RRSPs: Separating Fact From Fiction

Feb 16, 2022

As RRSP season gets into full swing ahead of the March 1, 2022, contribution deadline, we thought it might be instructive to review a few common fictions, fallacies and falsehoods surrounding this vital – and hugely important – retirement savings tool. What you’ve heard about RRSPs may not be entirely true, so we’ve compiled a list of facts to help guide and inform you.

The popularity of RRSPs, despite some annual fluctuations, seems solid. According to Statistics Canada: “Just over 5.9 million Canadians contributed to a registered retirement savings plan (RRSP) in 2019, down 1.5% from a year earlier. However, the amount they contributed rose 1.8% to $44.3 billion for a median contribution of $3,260.” That’s encouraging.

Initially introduced in Canada in 1957, the RRSP has attracted more than its fair share of confusions over the years that, if not clarified, can lead to unnecessary investor hesitation. As always, your credit union financial advisor can be an excellent source of advice and reassurance.

What You Need to Know About Making RRSP Contributions

1. The RRSP Contribution Deadline Is Not Cast in Stone

By making your contribution before March 1, 2022, you are entitled to deduct the full amount from your 2021 taxable income. That said, contributions are acceptable at any time and deductions can be claimed in future years. For specific guidance on limits and timing, consult your credit union financial advisor.

You don’t necessarily need to make your contribution before March 1 to claim it for 2021

There’s something out there called “parking”. Translated, it means you can allocate your contribution in cash before the deadline, claim it on your 2021 tax return, and subsequently decide how to invest it as you want. “Parking” helps you avoid making a rash time-pressured decision.

2. RRSPs Are Not Tax Exempt

Many people think RRSPs are tax-free, but nope. RRSPs provide a deferral, or shelter, from taxation until your funds are withdrawn, at which time they are taxable. A tax exemption is forever. RSSPs offer temporary, but not permanent, relief from tax.

3. Contrary to Popular Opinion, Your Tax Refund Is Not a “Bonus”

If only. You’re simply getting back what you’ve already paid in. That said, you can find an investment advantage if you reinvest the refund and enjoy compounded tax savings. Our government doesn’t believe in freebies, but your financial advisor will be able to give you advice on how to minimize your tax liability.

4. Maxing out Your Contributions Isn’t Always the Goal

You can over-contribute to an RRSP. An RRSP that grows too large can also put you at a high tax rate when it comes time to withdraw funds and precipitate an Old Age Security (OAS) benefit claw back. Expert advice is key.

5. It’s Okay to Skip Contributions as Needed

This is particularly true if you’re carrying an unacceptably high credit card balance or any other kind of high-interest debt. The banks want you to maintain your debt levels because it’s profitable for them to do so. Paying off your credit card balance costs them money and there are certainly circumstances where it’s better to reduce debt than contribute to an RRSP. This is another key instance when your financial advisor can help you make an informed decision.

Consider Personalized Advice

If you don’t already have a financial advisor working for you, then perhaps you may want to think about making an appointment with one of the credit union partners who stand behind Everything Retirement – Coastal Community Credit Union, Interior Savings and Coastal Community Private Wealth Group. It’s never too late to enlist a financial advisor who can not only give you RRSP advice, but also assist you in creating a financial plan with your future and your eventual retirement in mind.

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