hey guys it's adrian here the canadian in a t-shirt and today i'll be breaking down the
biggest rrsp mistakes to avoid in canada the rrsp the registered retirement savings plan is one of
the most powerful investing tools available to everyday canadians to fund their retirement if
used correctly you can reduce your tax bill and build long-term wealth for the future but the
rules can be confusing and a lot of canadians are not using the rrsp correctly in this video i want
to address some of the most important mistakes about the rrsp that you might not be aware of and
could be costing you a lot of money in the long run make sure you watch my previous two videos
rrsp explained where i go over how the rrsp works the rules to follow tax deductions withdrawals and
my investing strategy to get the most out of your tax sheltered growth click the pop-up at the top
right or click the link in the box below to watch those videos first to learn what you should do in
an rrsp this video is all about what you should not do in an rrsp as a super quick summary the
rrsp is a tax sheltered account designed to fund your retirement the rrsp offers two main benefits
one it allows your investments to grow tax-free this is extremely powerful and your investments
will grow much faster inside an rsp than they would in a non-registered account the second
benefit is that the rrsp allows you to defer your taxes for years or decades until retirement you
are able to reduce the amount of taxes you pay now in your high income years and pay a much smaller
tax bill when you retire and are in a much lower tax bracket the catch is that there is a limited
amount of contribution room which is why you have to be smart and make the most of it and
that takes us to our first mistake using the rrsp as a savings account this is frustrating because
the name itself is misleading it has the word savings in the name but really the rrsp should be
used as an investing account the real power of the rrsp is to invest in the long term and have your
investments grow and compound tax-free year after year but using your rrsp as a savings account
is frankly wasting its power interest rates are historically low so your savings account at a big
bank will pay you around 0.1 percent in interest that is pitiful even the best savings account in
canada eq bank only pays 1.25 percent and that doesn't even match inflation you'll barely earn
any interest income and so you're barely saving any money on taxes anyway instead if you invest
in quality stocks and etfs and hold them in an rsp you can reliably earn over seven percent
every single year and that's the kind of income you want to save taxes on i talk about this in
greater detail in my tfsa mistakes video a lot of those mistakes apply to both the tfsa and the rrsp
so make sure you check that video out as well the rrsp is more complicated and there's a lot more
that can go wrong so that's what i want to focus on in this video but here's the bottom line to
build long-term wealth hold investments in your rrsp leave your savings out of it just like the
tvs say you have a limited amount of contribution room and it is your responsibility to keep track
of how much available room you have but unlike the tvsa your rsp room depends on your income and
there is no minimum age limit so even if you are a teenager as long as you earned income you can open
an rrsp before the age of 18. here's how it works your rrsp contribution room will be 18 of your
earned income from the previous year earned income includes your regular employment income from your
job plus your net business income and net rental income notice that earned income does not include
investment income so dividends and capital gains do not earn you rrsp room let's say you run an
incorporated business and you decide not to pay yourself a salary and you only pay yourself in
dividends this does not count as earned income so you won't earn any rrsp contribution room also
note this 18 amount is capped at an annual maximum for 2022 this maximum is 29 two hundred and ten
dollars so if you make two hundred thousand dollars a year you don't get eighteen percent
of that in rsp room you're capped at twenty nine thousand but if you make a hundred thousand
dollars a year you'll gain eighteen percent of that or eighteen thousand dollars in rrsp room
but this is important you'll only gain this new room next year when you file your tax return so if
you're a new canadian and you just started working this year you can't put any money into your rsp
yet you only gain that rrsp contribution room next year when you file your taxes you gain tfsa room
as soon as you start living in canada but the rsp is one year behind since the government doesn't
know how much money you earned until you file your taxes and just like the tfsa unused contribution
room is not lost it gets carried forward so don't worry if you can't max out your rrsp every year
remember it's your responsibility to know your available room and stay below your limit luckily
you don't have to calculate your rrsp room by hand the government does it for you after you file your
tax return in the spring you'll receive a notice of assessment and at the bottom it will tell you
your available rsp room based on your income but throughout the year it is your responsibility to
track all of your contributions and stay below this number do not over contribute to your rsp
the penalties will be severe if you exceed your limit you will be charged a penalty of one percent
every single month on this excess amount that's 12 a year in fees that's huge and almost as bad
as credit card debt so please avoid this there is no investment that's worth a guaranteed loss of 12
so stay within your limit technically the government gives you a buffer of 2 000
above your limit before you get penalized but don't try to game the system and take advantage of
this you won't be able to deduct this two thousand dollars it's just there to give you some leeway
if you make an honest mistake one of the common mistakes that get people in trouble is over
contributing because of pension adjustments if your employer offers you an rrsp or pension
plan matching program then your employer's contributions will also take away from your
available room if i put in five thousand dollars into my job's pension plan and my employer matches
that five thousand dollars my available room goes down by ten thousand dollars even though half that
money didn't come from me it's still treated as a contribution so keep that in mind when planning
