A recent report from Royal Bank Economics projected that Canada would experience a surge in retirements following the COVID-19 pandemic.
Interestingly, retirements were down in the first half of 2019 but experienced an uptick in early 2020. Canadians who are nearing or actively preparing for retirement have likely invested in an RRSP. Today, I want to look at three mistakes you need to avoid in 2021 and beyond.
Early withdrawals
There are occasions where an investor may make a quick contribution in an RRSP and later find out that they will require that cash. Or, in other situations, the investor is short on cash and an RRSP withdrawal stands as one of the last resorts.
An RRSP withdrawal gives up years of tax-deferred growth your money has the potential to generate in the account. Moreover, you will face a double tax hit. Withholding taxes stretch from 10-30% depending on the amount of the withdrawal.
Stashing only cash in your RRSP
Like the Tax-Free Savings Account, the RRSP offers terrific flexibility when it comes to choosing investment vehicles. You may hold stocks, GICs, mutual funds, bonds, and other vehicles in your RRSP. Unfortunately, many Canadians are content to store just cash in their RRSPs.
Over-contributing to your RRSP
Canadians may put up to 18% of your previous year’s earned income in their RRSP. However, this goes up to a maximum amount that is set annually. That was set to $21,830 in 2021. However, if you go above that percentage or the maximum amount you risk paying a penalty. Fortunately, you may over-contribute a lifetime total of $2,000 without paying that penalty.
