Don’t Make These Top 3 RRSP Errors

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:

1. 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.
2. 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.
3. 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.