RRSP (Registered Retirement Savings Plan) is a savings plan in Canada that is designed to help people save for their retirement. The contributions made to the RRSP are tax-deductible, making it an attractive option for many high income earning people. However, despite its popularity, there are several common mistakes that people make when it comes to RRSPs. Here are the top 3 RRSP errors to watch out for:
- Procrastinating – Like anything in life, the earlier, the better. RRSP contributions can be made at anytime during the year, but in order for them to count toward a particular taxation year the contribution must be made within 60 days of the year in question. For example, your deadline to make a contribution that counts towards your 2022 year is March 1, 2023. Guess what so many people do… They wait until the last minute to contribute. While it’s great that you’ve made the contribution, you’ve missed out on an entire year of potential TAX-FREE investment income. Over the long run, this can lead to thousands of dollars of lost wealth.
- Low Diversiﬁcation – Many investors tend to fall in love with one type of investment. Whether it’s real-estate, tech stocks, 2nd mortgages, whatever. Novice investors can sometimes pile all their eggs into one basket leading to a portfolio with poor diversiﬁcation. Investment diversiﬁcation is the process of spreading your investments across different assets and markets to reduce risk and increase potential returns. The idea behind diversiﬁcation is that if one investment performs poorly, the impact on your portfolio will be minimized because you have other investments that may perform well. This helps to balance your overall risk and reward. Additionally, diversifying your investments gives you exposure to a wider range of markets and economies, which can lead to greater stability and a more balanced portfolio. In short, investment diversiﬁcation is essential for managing risk and maximizing returns, and it is a key aspect of a successful investment strategy.
- Improper Allocation – RRSPs should not be viewed as a stand-alone investment, but rather, as part of your family’s overall investment strategy. I’ve often consulted on high-income families who’s RRSPs are loaded with equities and their taxable accounts loaded with high income generating securities such as mortgage investments. Simply switching these investments around (high-income in the RRSP and equities in the taxable account) can lead to significant long term tax savings. Tax and investments are heavily intertwined and investment decisions should always consider tax consequences.
In conclusion, RRSPs can be an effective way to help you and your family build a tax-efﬁcient retirement strategy, but care must be taken to ensure you’re doing it right.
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