tax planning guide for 2015/16.
6. Don't use RRSPs only as short-term savings
The key word is retirement. Yes, you can withdraw funds from your RRSP under the first-time homebuyer and lifelong learning plans, but the focus is meant to be on the long term.
Experts warn against using your RRSP to finance things such as a vacation or other big purchases.
7. Don't forget your spouse's RRSP
You have to collapse your RRSP when you turn 71 and you can't contribute to it beyond the end of the year in which you reach that age. However, you can use your unused RRSP contribution space to put money into your spouse's RRSP until the end of the year they turn 71.
8. Don't contribute at the wrong time
Diane Dekanic, the owner of Financial Health Management Inc. in Calgary, says if she is talking to 30-year-olds who make RRSP contributions and who have the possibility of higher earnings in the future, "there may be an advantage to delay making the deduction [to] when they are in a higher marginal tax bracket."