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A Registered Retirement Savings Plan (RRSP) is a type of investment vehicle that helps you grow your retirement savings. One of the main benefits of an RRSP is that you defer paying taxes on the money you contribute today and any investment income earned, until years later when you withdraw your money in retirement.
To help ensure you are getting the most out of your RRSP, here are five things you should try to avoid.
1. Withdrawing funds early
If possible, try not to withdraw funds from your RRSP before retirement. If you withdraw funds early, you lose that contribution room and the tax-deferred growth that comes with it. While all withdrawals are subject to withholding tax of 10% to 30%1, you’ll likely pay a higher marginal tax (percentage of tax applied to your income based on your tax bracket) as the money withdrawn will be added to your income for the year.
2. Contributing too much
It’s great to plan for your future, but putting too much into your RRSP can be costly. Over contributions to an RRSP can cost you a penalty of 1% per month on contributions that exceed your RRSP deduction limit by more than $2,000. Keep in mind that you can contribute up to 18% of your previous year’s earned income — up to a maximum of $29,210 for 2022, plus any unused contribution room from previous years.
If you have additional savings, you can also consider a Tax-Free Savings Account, which offers a cumulative total contribution room of $81,500 for 2022.*
A Scotiabank advisor can help review your options and recommend a solution that works best for you.
How do you find out your RRSP deduction limit?
Your RRSP deduction limit can be found on your most recent Notice of Assessment from the Canada Revenue Agency (CRA). You can also find it on your online myCRA account.
3. Procrastinating
Time is on your side when it comes to contributing to an RRSP – contributing early and on a regularly can help you build your savings easily and automatically. Regular contributions (weekly, biweekly or monthly), boosted by the power of compound growth can accumulate significantly over time. Speak with a Scotiabank advisor about setting up a Pre-Authorized Contribution (PAC) plan that works best with your financial situation to help achieve your savings goals.
4. Getting sidetracked by market noise
Keep in mind that an RRSP is a long-term investment. Depending on your age, there may be decades before you reach retirement. While market swings can be stressful, it’s important to stay invested and maintain a regular contribution schedule – even when markets get choppy. Having a longer-term perspective and taking a diversified approach to investing – aligned to your risk tolerance and specific time horizon – is often the best approach.
5. Forgetting to revisit the plan
It’s not enough to open an RRSP and make a lump sum contribution. Each year, you should take the time to re-evaluate your retirement goal – when you want to stop working and how much annual income you’ll need to do so comfortably – and adjust your plan if needed.
Legal Disclaimer: This article is provided for information purposes only. It is not to be relied upon as investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article, including information relating to interest rates, market conditions, tax rules, and other investment factors are subject to change without notice and The Bank of Nova Scotia is not responsible to update this information. All third party sources are believed to be accurate and reliable as of the date of publication and The Bank of Nova Scotia does not guarantee its accuracy or reliability. Readers should consult their own professional advisor for specific investment and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.
* Some conditions apply. Speak with your Scotiabank advisor for more details.
Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed or insured by the Canada Deposit Insurance Corporation or any other government deposit insurer, their values change frequently and past performance may not be repeated.