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RRSP pitfalls to avoid

 
(Special) - While the Registered Retirement Savings Plan (RRSP) is a great vehicle to help Canadians save for their retirement, there are some pitfalls that investors may not knowabout and should try and avoid.
 
Many people, forexample, confuse their contribution limit with the deduction limit.
 
The deduction limit isset at 18 per cent of your previous year's earned income, up to a dollar limit,which changes every year. The maximum dollar limit for the 2012 tax year is$22,970, up from $22,450 in 2011, and will rise to $23,820 in 2013. It iscontained in the Notice of Assessment that you get each year from the CanadaRevenue Agency after you have filed your return.
 
If you have not beencontributing the full amount to your RRSP and have unused contribution room,your contribution limit could be higher than the deduction limit. If, forexample, you have $20,000 of unused contribution room from previous years, youractually contribution limit for 2013 could be $43,820, your 2013 deductionlimit plus your past unused contribution room.
 
Another pitfall can besaving too much in your RRSP and having too many accounts.
 
An RRSP of between$700,000 and $2 million, for example, may sound great, but that money will betaxed at some point. A retiree with such a large plan would be in the 46 percent tax bracket and would have their Old Age Security (OAS) clawed back.
 
Having your financialassets spread over several plans can lead to a disorganized investment strategy,duplication, inappropriate asset allocation and paying more fees than if allinvestments were consolidated in one account.
 
Waiting to the lastminute to make your contribution is another common pitfall. It can lead tomaking emotional decisions or parking the money for too long on the sidelines.By contributing early or making regular contributions during the year you getthe tax-sheltered returns starting sooner and get the advantages of dollar costaveraging.
 
Many people may notrealize they have a choice when they can actually claim their RRSPcontribution. You don't have to do it in the same year that you actually makethe contribution.
 
"If your incomeis below $45,000 one year but you expect it will go up the next year, you canmake the contribution but then wait until the second year to actually claimit," explains Myron Knodel, director of tax and estate planning withInvestors Group. "In this way you would get a greater tax break from yourcontribution because you are claiming it in a year when your income ishigher."
 
Many people also maybe investing in the wrong things in their RRSP.
 
The advantage ofinvesting in registered accounts such as RRSPs and Registered Retirement IncomeFunds is that the money is only taxed when the funds are withdrawn. When youtake money out of your RRSP at 71, you are taxed at your marginal rate at thetime, which is usually lower than when you were working full-time.
 
As a general rule,it's better to invest in fixed income in your RRSP and equities outside of yourRRSP in a non-registered account.
 
You can claim acapital loss from equities if they are in a non-registered account whereas youcan't if they are in a registered plan. And capital gains made on equities heldin a non-registered account are taxed at only 50 per cent of the individual'smarginal tax rate.
 
Consequently,non-registered accounts generally should contain equities and dividend payingstocks instead of interest-bearing investments such as Guaranteed InvestCertificates and bonds which should be in your RRSP.
 
Don't withdraw yourmoney from your RRSP early because it is taxed very heavily and try to takeadvantage of both your RRSP and the Tax Free Savings Account (TFSA).
 
Although the TFSA wasintroduced five years ago, a recent BMO Bank of Montreal survey found that fewer than half ofCanadians have been making the maximum contribution of $5,000 a year. Themaximum contribution this year is going up to $5,500.
 
"Look at whatyour tax rate is now and what you expect it to be when you retire," Knodeladvises. "If you expect your marginal rate will go down when you retireit's better to make contributions to your RRSP and take the tax refund andreinvest it. If you are not saving for retirement a TFSA is usually preferableto an RRSP because you can remove money from it tax free but funds removed fromyour RRSP is taxed when removed. "
 
Talbot Boggs is aToronto-based business communications professional who has worked with nationalnews organizations, magazines and corporations in the finance, retail, manufacturingand other industrial sectors.
 
Copyright 2013 TalbotBoggs
 

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