It’s because of Canadian physicians that the registered retirement savings plan (RRSP) exists. Introduced more than 60 years ago to help doctors without pensions save for retirement, RRSPs remain a great way to do just that.
An RRSP is an investment vehicle that allows you to deduct your contributions from your taxable income (up to certain limits). This provides you with immediate tax savings. What’s more, the investment income earned in your RRSP is not taxed, allowing your retirement savings to grow faster.
Future withdrawals from your RRSP are taxed, but if you’re in a lower tax bracket when you retire than you are now, you will pay less tax overall.
The rules and strategies around RRSPs can be complicated. With the RRSP season approaching again, we’ve compiled a list of six mistakes to avoid.
Thinking an RRSP is not for you
There are reasons you might think an RRSP is not for you: you’re a medical student in debt, a resident who’s not going to benefit from the tax deduction, or an incorporated physician who wants to save through your corporation instead.
In fact, some of the above is reason enough to rule out an RRSP. Also consider some of the changes to your situation resulting from COVID-19-related disruptions of 2020. Talk to a financial advisor who understands your situation to see if it makes sense for you to contribute to your RRSP this year.
Missing the deadline
If you have contribution room available and money to contribute, don’t wait till the last minute! The RRSP deadline is Monday, March 1, 2021. If you miss the deadline, you can’t use the tax deduction to reduce your 2020 tax bill.
Leaving your contribution in cash
In their rush to meet the deadline, it’s not uncommon for people to park their contribution in cash — and then forget about it. Whether you’re investing on your own or with the help of a financial advisor, don’t let your hard-earned dollars sit in cash.
You can invest your RRSP contributions in myriad ways, including individual stocks, mutual funds or exchange-traded funds (ETFs) where interest income, capital gains and dividends can accumulate and grow, tax-deferred.
Spending the tax refund like free money
One of the best things about contributing to your RRSP is getting the tax refund, but many of us are tempted to spend it on the latest gadget or some other item that’s caught our eye. But this refund is not free money – because as part of the bargain, you will be giving at least of some of it back one day.
That’s because you pay tax when you eventually withdraw funds from your RRSP. So, use your refund money constructively — for example, to pay down debt or contribute to your tax-free savings account.
Going over your contribution limit
If you’re in the position of being able to contribute more than the amount you’re allowed, be sure you don’t go over the limit. You can find your contribution limit by phoning the Canada Revenue Agency at 1-800 959-8281 or by using its online “My Account” service.
You are allowed a lifetime overcontribution of $2,000 but you can’t claim a tax deduction for the excess amount. After that, you’re penalized 1% per month of every dollar you have contributed over the limit.
Not naming your spouse (or a dependant) as the beneficiary
If you don’t name a beneficiary for your RRSP either on the account or through your will, when you die the money goes to your estate, where 100% of it is taxed as income.
However, if you name your spouse, common-law partner, financially dependent child or grandchild, or disabled financially dependent child or grandchild as the beneficiary, you can roll it over to their RRSP tax-free. Note that in Quebec, you cannot name beneficiaries on RRSP applications. This has to be addressed in your will.
This past year has been different, and your ideal RRSP strategy could look very different too. Don’t settle for generic financial planning advice meant for just anyone. Thoughtful planning and physician-focused advice from MD Financial Management can help you save more and rest easier.
To best support your financial goals, you need a plan that considers the intricacies of your career in medicine, your personal circumstances, and the current environment. Contact an MD Advisor* and discover the difference physician-focused advice can make.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.