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Three Big Mistakes: #1 RRSP

Daren Givoque, CDFA, Financial Advisor

O’Farrell Wealth & Estate Planning | Assante Capital Management Ltd.

There are many things to think about when it comes to retirement. How am I going to fill my time? What type of lifestyle do I want to enjoy? And most importantly – How am I going to pay for it?

After being a financial advisor for many years I have learned a lot about how to guide people in the right direction financially when it comes to retirement. Unfortunately, there are still some major pitfalls that people fall into when planning for retirement that can generally be avoided. Three big ones come to mind.

Over the next few weeks I will be going over the top three mistakes that people make when planning for retirement. Hopefully this will help you avoid them and ensure that you have the money you need to finance the retirement that you want.

If I asked you what your biggest expense is what would you say? Your mortgage or car payment may come to mind. What would you say if I told you that your biggest expense is actually tax? Many people forget about it because it is worked into your expenses in incremental amounts. However, in *2016 the average Canadian family (including single Canadians) who earned $83,105 in income paid $35,283 in tax. That’s 44% of your income going to taxes!

In Canada almost everything is taxable. This includes your pension, salary, cottage, rental properties, RRSPs and RIFs, investment returns, the sale of a business and more. There are only three things in Canada that are considered tax free: your primary homes increase in value, your TFSA and insurance. Now there are a few others like the lottery, inherited gifts and exemptions for business owners, but these are unique and not easy to plan with.

Now that you know what is taxable and not taxable are you using it to your advantage to save for retirement? This brings me to:

Mistake #1 - Delaying using you RRSPs

The whole idea behind RRSPs is to help you save for retirement in a tax-sheltered way. The money is only taxed once you start withdrawing it as income when you retire. The idea is that at this point you will be in a lower tax bracket and pay less tax on your withdrawals.

At age 71 you must convert your RRSP into a Registered Retirement Income Fund (RRIF) and start to withdraw money. Many people wait until the last minute to start withdrawing money from their RRSPs but it many cases this doesn’t make sense tax-wise.

The reality is every year you delay liquidating your RRSPs the government increases the percentage of tax you need to pay on it. By the time you are 80 you will be paying more tax than you would have if you started withdrawing money at age 65.

Also, if you die and don’t have a spouse there is no one you can leave the money in your RRSP to tax-free. The day you die the entirety of your RRSP must be cashed out and if you have a lot of money left, it will be taxed at a high rate. For example, an RRSP that still has $340,000 left in it will be taxed at a 50% marginal tax bracket which means you will be losing half your savings.

When planning for retirement it’s a good idea figure out the optimal age to start withdrawing money from your RRSPs to save the most tax. Unfortunately, there is no cookie-cutter approach. A qualified financial advisor will be able to look at your savings and retirement income and help you pinpoint the best course of action.

There you have it. Mistake #1 when planning for retirement.

* Taxes versus the Necessities of Life: The Canadian Consumer Tax Index, 2019 edition

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