Are you Making an RRSP Mistake?
May 20, 2020
Many Canadians squander some of the benefits of making an RRSP contribution, writes Peter Watson.
Many Canadians fail to take advantage of income tax rebates resulting from RRSP contributions. That rebate could be included in your long-term financial plan and used to finance other investments as opposed to treating it like “free money” and spent on impulse items.
It can be a simple mistake. A mistake that most will not be aware of. To illustrate this, we will follow the pattern of a typical investor.
An investor contributes to their RRSP with two financial advantages. Money is put aside during the working years that will hopefully grow and contribute to their retirement’s financial security.
The amount of the contribution can be used to reduce taxes payable.
Some will consider the rebate as newfound money. Perhaps this is a good time to upgrade household electronics or take a trip.
An alternative is to reframe how you react to this “free money”. Consider it as money that could be used to enhance your long-term financial security.
The income tax rebate can be used to reduce household debt including a mortgage, contribute to Tax Free Savings Account, or make another RRSP contribution.
If you are saving to assist with the cost of a post-secondary education, a Registered Educational Savings Plan contribution is an option. RESP contributions can result in you getting a government grant.
Our recommendation is to create a two-step RRSP strategy. First make an RRSP contribution. Second use the RRSP tax rebate for other long-term financial purposes.
Everyone has their own unique personal circumstances so how you develop and implement your two step RRSP strategy will differ.
Some might have extended themselves financially to contribute, with the anticipated income tax rebate already built into the household’s budget.
If you have the financial ability that does not require you to rely on the tax rebate, consider how to best use the RRSP tax rebate.
Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through www.watsoninvestments.com