While RRSPs are useful, they can also be sizable tax burdens if misused.
So tell clients the conditions before setting up their accounts, says Hélène Marquis, regional director of Wealth Advisory Services at CIBC Private Investment Counsel.
Most importantly, explain that money held within an RRSP has limited use.
“The money is supposed to be kept there until you use it for retirement purposes,” she says. “If you take money out of RRSPs [and use it] for home repairs or renovation, that amount will be fully taxable in the year it’s withdrawn,” causing a huge tax hit.
Also, clarify that RRSP contribution room is limited to 18% of the client’s earned income in the previous tax year. Make sure they know “this doesn’t include income generated by an investment portfolio,” Marquis warns.
If you suspect clients are dipping into their accounts, remind them they were created to help Canadians reach retirement goals. They shouldn’t treat the funds as emergency savings, for instance.