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Market Update| Avoid These 5 RRSP Pitfalls| January 10, 2021

Kevin Becker - Jan 10, 2022
Beyond the importance of contributing to grow funds for retirement, avoiding certain practices can also help to save tax or create a bigger nest egg for the future

We have now seen 2021 end and are starting a new for 2022. I won’t belabor a recap -- we started with a speculative wave, meme-driven (remember Gamestop?), got caught in a growth-value trade as we plowed through another wave of IPOs in the spring, dragged our feet through the summer as vaccines gave everyone the opportunity to take a well-deserved vacation, China became an issue again (growth fears, heavy-handed government regulation, Evergrande, etc.), and we ended the year in a volatile fashion as supply chain bottlenecks coupled with labour shortages sent inflation soaring, we retired transitory, and Powell’s pivot set us up for a potentially new monetary policy regime in 2022.

Looking ahead to 2022, words like “volatile”, “pullbacks”, “choppy”, and “hard to call market” define the majority of street strategy reports for 2022. The pace of Fed tightening/lift-off, coupled with uncertainty regarding inflation, and worries about Chinese growth/stability will weigh on the equity markets ability to post-above average returns. That being said, we are not looking for a recession more likely a market experience similar to 2005 or 2011. History following greater than 25% upside years in the S&P 500 (SPX) point to solid returns the next year but suggest waiting for early year downside before adding any broad market exposure.

Another situation that usually kicks into play when the calendar turns is the start to another “RRSP Season”. Now that we are into January I believe it is time we address some issues in regard to RRSP’s.

Avoid These Five RRSP Pitfalls

Registered Retirement Savings Plan (RRSP) season is here again! Beyond the importance of contributing to grow funds for retirement, avoiding certain practices can also help to save tax or create a bigger nest egg for the future. Here are five:

Withdrawing Funds to Pay Down Debt — Consider the implications of making taxable withdrawals from the RRSP to pay down short-term debt. You may be paying more tax on the RRSP withdrawal than you’ll save in interest costs. In addition, once you make the RRSP withdrawal, you won’t be able to get back the valuable contribution room — unlike the TFSA, where contribution room resets itself in the following calendar year.

Contributing Losers In-Kind — If you are considering making in-kind contributions to the RRSP by moving investments from non-registered accounts, be careful not to transfer investments that have declined in value. You will be deemed to have sold these investments at fair market value when transferring them to the RRSP, yet any capital loss will be denied. Instead, consider selling them on the open market and contribute cash to the RRSP so you can claim the loss. Be aware of the superficial loss rules if you wish to repurchase them.

Claiming the Deduction in the Wrong Year — With any RRSP contribution, you’re entitled to a tax deduction for the amount contributed so long as it is within the contribution limit. Keep in mind that you don’t have to claim the tax deduction in the year that the RRSP contribution is made. You may carry it forward if you expect income to be higher in future years such that you may be put in a higher tax bracket, potentially generating greater tax savings for a future year.

Neglecting to Update Beneficiary Designations — It may be beneficial to review account beneficiaries on a periodic basis, especially in light of major life changes. For example, in the event of divorce, be aware that named beneficiaries may not be revoked, depending on provincial laws. Therefore, the designation of an ex-spouse may still be in effect.

Withdrawing from a Spousal RRSP — For couples in which one spouse will earn a high level of income in retirement while the other may have little retirement income, a spousal RRSP may be a valuable income-splitting tool. However, don’t forget that the attribution rules generally apply to a spousal RRSP. If the higher-income spouse has made contributions to the spousal RRSP in the year or in the immediate two preceding years, and if funds are withdrawn, they may be taxed to the higher-income spouse, as opposed to the lower-income spousal RRSP owner.

RRSP Season Reminders:

Contribute — Deadline for 2021 tax year contributions is March 1, 2022, limited to 18 percent of the previous year’s earned income, to a maximum of $27,830 (for the 2021 tax year).

Consolidate — If you hold multiple RRSP accounts at different financial institutions, consider consolidating for improved administration, convenience and potential cost savings.

Collapse — Turning 71 years old in 2022? Get in touch to discuss options for closing your RRSP by year end.

As I mentioned last time, here’s to bright days ahead! We are hopeful for a return to normalcy in 2022, and that we will see a reduction in the Omicron Variant soon and start to get back to more a more normal life and reconnecting in person once again. Thank you for your ongoing confidence in our services during this lengthy period of adjustment.

I will mention it again, but the start of the year brings RRSP season. For those of us who haven’t yet reached retirement, it is a reminder that time continues to pass and retirement quickly approaches. Keep planning for the future!

Here’s wishing everyone a very happy and successful 2022.

Take care,

Kevin