There’s no question that Registered Retirement Savings Plans are a good idea. As we live longer and as fewer among us can count on company pensions, personal saving has to fill the gaps. Author, investment expert and Star columnist Gordon Pape calls RRSPs the “ultimate wealth builder,” using that phrase as the title of a book.
In the year you turn 71, your RRSP must be converted into a Registered Retirement Income Fund (RRIF) because the government wants its money back, setting minimum annual withdrawal limits starting at 7.38 per cent in the first year and rising to 20 per cent a year at age 94 and beyond. That too, is considered income for tax purposes.
Myth #2: Most Canadians have an RRSP: About 60 per cent of us have opened an RRSP, but according to Canada Revenue Agency, some 94 per cent of the available room is unused. Higher-income earners tend to contribute most because they have more money to shelter and more tax to pay.
Carleton University business professor Ian Lee believes one reason for the large amount of unused room is that young families make a shrewd choice between real estate and retirement. Since they don’t have the money for both, they opt for the house.
Myth # 3: Always max out the contribution: If you have a lot of debt at high rates of interest, it is a better idea to pay that off. Credit cards carry annual rates of 19.99 per cent, while you may earn 4 or 5 per cent inside your RRSP.
Related: 3 things that compete with an RRSP
Myth #4: An RRSP loan is a good idea: For many people, probably not. If you were disciplined throughout the year and made regular payments, you shouldn’t need to borrow money. If you weren’t disciplined, are you likely to repay the loan with your refund?
Try a payroll deduction instead. It’s easy and painless. Money you don’t see is money you don’t miss.
Myth #5: Always aim for the Feb. 28 deadline: That’s not a good idea, though it’s better than nothing at all. Most people don’t have the full amount lying around, and those who contribute at the deadline also miss an entire year of tax-free growth.
Myth #6:An RRSP is a pension: An RRSP is just a pile of money (hopefully a big one). That’s where the stress comes in for many people. You have to manage it. A defined benefit pension plan gives you a monthly payment for life. You don’t have to worry about it. An RRSP must be invested in something to create the monthly payment.
Myth #7: RRSPs are better than TFSAs: For young people who are saving for a home, a Tax Free Savings Account may be better. It’s easier to get at the money and the amount inside grows tax-free. For low-income earners, a TFSA may also be better, because the income in a TFSA isn’t counted for tax purposes and so doesn’t affect such things as the means-tested Guaranteed Income Supplement (GIS). For seniors, a TFSA may also a better place to shelter money.
In the end, an RRSP is a terrific way to save and can play a key role in your retirement planning. But as with all things to do with personal finance, one size doesn’t fit all. Sometimes other things come first.
More columns by Adam Mayers
Adam Mayers writes about investing and personal finance. Reach him at firstname.lastname@example.org .