The key to a happy life during your golden years is to have and follow through with a solid retirement plan. Besides the Canada Pension Plan (CPP) and Old Age Security (OAS) benefits, you can set yourself up with a self-directed pension using accounts with a tax-sheltered status like the Registered Retirement Savings Plan (RRSP).
However, there are some things Canadians tend to do that the Canada Revenue Agency (CRA) might feel inclined to do the kind of scrutiny that affects your overall retirement income. Knowing about the red flags can help you avoid unnecessary attention from the CRA. Let’s take a look at what they are.
CRA red flags to watch
The CRA keeps a close eye on things like how much you’re contributing to your retirement accounts and a few other factors. They look for things that don’t align with the regulations. RRSPs can be excellent tools to make an amazing retirement plan, but abusing the rules, with or without the intent to do so, can trigger an audit. Here are the three major red flags you want to watch for if you want to avoid the CRA’s watchful eyes:
- Overcontributing to your RRSP: The Notice of Assessment from the CRA outlines exactly how much you can contribute to your RRSP each year. Contributing more than the limit, especially beyond the $2,000 grace amount, can result in a 1% tax penalty per month on the amount exceeding the limit. It’s important to know the limit because even unintentional excess contributions can trigger an audit and penalties.
- Investing in non-qualifying assets: The CRA has identified the qualifying investments you can hold in a retirement account like the RRSP. Participating in any non-qualifying or suspicious investments can lead to the CRA investigating your account. Many investors get roped into making investments that go against CRA rules, resulting in potential audits, heavy taxes, and penalties.
- Reporting too many investment losses: When you face investment losses, it is important to report them to the CRA. However, reporting frequent losses can raise concerns with the CRA. It might suggest poor investment strategies and a potential misuse of the account. A well-diversified portfolio and reviewing your investment choices regularly can show the CRA that you’re managing the account properly.
Knowing these red flags will help you stay on the CRA’s good side and protect the value of your RRSP in the long run.
Good RRSP investments
Now, let’s talk about qualifying investments you can make in an RRSP to align with a good retirement plan. When picking investments for your self-directed retirement portfolio, you want to get assets with risk levels you’re comfortable with and that align with your goals. There’s no shortage of potential investments on the TSX.
To this end, Enbridge (TSX:ENB) is an excellent example to consider. The $134.90 billion market cap company, headquartered in Calgary, is a giant in the energy industry. It owns and operates an extensive network of midstream assets transporting hydrocarbons across the U.S. and Canada. Its pipeline network transports roughly a fifth of the hydrocarbons produced and consumed in North America.
Enbridge also owns one of the region’s largest regulated natural gas utility businesses and the largest natural gas distribution company in the country. It also has a growing portfolio of renewable energy assets that are setting it up for a stronger performance in a greener energy industry.
Enbridge is a staple in many investor portfolios due to its reliable dividend-paying history and its dividend-growth streak that currently spans over three decades. As of this writing, Enbridge stock trades for $61.88 per share and pays its investors their shareholder dividends at a juicy 6.1% dividend yield.
Foolish takeaway
When managing your RRSP, you must be careful of how much you invest, what you invest in, and have a disciplined approach. By avoiding the CRA red flags, you can lower the chances of an audit. It’s always a good idea to talk to financial experts who can help you make sure your RRSP stays a good part of your retirement plan.
