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Avoid these common RRSP mistakes

RRSPs don't have to be difficult. Nevertheless, it's easy to make mistakes. And that can cost you money. Here are the most common RRSP mistakes people make, according to a BMO survey which shows 43 per cent of Canadians plan to contribute.

RRSPs don't have to be difficult. Nevertheless, it's easy to make mistakes. And that can cost you money.

Here are the most common RRSP mistakes people make, according to a BMO survey which shows 43 per cent of Canadians plan to contribute. And here's how to avoid those mistakes.

  • Don't rush. Confirm the tax shelter RRSP strategy makes sense, then take the time you need to decide what mix of investments to put into that shelter based on your stage in life, risk tolerance, retirement plans and other investments.
  • Don't skip a contribution if money is tight. Could you contribute investments you already own to a (selfdirected) RRSP? Provided you don't have too much other debt, could you borrow to make the contribution - perhaps using a tax refund to pay down the loan?
  • Don't overlook the main purpose(s) of the RRSP. This is a tax-preferred retirement vehicle, which also allows money to be withdrawn for a first home or education. However, the cost is the loss of what that withdrawn money could have grown to plus tax costs if not re-contributed.
  • Don't forget a touch of estate planning. Designate the spouse or disabled child as beneficiary to minimize tax on the contributor's death. Calculate any (aftertax) value on death to make sure the estate is distributed as planned.
  • Don't shun advice. Find a knowledgeable, unbiased advisor to help you make the most of RRSPs - for example, timing contributions, deductions and withdrawals to maximize the tax savings.

While the RRSP isn't the perfect solution for everybody, make sure any alternative approach you choose offers you a likely better result both now and in the future.

For example, you could invest instead in a family business so each shareholder family member could take advantage of the tax-free capital gains available on the sale of qualifying small business shares. You would want expert advice to help implement such a plan.

Mike Grenby is a columnist and independent personal financial advisor; he'll answer questions in this column as space allows but cannot reply personally. Email [email protected]