Mistakes You Can Make with an RRSP & How to Avoid Them

February 20, 2025

When it comes to RRSPs (Registered Retirement Savings Plans), there are a few common mistakes that can negatively impact your savings or tax strategy. Here are some of the most common mistakes and tips on how to steer clear of them.

Exceeding Your Contribution Limit (Over-Contribution)

Mistake: Going over the RRSP contribution limit, even by a little, can trigger a penalty. In Canada, the over-contribution penalty is 1% per month on the excess amount, which can add up quickly.

How to Avoid: Always check your RRSP contribution room before contributing. You can find it on your Notice of Assessment from the CRA or through the CRA My Account portal. If you go over by up to $2,000, you won’t face penalties, but anything above that will incur a 1% monthly penalty.

Failing to Carry Forward Unused Contribution Room

Mistake: Not utilizing unused contribution room from previous years can be a missed opportunity. RRSP contribution room is carried forward indefinitely, so if you didn’t use the full limit in one year, you can make it up in future years.

How to Avoid: Make sure you track your contribution room each year, which the CRA reports on your Notice of Assessment. If you missed contributing in prior years, try to catch up in later years, particularly in high-income years to maximize tax savings.

Withdrawing RRSP Funds Early Without Considering the Tax Implications

Mistake: Withdrawing funds from your RRSP before retirement means the withdrawal is taxed as income, which can be a significant hit, especially if you’re in a high tax bracket.

How to Avoid: Avoid early withdrawals unless absolutely necessary. If you’re buying your first home, use the Home Buyers’ Plan (HBP), where you can withdraw up to $35,000 tax-free to buy a home, provided you repay it over 15 years.

Not Taking Advantage of the RRSP Deadline (Contribution Deadline)

Mistake: Missing the contribution deadline for the year. In Canada, contributions made before the March 1st deadline count for the previous year’s tax deduction.

How to Avoid: Set a reminder well in advance, as missing the deadline means you’ll miss the chance to claim a tax deduction for that year.

Not Considering a Spousal RRSP for Income Splitting

Mistake: If you and your spouse have significantly different incomes, not using a Spousal RRSP can be a missed opportunity for tax planning.

How to Avoid: If one spouse has a higher income, contribute to a spousal RRSP to help balance retirement income between both spouses. This can help reduce overall taxes in retirement since withdrawals from the spousal RRSP are taxed in the hands of the lower-income spouse.

Investing Too Conservatively (or Too Aggressively)

Mistake: If you’re too conservative with your RRSP investments (e.g., holding too much cash or low-interest bonds), your returns may not outpace inflation over time.

How to Avoid: Make sure your RRSP portfolio is diversified. Review your asset allocation periodically and adjust based on your retirement timeline and risk tolerance. If you’re young, you might want to take more risk in your RRSP by investing in equities. As you near retirement, gradually reduce the risk by shifting towards more stable investments.

Using RRSPs for Short-Term Goals

Mistake: RRSPs are meant for retirement savings, so using them for short-term needs, such as a car or vacation, is a mistake.

How to Avoid: Stick to using your RRSP for retirement purposes. If you need short-term savings, consider a Tax-Free Savings Account (TFSA), which offers more flexibility without the tax penalties of early RRSP withdrawals.

Neglecting the Impact of RRSP Withdrawals on Government Benefits

Mistake: In retirement, RRSP withdrawals can push you into a higher income bracket, potentially reducing your eligibility for government benefits like the Guaranteed Income Supplement (GIS) or Old Age Security (OAS).

How to Avoid: Plan your withdrawals strategically to avoid large lump sums that may push you into a higher income bracket. You may also want to consider converting your RRSP to a RRIF (Registered Retirement Income Fund), which provides more predictable income in retirement and potentially lower taxes.

Not Taking Full Advantage of RRSP Tax Deductions

Mistake: Many people contribute to an RRSP but fail to take advantage of the tax deduction in the year they contribute. The RRSP deduction reduces your taxable income, which can lower the amount of tax you owe.

How to Avoid: Always claim your RRSP contribution on your tax return in the year you make the contribution. This will result in a lower tax bill for that year.

Forgetting to Convert Your RRSP into a RRIF (Retirement Income Fund)

Mistake: By the time you turn 71, you must convert your RRSP into a RRIF (or another retirement income product). Failing to do so can result in a large lump-sum taxable withdrawal.

How to Avoid: Ensure you convert your RRSP before the deadline at age 71. The conversion can be gradual (via a RRIF), allowing you to receive regular payments from the account while continuing to benefit from tax deferral.

By avoiding these mistakes and taking a proactive approach to managing your RRSP, you can maximize your retirement savings and minimize your tax burden. Haven’t opened your RRSP yet? YNCU has more than one RRSP investment option for you. Check out which option would work best for you.

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