Dale Jackson

Personal Finance Columnist, Payback Time

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A new survey from Edward Jones shows just over half of Canadians plan to make a registered retirement savings plan (RRSP) contribution before the March 1 deadline.

That’s a big jump from 33 per cent in last year’s survey; suggesting Canadians are emerging from the pandemic ready to tackle the future and - in most cases - reap a handsome tax refund in the spring.

The RRSP has become a primary source of retirement savings for most Canadians since its introduction in 1957.

It has also become a primary source of myths and misunderstandings as the finance industry jockeys for the billions of dollars in RRSP savings.

Here are eight:  

1. You must contribute by March 1

Wrong. You only need to make your contribution before March 1 if you want to deduct it from your 2022 taxable income. You can contribute any time and claim it in future years.

2. You must invest your contribution by March 1 to get a refund

Wrong. You can park it in cash before the deadline, claim it on your 2022 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 or the advantages of an RRSP are lost. 

3. RRSPs are a tax exemption

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 RRSPs provide a deferral, or shelter, from taxation until funds are withdrawn, ideally in retirement when you are in a lower tax bracket.

4. You cannot withdraw from your 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 withdraws 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 

No, it’s just Ottawa returning part of what you already paid during the year through payroll deductions from your employer. 

Contributors might be disappointed to learn RRSPs only provide an investment advantage if the refund is reinvested and those tax savings can compound over time.

6. You should contribute as much as possible

According to that same Edward Jones survey, 23 per cent of those contributing this year are making the maximum allowable contribution; 18 per cent of their previous year’s income to a maximum of $27,230.

That could be a costly mistake for those with plenty of time before retirement. Even if you don’t contribute the maximum allowable amount, an RRSP that grows too large could subject withdrawals to a higher marginal tax rate. 

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 contribute something to your RRSP

Not always. There are times when your dollars would be better spent elsewhere. 

One poignant example comes from last year’s massive hike in borrowing rates. There are no RRSP investments that could guarantee returns even close to the double-digit interest rates on consumer and student loans, lines of credit, or credit card balances - even after you factor in the tax savings. If you’re one of the many Canadians struggling with a high level 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 cannot be deducted from income but is not taxed when it is withdrawn. 

It’s important to note unused allowable RRSP contribution space can be carried forward to future years. Save that space for higher income years.

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

Far from it. 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, some options, exchange traded funds (ETFs), which almost always carry lower fees.