Hindsight. Isn’t it great? Let me share with you some common mistakes and missteps related to RRSPs so you can make sure you’ve got your eyes wide open on the dirt road full of potholes on your way to retirement.
1. Confirm who you have named as your RRSP beneficiary. You can have multiple beneficiaries, you can designate the % allocation to each beneficiary, and you can name a charity as your beneficiary. I’m sure you still love your ex-spouse at some level, but keeping him or her as your beneficiary might not be your intention.
2. Remember that you cannot claim a capital loss within your RRSP, so it doesn’t usually make sense to put your riskiest investments in your RRSP. Check your overall asset allocation for all of your accounts combined and make sure you’ve got the ‘where’ question right: that your high risk investments are in the right place/account.
3. Since you’ll eventually pay tax on withdrawals as if the investment returns were interest (i.e. taxed at your highest marginal tax rate), it makes sense to ‘shelter’ your interest-bearing fixed income (i.e. bonds) in your RRSP. Even though interest rates are pathetically low, you may as well get this ‘where’ question right too: your highly taxed investments are in your RRSP
4. While it’s convenient to make ‘in-kind’ contributions to your RRSP (i.e. you move existing shares from your non-registered account to your RRSP fully intact and claim the market value-equivalent as your RRSP contribution), you’ll lose the capital loss if it exists, but you’ll still have to pay the capital gain if it exists. I know, no fair.
5. There’s a chance that your income in retirement will be higher than while you were working (I know, a nice burden to contemplate) which is painful if it puts you in a higher tax bracket. If you have pension income coming to you in retirement, you’ll likely have no control over how much you receive in a given year and also no control over the fact that it is taxed at your highest marginal tax rate. If your minimum RRSP withdrawals push you up a tax bracket, you’ll be sharing your hard earned savings with CRA. Ask your advisor to do some what-if calculations of your retirement income situation with respect to taxes and make sure you’re not blindly exposing yourself to higher taxes.