Common pitfalls to avoid in RRSP savings

RRSPs may be the best vehicle in for most Canadians when it comes to retirement saving, but that doesn’t mean they’re fool proof, wealth advisers say.

There are many common mistakes that may be hurting savers, ranging from a failure to maximize the full tax potential to a poor choice of investments that means investors aren’t getting the best returns, they say.

“One very common mistake last year was that investors were making a contribution but not investing the money,” said Tina Di Vito, director of retirement strategies at BMO Financial Group. “We’re trying to make sure they don’t make the same mistake this year.”

The problem at the beginning of 2009 was too much caution. Investors were still concerned about the 2008 market meltdown and chose to take a wait-and-see approach with their money. As a result they may have missed out on the best year for Canadian equities in three decades.

BMO said it’s going all out this year to educate consumers, with a full section on its website, including an investor profile tool to help savers determine their true comfort level with market risk.

For CIBC Asset Management President Steven Geist, the biggest mistake is not making a contribution at all.

“We are seeing surveys indicating that people are not making contributions, or are contributing less and I’m mortified when I hear this,” he said. “If you are concerned about the appropriate risk the best response is to adjust the investments you make.”

Advisers say the best approach is to have a well-balanced portfolio and to avoid chasing the latest investment fad.

This year that may be focusing too heavily on long-term bonds. With interest rates at historic lows investors have been seeking out the highest yield possible and that has been sending them towards longer-term securities.

As interest rates begin to rise, probably from the middle of this year, that may not be the best strategy as bond prices tend to move in the opposite direction to rates.

“People do not understand that their capital may be hurt once interest rates start rising,” said Warren Mackenzie, president and chief executive of Weigh House Investor Services.

Another common problem is failure to make the most of the tax benefits.

“I’ve seen many individuals who have the money to invest and the room but don’t contribute because they are on maternity leave or sabbatical for example and therefore not paying much tax,” Di Vito said.

What they are forgetting is they can make the contribution now and use the tax deduction in a future year when they are in a higher tax bracket, she said.

Likewise, when people reach retirement they also tend to overlook potential tax savings. For example, someone over 71 and still working won’t be able to contribute to their own RRSP any more but could still pass on the deduction to a younger spouse if they have unused contribution room.

Investors should also pay attention to the mix of stocks they have. Some advisers argue the RRSP is not the best place for high-growth stocks or high-dividend stocks that may receive more a favourable tax treatment outside the plan.

If the riskier high-growth stocks turn into big losers, the losses won’t be tax deductible if the investments are in an RRSP. When the RRSP is cashed in the investments will be taxed as income and will not be eligible for the 50% relief on capital gains tax otherwise available.

That said CIBC’s Geist said those are perhaps considerations for sophisticated investors. For the majority of Canadians the best place for their investments is still a mix of stocks and bonds inside an RRSP.