out your rrsp contributions for the year this is still a great deal if your employer is matching
your rrsp contributions that's free money so definitely take advantage of it but if your
employer does not match your contributions you should avoid these employer rsp programs generally
speaking employer rrsp programs will take money out of each paycheck and put it into a mutual fund
where you will have no control or flexibility with your money and on top of that they will
charge you enormous management fees usually around two or three percent that's huge and what are you
really paying for instead you can open your own rsp account with a broker like questrade which
is my personal favorite and you will have total control of what to do with your money you can
even replicate the same investment portfolio by buying etfs at a fraction of the cost of mutual
funds etfs will usually only charge you between 0.1 percent and 0.6 in management fees that will
save you a ton of money in the long run again if your employer offers matching contributions then
take advantage of it and max out that free money sure you'll be stuck paying high fees in a mutual
fund but you are doubling your money right off the bat so it's well worth it but if your job doesn't
offer any matching then skip it and open your own rrsp account one incentive your employer rrsp
plan will advertise is the ability to reduce the taxes from each paycheck instead of paying taxes
contributing to an rrsp then waiting a whole year to receive that tax refund why not reduce
the taxes from each paycheck that way you get to enjoy that tax refund throughout the year rather
than waiting for one large check that's great but you don't need an employer rrsp plan to do that
you can do that on your own and it's very easy you just need to fill out a t1213 form called the
request to reduce tax deductions at source i'll be making a whole video about this but all you have
to do is send the form to the cra and when they approve it give it to your boss or hr department
that form is basically a promise you make with the government that you will contribute let's say
five thousand dollars to your rsp by the end of the year now every paycheck you get throughout
the year will be a little bit larger because you'll be taxed less you'll be taxed as if you
already claimed a 5 000 rrsp deduction you're just early so now you'll receive the same tax
refund but instead of waiting until next year you get to enjoy the tax refund right away
spread throughout the entire year just make sure you keep your promise and contribute at least five
thousand dollars into your rsp this year to be clear i just chose five thousand dollars for this
example you can choose any number you want as long as it's within your available room here's another
mistake that can lead to over contributing unlike the tvsa you do not get new rsp room on january
1st the rrsp calendar starts on march 2nd of every year and this is because of the 60-day rule
when it comes to rsps the first 60 days of the new year are treated like the previous year so
if you contribute to your rrsp before march 1st the first 60 days you can claim that tax deduction
against your income for last year this allows you to plan ahead and reduce your upcoming tax bill
before you file your tax return in the spring but if you have maxed out your rrsp do not contribute
any more money until march 2nd sure it's a new year in january but not when it comes to rsps
january and february the first 60 days are still treated like last year so you're still maxed out
technically speaking you won't know exactly how much new rsp room you'll gain until you actually
file your tax return but you can make a reasonable estimation remember take 18 of your earned income
from the previous year and that will be your new rsp room and if you want to contribute to your
rrsp before the march 1st deadline i recommend using the instant deposit feature with questrade
i have a whole video tutorial showing you step by step how to make instant deposits so check that
out this is one of the many reasons why questrade is my favorite online broker in canada and if
you'd like to get started click my referral link in the box below and you'll get 50 in commission
free trade rebates for the first 30 days when you sign up that basically means that your first 10
stock trades will be commission free that saves you 50 plus i'll get a small referral bonus as
well and when it comes to your available room only the money you put into an rrsp counts as a
contribution any income earned inside the rrsp will not take away your available room so even
if your rrsp is maxed out if you earn money from capital gains dividends or drips this will not
push you over your limit so don't worry this is the exact same with the tvsa and i talked about
this point in greater detail in my tvsa mistakes video here's another mistake to avoid for both the
rsp and the tfsa do not hold risky or speculative assets in your rsp these include penny stocks
cannabis stocks ipos crypto etfs anything that's incredibly volatile and likely to crash and burn
if you gamble and lose in your rsp not only will you lose money but you will permanently lose that
precious contribution room it's gone and you never get it back and unlike a non-registered account
there is no upside to selling a stock at a loss in an rrsp you don't get to claim a capital loss
and you don't get to reduce your taxes you just lose money with no benefit at all so in an rrsp
hold quality established companies that have a solid future do not gamble in an rrsp and i would
encourage you to prioritize u.s dividend stocks and etfs in your rrsp since only the rsp account
will allow you to waive the 15 withholding tax on u.s dividends again i talk about this point
in much greater detail in my tvsa mistakes video so please check that out here in this video i want
to focus on the more interesting mistakes specific to the rrsp now let's talk about claiming the rrsp
tax deduction this is very important you do not need to claim the rsp tax deduction right away
just because you put money into your rsp this year does not mean that you have to claim the
tax deduction this year you can carry forward that tax deduction to a future year where
you'll be in a higher tax bracket and thus that deduction will save you even more money in taxes
let's look at an example let's say you live in ontario and you make a small income of 45 000
