Falling out of love with RRSPs - MoneySense (2024)

FAQs

Is it normal to lose money in RRSP? ›

If you have an RRSP, the money in it is invested. This means that if the stock market or real estate markets drop, the value of the RRSP may also lose value. However, this may only be temporary; the stock market is cyclical, meaning it will go through both highs and lows.

A major drawback of maxing out your RRSP is the fact that the money will become taxable when you withdraw it. If you withdraw the money early, you may end up paying up to a 50% tax on it! Now, the theory is that you'll be paying lower taxes in retirement, because you'll only be working part time, if at all.

If you're in a low tax bracket, consider putting your money into a TFSA to help build up your capital. As you enter higher income brackets, you can withdraw your TFSA funds and make contributions into your RRSP to help lower your income taxes.

There is less freedom in how you can withdraw from an RRSP, compared to a TFSA. Withdrawals are classed as taxable income (unlike TFSA withdrawals). Low-income earners pay a low rate of income tax, so RRSPs don't make financial sense for this kind of investor (a TFSA would probably be a better option).

In many cases, we will recommend that people convert their RRSP to a RRIF before age 71. Age 64 or 65 are common ages for conversions to a RRIF, which we will explain below. For some people, the decision to convert an RRSP to a RRIF early is purely for cash flow reasons and out of necessity.

The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after. The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.

Generally speaking, you should aim to contribute at least 10% of your gross income each year to your retirement savings. Start contributing in your early 20s, and that 10% per year could add up to a sizeable savings and a comfortable retirement. Start later in life—say, your late 30s—and 10% a year may not cut it.

On average, you'll need to have saved $1,051,814 to retire at 55 years old. This is based on the median earnings of Americans according to the Bureau of Labor Statistics' October 2023 Current Population Survey in weekly earnings.

In summary, making RRSP contributions when earning an income in retirement may lower your net income (and tax rate) today, but those contributions could increase the taxes you pay down the line, potentially causing an OAS clawback and other credit reductions, once withdrawals are made.

How do RRSP withdrawals work? ›

Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan. However, you generally have to pay tax when you cash in, make withdrawals, or receive payments from the plan. If you own locked-in RRSPs, generally you will not be allowed to withdraw funds from them.

However, most people find it simpler to have only one or two plans, making it easier to keep track of their RRSP investments. If you are investing in assets which are insured by the Canada Deposit Insurance Corporation (CDIC), it may make sense to have more than one RRSP with different RRSP issuers.

A lack of knowledge is a major reason why many people do not invest. The world of money and finance can be confusing and daunting.

No, there isn't a way to transfer funds from an RRSP to a TFSA without paying tax. When you make a transfer, it's considered a withdrawal from your RRSP. The amount withdrawn minus withholding tax is deposited to your TFSA.

10% on withdrawals up to $5,000 (5% in Quebec). 20% on withdrawals between $5,000 and $15,000 (10% in Quebec). 25% on withdrawals of any amount for non-residents of Canada. 30% on withdrawals over $15,000 (15% in Quebec).

Deposits held in a Registered Retirement Savings Plan (RRSP) are protected separately from the eligible deposits held in other insured categories, such as those held in individual names.

Issues include the tax hit when taking money out of the RRSP or RRIF later in life and the potential clawback of Old Age Security (OAS) benefits if your income exceeds the annual threshold, which was $81,761 for 2022. Dying with too much money in your RRSP or RRIF can also trigger a huge tax bill on an estate.

There are several reasons a 401(k) can lose money. Disruptions to an industry or a recession could hurt stock share prices. If other investors are worried about an economic downturn, they might rush to sell their stocks, sending share prices plummeting.