RRSP Mistakes to Avoid

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Although registered retirement savings plans (RRSP) have been around for more than 50 years, many people are still confused about them. Understanding the basics is one thing, but people often struggle when deciding between using their RRSP vs. TFSA.

To complicate things, there are many RRSP mistakes that you can make. That can be something simple such as not knowing your RRSP contribution limit or not know the taxes you’ll pay on RRSP withdrawals. Of course, there are many other RRSP mistakes you can make so I reached out to Markus Muhs, a financial planner based in Edmonton who shares some RRSP mistakes that he’s come across in today’s guest post.

In my career as a financial planner and indeed in financial services in general—which goes back to my start in a call center for a major bank in 2004—I have seen every manner of often avoidable RRSP mistakes being made. Here are 5 of the most common mistakes, from my first-hand observations.

Not having a proper emergency fund

Starting out, the biggest RRSP mistake I see people making is contributing to an RRSP in the first place. A lot of financial planning is simply determining priorities among various goals and your capacity for reaching them.

First and foremost, before retirement planning or any other type of long-term savings goals is to ensure that you’re liquid. That is, your cash flow needs to be positive, and you have to actually have the capacity to save for retirement. On top of that, ensure that you have a sufficient emergency fund. At the very bare minimum, readily accessible low-interest credit in the form of a line of credit sufficient to cover 3 months of cash flow needs in case you lose your job or need access to a lump sum of money. Ideally, you have a minimum of 6 months cash in the bank (earning a bit of interest in a high-interest savings account).

It was laughably common, when I was working at a retail bank location, to see wide-eyed young people journey into the world of “adulting” and opening their first RRSP in February, only to see them back again in March or April to withdraw everything (minus tax and fees) because their car broke down and they needed to get a new one. Essentially, withdrawing from an RRSP prior to retirement is the mistake and not having an emergency fund is almost always the cause. An RRSP should never be seen as an emergency fund or in any way accessible until your retirement. It’s not one of your bank accounts; it’s your pension.

If cash is tight then you have absolutely no business whatsoever of contributing to an RRSP in the first place, no matter what the short-term benefit is on your taxes.


This is an obvious RRSP mistake and you’d be surprised how often it can occur, even with my own clients, due not to my fault or the client’s, but often due to a missing bit of information. Your RRSP contribution limit is easy enough to find, so why does this keep happening?

Those who most often make an over-contribution are people with defined contribution pension plans or group RRSPs with employer matching contributions who also make additional RRSP contributions in their regular RRSP. Often what happens is you have a certain matching scheme at work—let’s say 5% employee and 5% employer—and you put an additional 8% (for a total 18%, per the limit) into your personal RRSP. If you can automate such a set up with a monthly pre-authorized contribution (PAC), all the better. As your income rises the amounts going into your company plan rise, and you’ll find you have some additional contribution room each year too, so you either up your personal RRSP PAC or make top up contributions.

All goes well for many years until your income crosses a certain ceiling, which for the 2019 tax years is around $147K, at which point your RRSP limit is no longer 18% of prior year earnings, but it hits the statutory maximum ($26,500 for 2019). At $145K income you will have had $14,500 going into your company plan and $11,600 going into your personal RRSP, all together below the limit. If you left things on auto-pilot, at $160K income you have $16K going to your company plan and still $11,600 going into the personal plan; you’ve now overcontributed by $1,100.

Otherwise, I’ve also had clients just not take their company plans into account at all when determining their limits; forgetting about them entirely. In a way, forgetting you had that company RRSP or DCPP automatically contributing for you in the background is a good thing—a nice extra cashflow come retirement time—but you don’t want it to force extra punitive over-contribution penalties (1% per month of over-contribution) on you.

Thankfully, RRSPs have for a long time had a $2000 “cushion” to off-set over-contributions, mitigating punitive penalties for most Canadians when such over-contributions happen, especially when these automatic contributions accidentally put you over.

“Buying RRSPs”

This is not just a mistake in terminology, but a mistaken concept. I guess when you go back a number of decades, to when RRSPs were still new, people primarily “bought” them at the bank, where Guaranteed Investment Certificates within RRSPs were marketed as RRSP investments, or just “buying RRSPs”. This can lead consumers to potentially make investment mistakes, or not invest at all.

I still saw it rampant in my days at the bank, where on the eve of the RRSP deadline people would be lining up to “buy RRSPs” at the last minute and when I launched into an investment conversation I got puzzled looks from people, “I’m not here to invest, I’m just buying RRSPs to get a contribution receipt.” Not realizing that in addition to contributing to an RRSP (contributing money into a plan; not buying a plan), you also need to make an investment decision, can lead to people just leaving money sitting in a basic RRSP savings account at 0.05%. Worse, someone not paying attention to the importance of the investment side of things can potentially get themselves swindled into a bad investment decision. “Yeah, whatever sure I’ll buy whatever limited partnership, where’s my receipt?”

Not having a plan

At the root of the above misconception is the bad habit of being fixated on the short-term tax effect of contributing to an RRSP. Too many people just run their numbers through a tax program, find that for some reason they’re owing a balance on their taxes or want to goose their refund, and run to the bank to make an RRSP contribution for that reason and that reason only.

I’m not saying you absolutely need to see a financial planner to get a comprehensive financial plan done, but realize that the RRSP isn’t a short-term tax planning tool. It can be that, but it’s also the long-term ticket to a comfortable retirement and the decisions you make with your RRSP today have long-term tax ramification.

