6 Things to Avoid when Withdrawing RRSP Funds
First, let’s take a quick look at how the RRSP works. As we mentioned before, an RRSP is a place you have to save for your retirement. However, other
Thinking about what will happen when you retire should be an essential part of your life. Luckily in Canada, there is an easy option that you can use for your retirement savings, and it’s called the Registered Retirement Savings Plan (RRSP). Even though you can contribute a determined amount each month, this account is also perfect for investments. If you want to make the most out of this opportunity, you should learn how to avoid common mistakes when withdrawing your RRSP.
First, let’s take a quick look at how the RRSP works. As we mentioned before, an RRSP is a place you have to save for your retirement. However, other characteristics make this account unique. An RRSP is a tax advantage account, which means, during the years you make contributions you won’t have to pay taxes. Instead, this will happen when you withdraw the funds. Plus, you can get a deduction from your tax return according to the amount you contribute to the RRSP.
Keep in mind that here we are only mentioning some of the benefits you will be able to enjoy. But, to do this process right and have a large fund for your retirement, we are going to tell you which things to avoid.
6 Mistakes to avoid when withdrawing your RRSP
1. Early Withdrawal
Upfront, the first thing that you should remember is that once you open your RRSP, you should not cash out the funds early. If you do this, you will be losing the contribution room and tax-deferred growth. Also, when you withdraw these funds, you will be double tax, and you will have to pay withholding tax. This withholding tax can be 10%, 20%, or 30%, depending on how much you decide to take out.
However, we understand that there are some instances in which you just need the money. It could be to pay the bills, buy a house or even cover your debts. But, before you withdraw from your RRSP, there are other options. Programs such as the Home Buyer’s Plan and the Lifelong Learning Plan, are free of any penalties and can give you access to a large number of funds. If you want to learn more about these options, click here.
2. Skipping the deadline
If you want to make the most out of your RRSP, one of the things that you should keep in mind is consistency. An RRSP account will give you the growth you are looking for only if you are committed. That’s why you need to remember the deadline and make the contribution beforehand. This will not only help grow the savings for your retirement, but further, you can use it to get a deduction on your tax return.
In case, you don’t know which one is the RRSP deadline, you can ask your financial advisor or the bank where you open the account. Also, if you don’t want to forget about your contribution, you can arrange regular automatic withdrawals.
3. Only contributing cash
Many people think that contributing to their RRSP is all about cash. However, that is not the case. The best part of having an RRSP is that you can start investing without having to pay taxes. On this account, you can hold single stocks, mutual funds, and equities, among other things. That’s why apart from contributing regularly to your RRSP, you need to move your hard-earned money.
When it comes to investing, you can start learning about it through books or even videos. But, you can also talk to your financial advisor and allow them to help you choose the best investment strategy according to your particular situation. If you do this for many years, you can accumulate interest income, capital gains, and dividends. That means your money can endlessly multiply in your RRSP.
4. Surpassing the contribution limit
Even though we understand that sometimes when you have access to more funds, you might want to contribute more, please avoid it. When you open an RRSP account, you will have a contribution limit. That means you can only contribute a certain amount of money during the year, which will be 18% of your past’s years income. If you don’t respect this rule, then you will have to pay a penalty of 1% monthly, depending on the funds you cash over the limit.
If you don’t know which one is your contribution limit, you can call the Canada Revenue Agency or find out online through their website. We understand that there are some instances in which you might go over the limit accidentally. That’s why the CRA factors that in and allow you an over-contribution of $2000 in a lifetime.
5. Spending your tax refund
As you know, when you make a regular contribution to your RRSP, that will result in a tax refund. Many people tend to spend what they consider this “free money” on purchasing the latest gadgets or clothes. But, this cheque is not a fund that you can spend since it’s part of your RRSP benefits. Right now, you might be wondering what that means. Luckily this part is easy to understand.
Imagine you fill out your tax return, and because of your contributions, you get a refund. What you need to do is deposit that money back into your RRSP. That way, over time, the refund will be larger throughout the years. Remember that when you are cashing this money, you should not surpass your contribution limit.
6. Not reading the succession rules
One main element you need to understand regarding your RRSP is the succession rules. This is something you should look into since it is the only way to ensure that when you die, your family gets the money. On this matter, the first step you need to take is naming your spouse or common-law partner. The reason why this is crucial is that in case you passed away, the assets will be transferred to them tax-free.
Further, if you don’t have a spouse, you need to name a dependant. This person will get the funds from your account, but these will be taxable. Unless the dependant is a child that is disabled or is under 18 years old. Make sure that all these plans are also stated in your will.
If you can avoid these mistakes and commit to your retirement plan, we are sure your RRSP will end up holding a large amount of money. Don’t forget that as a routine, you should revisit your plan at least once a year.