The Learning Centre:
Maximize your RRSPs by avoiding these two common missteps
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Contributing to a Registered Retirement Savings Plan is a surefire way to add financial peace of mind over and above your pension income in retirement.
Yet there are two common missteps that can cost you greatly in fees, among other things.
The first of these missteps: having multiple RRSP accounts.
If you have multiple RRSPs, chances are you’re paying more administration and management fees than necessary. Those fees could range from as low as $25 to as high as $200 annually (depending on the financial institution)—and that’s per account. Multiply those fees by the amount of RRSP accounts you have floating around and you’re looking at costs that can really add up over time.
When it comes to investment fees, consider also shopping around for lower-cost alternatives. For example, education members and their families benefit from investing with Educators Financial Group because we don’t charge administration fees. However, not all brokerages or financial institutions are created equal. For the fees that are part and parcel when it comes to investing (such as the Management Expense Ratio or MER, which is charged on all mutual funds), some may charge more than others. The best way to literally look after your interest when it comes to RRSPs or other investments is to clearly pay attention to the fees you’re paying out.
Having multiple RRSP accounts can also make it more challenging to keep your investment strategy aligned for retirement.
This is because factors such as investment timeline and risk tolerance can be compromised if your RRSPs are scattered across multiple accounts and financial institutions. The closer you are to retirement, the less time you’ll have to recover from any hiccups in your investment strategy. Consolidating your RRSPs under one roof, so to speak, will make it easier to keep your investment strategy (and you retirement goals) on track.
Don’t have time to monitor your RRSP portfolio? Click here to learn more about Educators Monitored Portfolios.
Before consolidating, be sure to review the latest statements for all of your RRSP accounts.
The benefit of reviewing your statements is that you’ll be able to compare how much you’re paying in fees, as well as how well each account has been performing in recent years. This will assist in determining which account/institution you should consolidate to—or whether you should move your RRSPs somewhere new. Just keep in mind that it’s never an apples-to-oranges comparison. For example, you don’t want to compare the performance of a growth fund (which has appreciation as its primary goal, with typically little dividends) to a money market fund (which is a low risk fund with lower returns).
Next, when consolidating your RRSP accounts, transfer assets ‘in-kind’ if possible.
When consolidating your RRSP accounts, you’ll have the choice of transferring assets ‘in-cash’ (where all investment holdings will be sold before there are transferred) or ‘in-kind’ (where all investment holdings will be transferred ‘as is’). It is generally recommended to transfer your investments ‘in-kind’—as long as the receiving institution is capable of holding those same assets.
But why choose ‘in-kind’ over ‘in-cash’ transfers?
It’s simple really—in-kind transfers benefit you on the occasions when time is not on your side.
For example, let’s say you went the ‘in-cash’ route and liquidated your investments right after a downturn. Since there is no timing (or predicting) when the market will rebound, that money could be out of play for a few weeks before it gets transferred and reinvested. If the market recovered during that timeframe, not only would you miss out on the uptick, but you would inadvertently end up selling low and buying high—which is the total opposite of what you want to do.
With in-kind transfers, you don’t have to worry about your money being out of play during crucial timeframes (such as a market rebound). Plus, you’ll avoid costly deferred sales charges associated with in-cash transfers of certain investment funds.
The second common misstep: making early RRSP withdrawals.
40% of Canadians withdraw money early from their RRSPs for reasons that seem valid enough (such as to pay down debt or cover the cost of living expenses)—only to discover these early withdrawals come at a cost.
In fact, early RRSP withdrawals come with three major costs:
1: You’ll have to pay tax on those withdrawals—and possibly twice.
The first of which is an immediate withholding tax, which is calculated as follows:
- 10% for withdrawals up to $5,000
- 20% for withdrawals between $5,001 and $15,000
- 30% for withdrawals more than $15,000
In addition to the withholding tax, the amount of the withdrawal is also included in your annual taxable income. Should the withholding amount fall below your marginal tax bracket, the remaining amount owed in taxes would have to be paid upon your year-end tax filing.
2: You’ll lose tax-sheltered compounding.
RRSP earnings are tax-sheltered, right up until the time you make a withdrawal. The moment you do so means losing that tax-sheltered compounding of earnings. And don’t let a seemingly small RRSP withdrawal fool you into a false sense of security. Due to the effects of compounding, an early withdrawal—big or small, can have a significant impact on the long-term value of your savings.
What kind of impact are we talking about?
Well, let’s say you withdrew $6,000 from your RRSP today.
In 25 years, you would have over $32,000 less in your RRSP than if you hadn’t made that $6,000 early withdrawal (assuming you consistently earned a 7% return each year).
3: You’ll permanently lose contribution room.
Unlike a Tax-Free Savings Account (where you can re-contribute the funds you withdraw today, back to your TFSA next year), when you make early withdrawals from an RRSP, you permanently lose the contribution room used to make your original deposit. This means that while you can continue making your maximum annual RRSP contributions in the future, you can’t re-contribute the amount you withdrew—reducing the potential value of your RRSP come retirement.
In addition to the costs associated with individual RRSPs, early withdrawals from spousal RRSPs can also carry penalties.
If you’re making ongoing contributions to a spousal RRSP, yet your spouse is the one withdrawing funds—depending on the timing, all or a portion of the withdrawal will be included in your (not your spouse’s) taxable income. This may result in an additional tax implication for your family if you are in a higher tax bracket than your spouse.
There are two situations, however, where you can withdraw from your RRSP early without incurring any tax penalties (as long as borrowed amounts are paid back within a set timeframe):
- Home Buyers’ Plan: where you and your spouse can borrow up to $35,000 from each of your RRSPs to build/buy a home. The only caveats being that you/your spouse must not have owned a home in the past 5 years and all amounts borrowed are repaid to you and your spouse’s RRSP within 15 years.
- Lifelong Learning Plan: lets you withdraw up to $10,000 per year from your RRSP (up to a maximum of $20,000) to pay for the education of you or your spouse/common-law partner (not your child). Keep in mind that you can only withdraw a maximum of $10,000 during one calendar year and the total amount withdrawn must be paid back in full within 10 years.
Need a little guidance avoiding missteps when it comes to your RRSPs? That’s where Educators Financial Group comes in.
Since 1975, we’ve been providing education members with specialized investment solutions. It’s a long, proud history that has enabled us to gain a unique understanding of how your pension benefit is linked to your overall RRSP contribution room.
It’s the kind of insight we like to call ‘educator-specific’.
Because no matter where you are on the pay grid or what challenges you face during the course of your career/life, you deserve the kind of financial advice that goes well beyond the generic.
Whether you have questions about fees, in-kind transfers, or tax implications on withdrawals—or simply need a little guidance on choosing the right investments for your RRSP, we’re here to help.
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The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting or professional advice. Please ensure to consult your accountant and/or legal advisor for specific advice related to your circumstances. Educators Financial Group will not be held responsible or liable for any losses, costs, damages or expenses incurred by reason of reliance as a result of the aforementioned information. The information presented was obtained from sources that are believed to be reliable. However, Educators Financial Group cannot guarantee their completeness or accuracy.