At the same time that I was taking RRSP contributions at the bank from wage earners I was also hearing the grumbling of my retired clients about the taxes they owed on their registered retirement income fund (RRIF) payments. “Why did I contribute to an RRSP to begin with, when it’s just going cost me this much in taxes when I’m retired?”

A retirement plan, properly executed, can utilize an RRSP or spousal RRSP to effectively shift tax liability from your higher income, higher taxed earning years to your lower taxed retirement year. That’s when an RRSP is most effective. In Alberta, where I live, someone taxed at the highest marginal tax rate of 48% (federal + provincial) can defer some of their pre-tax income to retirement, when their retirement income might be less than $100K and taxed at only 30.5% (assuming rates stay the same). Someone earning $90K today can defer some income to be taxed at 25% in retirement, instead of 30.5% today.

It’s important though to have some rudimentary plan that projects what that taxable income might be, when you’re retired, to ensure you are in fact benefitting from contributing at a higher tax rate today and withdrawing (eventually) at a lower tax rate. This brings me to my last RRSP mistake…

Waiting till the deadline and not automating it

“Phew, I just got that RRSP contribution in before the deadline” (which is March 2nd this year, or for future reference it’s always the 60th day of the year or the first weekday following, if it’s a weekend).

If you earn a pretty steady income, or at least know roughly the minimum you plan to contribute to your RRSP each year, why not set up a monthly pre-authorized contribution (PAC)? People automate their cell phone payments, yet they won’t automate something that makes them wealthier, why?

Not only does it take care of an annual chore, but you avoid finding yourself short of cash at “RRSP time” (all the time should be RRSP time!) and having to get an RRSP loan. Automating your contributions through a PAC also helps you take advantage of dollar cost averaging and greater time in the market. This is one of the RRSP mistakes that you can easily avoid.

Markus Muhs, CFP®, CIM® (www.muhs.ca) is a Portfolio Manager at Canaccord Genuity Wealth Management, located in Edmonton, Alberta. He provides comprehensive financial planning and wealth management to families with assets over $300,000 across Alberta, British Columbia, and Ontario. Markus alternatively provides fee-for-service (fee-only) financial planning to non asset-based clients.

About Barry Choi

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. You can find him on Twitter:@barrychoi


  1. Brenda on February 3, 2020 at 6:52 PM

    a mistake we and mostly our financial advisor made is taking into account our pension income, still keeping us in a higher tax bracket and then being required to withdraw funds in a RRIF at age 71. We just end up paying more taxes than we saved in the 80’s and 90’s

  2. Samantha on February 5, 2020 at 8:57 PM

    The greatest benefits of your RRSP account are that you can deduct contributions against your income and your investments will compound tax free. This all sounds great, but at the end you will be taxed fully on your RRSP, and the only question that remains is if the current income deductions received from your RRSP contributions will be taxed at higher rate when you start withdrawing in retirement. TFSA is my primary focus now, although I still contribute to my RRSP account every year.

  3. JP on February 6, 2020 at 6:16 PM

    Perhaps the biggest mistake with RRSPs in setting one up in the first place when a person could establish a Personal Pension Plan (PPP) where the tax deductions available over a long period of time could be 2 to 3 times the ones allowed under RRSP rules. We have seen cases where a person’s tax assistance (maxed out at $551,000 +/- since 1990 for RRSPs) is more than doubled thanks to the pension legislation that regulates PPPs. Picking the wrong vehicle could be the costliest error of them all.

    • Markus Muhs on February 8, 2020 at 3:08 PM

      The Individual Pension Plan is indeed overlooked by the vast majority of high income business owners and professionals (with prof corps), and their accountants, I find. One of those little-known things for a good comprehensive financial planner to uncover the need for and help set up.

      IPPs become especially useful after age 40 (when the contribution amounts exceed the statutory maximums on RRSPs) and someone under 40 can go ahead and continue contributing to an RRSP and then set up an IPP after 40, rolling over their RRSP assets. They’re mostly useful if you’re already paying yourself in excess of $150K personal income out of your corp and if your corp has excess cash and can benefit from the deductions.

      Recent changes to passive income in a corporation also make IPPs more beneficial as a way to shift assets out of the corporation and into a separate trust.

  4. Jean Pierre on February 8, 2020 at 3:21 PM

    And even more powerful as a tax-sheltering solution than the Individual Pension Plan, is the relatively new, Personal Pension Plan or PPP that doesn’t have the age 40 constraint that is identified by Mr. Muhs above since a younger (age 18 to 40) PPP client would contribute under the money purchase limit which always slightly exceeds the RRSP maximum. In fact, actuarial modeling suggests that a PPP client can shelter approximately $2,7 M more than an IPP customer (all else being equal) if the prescribed 7.5% designated plan assumption is used on the extra PPP contributions until age 71.

  5. Steve Bridge on February 23, 2020 at 8:19 PM

    Sad to see misconceptions about withdrawal strategy (or lack thereof). I hate when I see people write that they are paying more tax in retirement/ later years and didn’t touch their RRSP/ RRIF until age 72.
    There is so much tax planning that can be done to minimize taxes and draw down those RRSPs.
    Unfortunately, there is a lot of misinformation and poor planning done by ‘financial advisors’ as well. If they don’t know what’s best, what chance do regular people have???

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