Tick, tock, tick, tock. The RRSP deadline of March 1st is fast approaching. Are you planning to take full advantage of your RRSP this year? The RRSP is the government’s way of encouraging us to save for retirement. While RRSPs have been around for decades, it seems like we’re still making the same mistakes. Let’s take a look at five common RSRSP mistakes to avoid this year.
1. Not Contributing Enough
Are you planning to mostly rely on CPP and OAS in retirement? Then you could be in for a rude awakening. Unless you work in the public sector and have a gold-plated pension plan, you’ll most likely need to put money aside for retirement. How much money you need depends on several factors outside of your control, including interest rates and how long you end up living in retirement. The best strategy to ensuring you have enough money in your golden years is to start saving early and regularly. Saving just $50 a month at age 25 can go a long way to retiring comfortably many years later.
2. Contributing Too Much
While not contributing enough to your RRSP is a mistake, so is contributing too much. Each year after you file your taxes, the Canada Revenue Agency advises you of your RRSP contribution limit for the year on your notice of assessment. The CRA lets you contribute up to $2,000 over your contribution limit without paying a penalty, but anything over that and you’ll face a steep penalty of one percent per month. To avoid this unpleasant surprise, pay close attention to how much you’re contributing to your RRSP over the year.
3. Not Taking Enough Risk
Do you still have bad memories about the financial crisis? While you don’t want to take too much risk with your investment portfolio, you also don’t want to invest too conservatively. By just investing in safe investments like GICs and bonds, you’ll be lucky if your investment returns keep up with the rate of inflation. A far better approach is to reduce your exposure to stocks and mutual funds as you get older, but don’t get out of them entirely. Otherwise, you might not have enough money to retire comfortably.
4. Taking Too Much Risk
On the other end of the spectrum is taking too much risk. If you’re approaching retirement, investing a large portion of your investment portfolio in something risky like Bitcoin is probably not a good idea. Although you could make a lot of money, you could also lose your life savings. With today’s low interest rates, retirees are struggling to find decent returns, but cryptocurrency isn’t the answer. A balanced mutual fund with reasonable MERs is a much better choice for most retirees.
5. Failing to Repay RRSP Loans
RRSP loans can be a great way to catch up on RRSP room, as long as you’re financially disciplined enough to repay them. Failing to repay your RRSP loan means that it could cost you a pretty penny in interest. Instead of taking out a loan, a far better approach is to get in the good habit of regularly contributing to your RRSP. That way come next year, you won’t have to take out a loan in the first place since you’ve already saved the money.
