This year’s RRSP deadline is March 1, 2022. In the rush to get those contributions in, some of us may make some crucial RRSP mistakes. Zeljka Walker, Senior Investment advisor at TD Wealth, joins Kim Parlee with four RRSP missteps that investors can watch out for.
- The RRSP deadline is fast approaching. While people rush to get those contributions in, there might be a few common mistakes that people make. Here to tell us what to watch out for is Zeljka Walker. She's a senior investment advisor at TD Wealth.
Zeljka, always great to have you with us. I'm going to jump right in here. Why, first off, just to remind us, why is it so beneficial to contribute to your RRSP?
- Well, RSPs are an excellent way to save for retirement. I mean, although it's not the only way, but it's a great way to save now and defer your taxes for later. So essentially, you put contributions in your RSP, have it grow tax-free, and then one day, upon retirement, you can start withdrawing from it. So it's an excellent way to have your wealth grow.
- Let's get to the common mistakes. And mistake number one is you say people are so focused on the deadline, they forget you can actually make a contribution any old time.
- Exactly. So you're right, people focus so much on that deadline. And the deadline is there, yes, if you want to make a contribution to apply for previous year's income. So if you're scrambling now to get it in before March 1st, essentially it's because you want to get that contribution in and get your tax deduction for 2021. But you don't have to. If you forego it, you can absolutely carry that forward to future years. You don't have to rush out and get that in by March 1st.
- Now let's go to mistake number two. And that says you need to invest the money to get the credit on your taxes, which means I need to know exactly what I want to put my money towards in the RSP before I get the tax credit. And that's actually not true.
- That's not true. As long as you make a contribution, you get that cash into that RSP account, that vehicle, then you will get that tax receipt that you can make that deduction. You can actually invest it later. You don't have to rush out. But certainly be mindful that you don't want to leave it in cash for a very long time, as it's not earning anything. You want to keep up at least with inflation, have that grow. Talk to an advisor and see what's best for you to invest in that RSP cash.
- All right, well, and mistake number three, speaking of talking to advisors, that everybody should contribute to an RSP every year. And that may not be the case.
- It may not be wise to do so, for example, in low income years. If you are not working or your income is quite low, it may not make sense for you to make that RSP contribution. And it might be worthwhile for you to forego that year, and have that accumulate, carry forward your room in future years and make the contribution later, when your income is higher.
- Mistake number four, that your RSP always has to hold just one particular kind of investment. Not true.
- Not true. An RSP is just a vehicle. It's not a product. So you can open up an RSP account either online, where you're self-directed, with an advisor, at the bank, and you can choose what investments you want inside. It could be pretty much anything out there you can invest in your RSP, as long as don't keep it in cash, because that defeats the whole purpose of that tax deferral. Have something that will provide you some growth.
- Got it. And last one I'll ask you is, of the mistakes I mentioned, did we forget anything? Anything else we should watch out for?
- Well, the main thing I want people to remember, that the RSP contributions are not tax exempt, they're just tax deferred, meaning you will eventually pay tax, but that'll be later on in life, when you decide to start taking money out. It will be considered as income. It'll be taxed as income. But at that point, most likely you'll be in a lower tax bracket. So that's one.
Two, don't forget that RSP is not only for retirement, but you can borrow from it. You can, like I said earlier, take out up to $35,000 to borrow to buy your first home, or up to $10,000 for education. And you just pay yourself back. So do remember that the RSP can provide you other types of benefits, other than just saving for retirement.
- Zeljka, always a pleasure. Thanks so much.