Last week, I’d discussed three super RRSP tips that Canadians should consider for the long haul. Today, I want to focus on three RRSP mistakes that can put a damper on your retirement plans. Mistakes in a Tax-Free Savings Account (TFSA) are often frustrating but fixable. However, some mistakes in the RRSP can punish you for the long term. Let’s dive in.
Top RRSP mistake: Wasting your tax refund
Canadians who contribute to an RRSP will be familiar with the tax refund. This is one of the best benefits of the RRSP. Amounts contributed to this registered account reduce your net income. Essentially, contributing to an RRSP offers an immediate tax break.
One of the keys to smart investing is the elimination of bad habits. When we receive our tax refund, there is always a temptation to spend it on anything but our future. However, the best way to treat the tax refund is to reinvest that puppy right back into your RRSP. This means the account will grow, and the next tax refund has the chance to be bigger. By reinvesting, you are immediately putting yourself ahead for the next tax year. Don’t waste that opportunity!
Staying in cash
This is one of the worst habits in a TFSA as well. These accounts are perfectly suited for more aggressive styles of investing. Canadians who stash cash in their TFSA and RRSP are failing to take full advantage of these registered accounts. Like the TFSA, capital growth and income earned in your RRSP is tax free.
Just because you are going away from cash in your RRSP does not mean you have to take on huge risk. Emera is one of the best utilities available on the TSX. Shares of Emera have been mostly static in 2020. Emera does offer a quarterly dividend of $0.61 per share. This represents a solid 4.5% yield. Moreover, the stock boasts a favourable price-to-earnings (P/E) ratio of 15 and a price-to-book (P/B) value of 1.6.
Genworth MI Canada is another dividend stock I love for an RRSP today. This is the largest private residential mortgage insurer in Canada. Shares of Genworth have dropped 25% so far this year. The stock last possesses a very attractive P/E ratio of 7.7. Moreover, it offers a quarterly dividend of $0.54 per share. This represents a strong 5.9% yield.
These dividend stocks offer income and the chance at capital growth that do major work for your retirement nest egg. In this low interest rate environment, cash will not be able to touch their potential.
Third RRSP mistake: Overcontributing
This is another mistake that TFSA and RRSP investors can make. Canadians can put 18% of the previous year’s earned income in their RRSP. Investors can also carry forward contribution room from previous years. Your notice of assessment, which is available if you start an online CRA account, will make this room explicit for you.
Things are more straight forward in an RRSP, but that does not mean mistakes don’t happen. Canadians can overcontribute a lifetime total of $2,000 without penalty. Over that, the penalty for overcontributions is 1% on a monthly basis.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned.