RRSP Myths Debunked

The RRSP (Registered Retirement Savings Plan) is one of the most misunderstood things in finance and for good reason. There's a lot to it - taxes, investments, contribution limits, employer matching plans. These alone can create anxiety, put them together and now you're just scaring people.

As a result, it gets taught through the grapevine. Casual chats with friends, families and coworkers. This informal learning has led to a lot of misconceptions.

Here are some of the most common myths.

1) "My money's locked up until I retire"

While yes, the goal of the RRSP is to help fund retirement, you can withdraw anytime you want. There's no age or employment status you need to reach before you can access to your money. It's always available to you.

This leads us to our next big myth.

2) "I have to pay big penalties if I withdraw early"

There's no penalty. You simply pay taxes. The applies no matter when you withdraw.

The RRSP is a tax deferral account. Your taxes are deferred until withdrawal.

Anything invested into a RRSP is done with pre-tax dollars (as you can reduce your taxable income by the amount you contribute) and everything in the account grows tax-free. When you withdraw, that amount is considered income. And like all income, you pay taxes on it.

When you retire you're likely to be in a lower tax bracket. Deferring income till then means less taxes. This encourages folks to save while they're working.

Withdrawing triggers a withholding tax of 5-30% depending on the withdrawal amount and your province. This is not a penalty. This is similar to what your employer does with your paycheque. Money is put aside for your tax bill, if at the end of the year you overpaid, you get it back.

It important to remember that money in your RRSP is not all yours, you still owe taxes.

There's no penalty fee when you withdraw, you're just paying taxes you owe in the first place.

3) "I Invest in RRSPs"

RRSP is an account type, not an investment. "Advisors" at the big banks will talk customers into "buying RRSPs". This makes people think that it's some kind of investment. It's not. It's an account that can hold a variety of investments.

This confusion leads people to believe their options are limited and the big banks takes advantage of this to put people into their high fee mutual funds.

Hopefully this clears up some of the confusion out there. Don't fear the RRSP, it's a good thing.

Comments

Today's Special: Humble Pie

You champion a project, fight for an idea, and then...reality sets in. That churning in your stomach isn't butterflies, it's the realization you've missed the mark. Pride will puff up your chest, and kick in the "defend at all costs" instinct. But arguing with the umpire never changed a call. Admitting you're wrong isn't a sign of weakness. It can strengthen your professional standing. In a world obsessed with the illusion of infallibility, the courage to adjust course is a breath of fresh air. It shows you're confident enough to be wrong, and adaptable enough to learn from it. Do your research, think critically, and stand behind your decisions. But when the data whispers (or screams) otherwise, don't be afraid to swallow that slice of humble pie. Be the first to acknowledge. Don't wait for someone to point out your mistake. Be open, take responsibility, and most importantly, focus on what you're going to do to address it. Don't dwell ...

The Art of Giving Feedback

Constructive feedback is an awkward affair. You don't want hurt feelings, but recognize the importance of honesty. You've tried the classic "hoping things will get better on its own" and unfortunately it hasn't played out. When giving feedback, here are a few things that I try to keep it mind. Start with empathy. Step into their shoes and understand their story. If you don't know, ask. Be genuinely curious. Feedback is a dynamic affair. Shared communication with a shared goal towards progress. Take the emotion out of it. Focus on the situation, not the person. Focusing on the person adds unnecessary weight to an already emotionally-bloated event. Be specific. Give clear examples. Vague feedback equals dismissed feedback. Doing above won't de-awkward things fully, but it will dampen it and increase the chance of better outcomes.

Negative Feedback, Positive Lessons

In the battle against plastic bags, a five-cent tax was shown to be much more successful at deterring usage than a five-cent credit for bringing your own bags. Carrots satisfy but sticks sting, and they sting hard. So we default to the less painful choice of avoiding loss. Loss aversion impacts the way we process information. A 2019 study invited participants to learn through a series of multiple choice questions. Each question only had two options to choose from. Whether guessing correctly or not, they would still learn the right answer. Despite the identical learning opportunity, participants were much more successful at recalling the answers they guessed correctly than those they got wrong. "You're right!" feels good. We savour the moment, analyzing every detail. "You're wrong!" stings. We want to quickly forget, dismiss, and move on. When we succumb to loss aversion, we miss opportunities to learn. Failure is part of the process. We'll experie...

Herman Ye

Search