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Dale Jackson

Personal Finance Columnist, Payback Time


After two years of pandemic lockdowns, Canadians appear to be refocusing their attention on their financial futures.

A recent poll from Royal Bank of Canada suggested that 53 per cent of us are making our registered retirement savings plans a priority ahead of the March 1 contribution deadline. That’s up from 46 per cent at this time last year. 

At last count, 70 per cent of Canadian tax filers have an RRSP; a testimony to its success as a retirement savings tool. However, there are many myths, misunderstandings and misconceptions about RRSPs. Here are a few common ones:

1. You need to make your RRSP contribution before March 1

Wrong. You only need to make your contribution before March 1 if you want to deduct the full amount from your 2021 taxable income. You can contribute any time and claim it in future years.

2. You need to invest your contribution before March 1 to claim it for 2021

Wrong. You can park it in cash before the deadline, claim it on your 2021 tax return, and decide how to invest it whenever you want. Don’t wait too long, though. As inflation takes hold it’s best to have it invested in something that grows.

3. RRSPs are a tax exemption

Wrong. Tax exemptions are forever. RRSPs provide a deferral, or shelter, from taxation until funds are withdrawn; ideally in retirement when you are in a low tax bracket.

4. You can not withdraw from you RRSP until you retire

Not true. It might make sense to withdraw from your RRSP in years when your income is severely reduced and you are being taxed at a low marginal rate anyway. Withdrawals before 65 years of age are subject to a withholding tax at the source, but any excess amount will be returned when you file that year’s tax return.

Early withdrawals can also be made with no tax consequences for first-time home purchases or continuing education provided they are returned within a specific period of time.

5. The tax refund from your contribution is a windfall

Sorry. It’s just Ottawa returning part of what you already paid during the year through payroll deductions from your employer. Actually, RRSPs only provide an investment advantage if the refund is reinvested and tax savings can compound over time.

6. You should contribute as much as possible

Probably not. Even if you don’t contribute the maximum allowable amount, an RRSP that grows too large could put you at a high tax rate when it comes time to withdraw. Eventually, Ottawa will force you to make minimum withdrawals. If the amount is too high you could face Old Age Security (OAS) benefit claw backs as well.

7. You should always contribute something to your RRSP

Not always. Despite what the banks tell you, there are times when your dollars would be better spent elsewhere. One stark example is high-interest debt like credit card balances, which could top 20 per cent, or even student debt at ten per cent.

There are no RRSP investments that could guarantee returns even close to that even with the tax advantages. If you’re one of the many Canadians struggling with record amounts of debt, pay it down.

If your debt is under control but your income and marginal tax rate are low, a better option could be investing in a tax-free savings account (TFSA), which can not be deducted from income, but is not taxed when funds are withdrawn. Save that RRSP space for higher income years. 

8. You can only hold mutual funds offered by your bank

No way. Most Canadians invest for retirement through mutual funds, and most mutual funds are purchased through their financial institutions. “Advisors” are often mutual fund vendors, and their advice is often to purchase the mutual funds that pay them the best commissions. Most offer prepackaged portfolios of mutual funds for diversification; but RRSPs can be invested in just about anything; stocks, bonds, options, exchange-traded funds (ETFs), which almost always carry lower fees.