The rules and strategies around registered retirement savings plans (RRSPs) can be complicated. If you’re turning your attention to RRSP contributions (the deadline for 2022 contributions is March 1, 2023), it’s time to check whether you’re making any of these RRSP mistakes.
1. I don’t need an RRSP
You might think that an RRSP is not for you, perhaps because 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 these factors may be reason enough to rule out an RRSP — but other factors come into play, and it’s not a simple decision. Talk to a financial advisor who understands your situation to see whether it’s in your best interests to contribute to an RRSP this year.
2. I have until the deadline to contribute
If you have contribution room available and money to contribute, don’t wait till the last minute! The RRSP deadline is Wednesday, March 1, 2023. If you’re feeling rushed, you might end up not contributing, and will miss getting the tax deduction to reduce your 2022 tax bill. A better strategy is to have a plan and contribute throughout the year and benefit from the tax-deferred growth and compounding.
3. I’m planning to spend my tax refund
One of the best things about contributing to your RRSP is getting the tax refund, and you may already have plans for that extra money. But this refund is not free money — because as part of the bargain, you will be giving at least some of it back one day.
That’s because you will 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 (TFSA).
4. I don’t know my contribution limit
If you’re in the position of being able to make a substantial contribution, be sure you don’t go over your contribution limit. You can find this limit on your notice of assessment from the previous year, by using Canada Revenue Agency’s online “My Account” service or by phoning the CRA at 1-800-959-8281.
You are allowed a lifetime overcontribution of $2,000, but you can’t claim a tax deduction for the excess amount. After that, you’ll be penalized 1% per month of every dollar you have contributed over the limit.
5. I don’t have a beneficiary on my RRSP account
If you don’t name a beneficiary for your RRSP, either on the account or through your will, when you die the money will go to your estate, where 100% of it will be taxed as income.
However, if you name your spouse or common-law partner, financially dependent child or grandchild, or disabled financially dependent child or grandchild as the beneficiary, the money can be rolled over to their RRSP tax deferred. Note that in Quebec, you cannot name beneficiaries on RRSP applications. This has to be addressed in your will.
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 that 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.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.