It’s that time of year again - RRSP and tax season! As you prepare your 2012 tax return, you’ll likely be thinking about whether or not you want to top up on your RRSP contributions, especially if it means ending up in a lower tax bracket. Before you do, though, you might want to consider some of these common RRSP mistakes – future and present.
RRSP Mistake 1: Not Having a Plan
No matter what stage you’re at, you need a financial plan and timetable to complete it in. Remember that your financial plan needs to stand the test of time, including the ebbs and flows of the market.
RRSP Mistake 2: Choosing the Wrong Plan
For some, their biggest mistake is making choices based on the products they buy into, not their overall financial plan. This is especially true when it comes to making last-minute decisions at tax time. Try not to be motivated by tax savings, but by your overall savings instead. I’m no guru, but one thing I’ve learned over time is to have a system. Don’t jump at risky investments with the promise of big returns. Likewise, don’t choose overly conservative products with high fees that won’t grow your money. Choose something in the middle, and be sure to diversify your investment portfolio.
RRSP Mistake 3: Relying Completely on a Financial Planner
This is your future. You should be applying the knowledge your financial planner offers up, but ultimately, the choice is yours. Question the long term pros and cons associated with the strategy offered by your planner to make choices that are best for you and your family.
RRSP Mistake 4: Putting all of your Nest Eggs Into One Basket
This is one of those great lessons you learned as a kid that seems to apply all through life. In this case, failing to diversity can leave you vulnerable. Invest your money into a number of different options – stocks, bonds, mutual funds and commodities – and know that if one fails, you still have a plan in place.
RRSP Mistake 5: Not Taking Advantage of Your Company Pension Plan
The company pension plan is becoming an endangered species these days, so take advantage if you're one of the lucky few - especially if your company offers to match your contributions dollar for dollar. When else are you going to get a deal like that? Think about it – nothing you ever invest in will ever payout like that. If the opportunity is there, take advantage of it.
RRSP Mistake 6: Not Understanding Mutual Fund Fees
Here’s what you need to know; regardless of whether or not your portfolio makes money, fees are paid out to your financial advisor. In fact, Canadians pay some of the highest fees in the world. Why do you think they’re so keen on selling them to you? Over many years, these fees can add up, further reducing your retirement plan. Be sure to ask for a thorough explanation of the fees you can expect, and how they will affect your retirement plan.
RRSP Mistake 7: Using your RRSPs to Manage Debt – and Not Paying It Back
This is just bad practice, period. Other than using your RRSPs as a down payment on your first home, you shouldn’t even consider that money as a debt solution. It’s too easy to take it out and not pay it back, and although the consequences of this won’t be felt until later in life, they are no doubt very real.
RRSP Mistake 8: Relying Entirely on the Canada Pension Plan
According to this piece in Moneyville, some experts say the government has more than enough assets to pay out its obligations for the next 75 years. However, other sources will tell you that it has a $70-billion shortfall. As The Star puts it, “People who are counting 100% on their pensions alone for a comfortable retirement might be in for an unpleasant surprise.”
RRSP Mistake 9: Retiring Too Early
The government offers incentives to those who choose to work longer. If you are 62 years old, the maximum you can get from CPP each year is $9,300. If you wait until you’re 65 to retire that number increases to $12,000 per year. Wait until you’re 70 and you’ll receive a maximum of $16,800 per year. Truth be told, most 62-year-olds aren’t ready to retire anyway, so what’s the rush? If you can stick it out a little longer, it’ll be so worth it.