Apparently it’s RRSP week here on Financial Uproar (the blog you’d LOVE TO TOUCH. BUT YOU MUSTN’T). Check out my latest RRSP investments and how most retirees who aren’t saving 40% of their incomes won’t be screwed come their golden years. And then kindly eat a big bag of dicks.
Let’s talk a little bit today on how not to use your RRSP. Here are five RRSP mistakes the average person makes and how to correct them.
Contributing, but not investing
This is a big RRSP mistake that I’ve made in the past. I make my contribution and then the money sits there while I wait for some obscure value stock to get even cheaper.
There are a number of ways you can remedy this problem. The easiest way is to figure out an asset allocation and stick to it. Thus, when it comes time to contribute to your retirement savings, it’s only a matter of buying a couple of ETFs and calling it a day. Easy. Go golfing champ, you deserve it.
If you’re an active investor like me, there are a few other options. You could put the money to work in an ETF and then sell portions of the investment as you find better opportunities. This works especially well if you hide out in bonds, which don’t usually see big fluctuations in market value. Of course, doing this costs brokerage commissions, which can really eat into short-term returns. Especially when you’re dealing with small amounts of money.
There’s an argument to be made that GICs are reasonable fixed income products that can offer comparable yields to bonds without the risk of capital loss (although with bonds those risks are somewhat small). Additionally, it does make sense to hold any investment which is fully taxable in your RRSP to shield yourself from the taxes.
But I’m not talking about all that. I’m talking about the person who’s too scared of stocks to actually hit the buy button. Instead they hide out in GICs, content to earn 2% in exchange for not losing any of their precious capital. It’s going to be really hard to retire someday only earning 2%. Italics man, can I still call people pussies, or is that not politically correct?
Oh right. He’s dead.
Be mindful of tax brackets
The rule of thumb is simple. If you’re in the lowest tax bracket, you probably shouldn’t contribute to your RRSP. Put your cash in a TFSA instead.
When I was a young lad, when I wasn’t too busy masturbating, I contributed thousands of dollars into RRSPs. I did so while earning less than $10,000 a year working at my part-time job at Dairy Queen. In hindsight, I probably should have keep that contribution room for a few more years until I was in a higher tax bracket. Remember, you keep the room until you use it. There’s no real hurry.
Waiting until 65 to withdraw
If contributing to your RRSP should be a strategic exercise to minimize total taxes paid, then so should withdrawing. Remember, there’s no rule that says you have to wait until you’re 65 to start taking out the cash.
Thousands of Canadians are currently setting themselves up for a fantastic retirement. They max out their RRSPs every year and have accumulated hundreds of thousands of dollars there. That money will grow over time, perhaps even surpassing $1 million. That’s the holy grail for these people.
And then they hit 65 and start taking it out. They have so much invested that they’re pretty much forced to withdraw in big chunks, which comes with a large associated tax bill.
There’s a smarter way to go about it. Have a lean year at work? Take some money out of your RRSP. Sure, you’ll have to pay withholding tax at the time, but it gets treated as any other income. If you do this right, you’ll be putting money in that comes from a high tax bracket and withdrawing it to pay the tax on a low bracket. THAT’S WHAT I’M TALKING ABOUT, BITCHES.
Buying expensive mutual funds
Just don’t. Look, I’ve met that nice lady at the bank. She’s really a terrible person who is only good at sales. She murders puppies. I’ve watched.