Pattie Lovett-Reid

Chief Financial Commentator, CTV

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As the 2016 RSP season draws to an end, there are a few trends happening which could compromise the savings of those with good intentions when it comes to saving for retirement.

The RSP is a plan and not an investment. You get half the equation right by putting money away for your retirement, but miss the point of putting it in the plan leaving it in cash. Ideally, you develop an investment strategy that will grow over time while letting time and compounding work its wonder for you. Income generated within the plan is tax deferred with the objective down the road you being that you may have less income coming in and be in a lower tax bracket – which means you will ultimately pay less tax.

If you have been savvy enough to tuck some money away for retirement in an RSP, I hope you will be savvy enough to leave it in the plan. So often people will dip into their RSP and treat it like an emergency fund or maybe even use the money for a home renovation, vacation etc. Actions like this will translate into a tax bill come April which could then set you even further behind. Your financial institution will charge you a withholding tax of anywhere between five to 30 per cent, depending on the amount you withdraw and depending on your marginal tax rate it could be more come April.

There are exceptions to this statement – the Homebuyers' Plan for first-time buyers and the Lifelong Learning Plan. No tax is withheld at the time of the withdrawal but it should be noted you do have to the pay money back within a prescribed period and the extent to which you miss a schedule payment – the payment amount will be taken into income that year. In other words, you will wind up paying tax on it.

'Know your limit and stick to it' might apply to playing the lottery, but it is also true for your RSP contribution. The RSP limit for 2017 is the lesser of 18 per cent of your 2016 earned income or $26,010. If you choose to contribute and are focus on the 2016 contribution deadline of March 1, 2016 the maximum amount is $25,370. Look at your income earnings for 2016 and potential for 2017 and determine where you will get your biggest bang for your investment buck. Something to consider is that you can do a one-time lifetime over-contribution of $2,000 but going beyond this limit will result in a 1 per cent tax penalty monthly on the excess funds.

Once you have contributed to your plan, consider sitting in cash until you decided how best to invest the money. Don’t rush but you don’t want leave your money in cash for too long. You want that money working for you and yet you want to get the investment strategy right. Once your investment strategy is in place, be sure to review it at least annually to ensure it is aligned to who you are as an investor and continues to reflect your retirement goals. All too often people will put their money into their RSP, invest it and then leave it unattended to. 

CTV's Chief Financial Commentator Pattie Lovett-Reid offers a financial tip of the day during the month of February for Your Money Month.