that puts you in a low tax bracket with a marginal tax rate of 20 percent if you contribute ten
thousand dollars into your rsp and you claim that tax deduction you will save twenty percent of that
so you'll receive two thousand dollars as a tax refund that's great but we're still
in the lowest tax bracket so we're getting the smallest possible benefit from this rrsp
deduction remember i don't have to claim this tax deduction right away i could put the money into my
rrsp and let it grow tax-free but i can choose to carry forward that deduction to next year
if i expect a larger income back to my example if next year my salary increases to 65 000
now i'm in a larger tax bracket with a higher marginal tax rate of 30 percent
since i carried forward that rrsp deduction now i can claim that same 10 000 deduction but i saved
30 of that so now i get 3 000 as a tax refund i just gained an extra 1 000 in tax savings just
for waiting one year to drive this point home let's say i carry for the tax deduction for
five years and now my salary has made a huge jump to a hundred and fifteen thousand dollars now i'm
in a high tax bracket with a marginal tax rate of forty three percent now if i claim that same ten
thousand dollar rsp deduction i save forty three percent of that so i get 4 300 as a tax refund
that's more than double the tax savings if i had claimed it in the lower tax bracket some common
advice you'll hear is don't contribute to your rsp when you're young wait until you have a high
income to make contributions but that's only half true you should definitely contribute to your rsp
even if you are in a low tax bracket the earlier you invest the more time your investments will
have to grow tax-free inside your rsp just don't claim those tax deductions right away carry those
forward to a future year to get real tax savings that's what i did i invested in my rsp while i
was in university and making very little money from side jobs but i started early and i let my
investments grow tax-free for three years until i had a high-paying job and then i decided to claim
those rrsp deductions which saved me a lot of money but you have to plan ahead just because your
income will grow next year doesn't mean that you should wait it's only worth carrying forward those
tax deductions if your higher income will push you to a higher tax bracket back to my example
if i'm making 65 000 a year in ontario and next year my salary increases to 70 thousand dollars
i'll still be in the same tax bracket with a marginal tax rate of 30 percent so whether i
claim the deduction this year or next year i'll get the same 3 000 in savings so there's no point
in waiting if you're going to be in the same tax bracket next year then don't wait claim the rrsp
deduction right away and invest that tax refund that will give your investments a whole extra
year to grow tax-free make sure you plan ahead and run those numbers and remember each province
has different tax brackets in this example i was just talking about ontario you'll notice
that i said to invest your tax refund do not waste your tax refund on frivolous spending the
whole point of the rrsp is to reduce your taxes now giving you more money to invest with today
and let that money grow for years and years when you receive your tax refund i would encourage you
to invest that money back into your rrsp to gain another refund next year or put that money in your
tvsa or if you have kids put it in an resp to gain the 20 of free government grants don't leave free
money on the table take advantage of these tax sheltered accounts and check out my resp explained
videos to see how the resp works and how to get the free government grant money for your kids when
it comes to rrsp withdrawals there is a ton to talk about in fact i already made a whole video on
rrsp withdrawals so please check that out but this is important you should not withdraw from an rrsp
until you are in retirement technically you're not locked in you can always choose to withdraw from
your rrsp early but you shouldn't do it for two main reasons first whenever you withdraw from your
rrsp you will be fully taxed on that amount as if it was regular employment income so if you're in a
high tax bracket with a marginal tax rate of 40 percent you will be taxed 40 of that withdrawal
amount that's huge the point of the rsp is to withdraw that money when you're in retirement
where you'll be in a much lower tax bracket and so you'll pay far less in taxes the second downside
is that when you withdraw from an rsp you don't regain that contribution room it's gone forever
this is different from a tpsa where you can withdraw money and gain that room back next
year but with the rrsp as soon as you make a withdrawal that room is gone so now you've
missed out on a lifetime of tax shelter growth and that's a huge opportunity cost i always encourage
you guys to invest in the long term but this mentality is even more important with the rrsp
always keep this in mind the money you invest in an rrsp should be money that you will not
touch for years even for decades withdrawing early from an rsp should only be used as a last resort
i've said this many times it is so important to build up an emergency savings fund that you
can rely on if you need money you never want to be forced to sell your investments but if your
savings just aren't enough then withdraw from your non-registered account or even your tvsa if you
have to those accounts are much more flexible and you will regain that tvsa room next year but if
you withdraw from the rsp you never get that room back so please avoid it so there you have it guys
those are some of the biggest mistakes to avoid in your rrsp this is the third video i've made on
the rrsp and there's still so much more to talk about so stay tuned for more rrsp videos where
i'll discuss the two exceptions that allow you to withdraw from your rrsp without paying taxes
and that's the home buyers plan and the lifelong learning plan i'll also discuss strategies to
reduce your taxes during retirement using a rif spousal income splitting and other considerations
like oas claw back rrsps are incredibly powerful but they can be complicated so i'll be here
to help break it down thanks for watching guys and be sure to like comment and subscribe if you found
this video helpful every thumbs up and comment really does help me build this channel on youtube
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thanks everyone and i'll see you guys on the next episode of the canadian in a t-shirt bye guys