Building a million-dollar portfolio through a Registered Retirement Savings Plan (RRSP) is a dream for many Canadians. However, achieving this goal requires more than just contributions and market gains. To safeguard your savings and remain compliant with the Canada Revenue Agency (CRA), it’s vital to steer clear of common pitfalls. This article explores three major CRA red flags for RRSP millionaires and highlights how investing in a diversified ETF can help you optimize growth while avoiding tax headaches.
Table of Contents
1. Excess Contributions: A Costly Mistake
What is the rule?
The CRA allows annual contributions to your RRSP based on 18% of your previous year’s earned income, up to a specific maximum ($31,560 for 2024). Additionally, unused contribution room from prior years can be carried forward.
What’s the penalty?
Over-contributions exceeding a lifetime buffer of $2,000 are subject to a 1% monthly penalty on the excess amount. Left unchecked, this can add up quickly and eat into your savings.
How to avoid it:
To steer clear of excess contributions, monitor your RRSP limit via the CRA’s My Account portal or your annual Notice of Assessment. If you’re approaching the limit, consider alternative strategies like investing in a Tax-Free Savings Account (TFSA).
2. Unreported Early Withdrawals: Tax Trouble
What is the rule?
Withdrawals from an RRSP before retirement are considered taxable income unless part of specific programs such as the Home Buyers’ Plan (HBP) or Lifelong Learning Plan (LLP). Failure to report these withdrawals can lead to penalties and extra taxes.
Why is it risky?
Early withdrawals not only trigger immediate taxation but also reduce your RRSP’s future growth potential. The lost contribution room is also permanently removed, impacting your long-term retirement goals.
How to avoid it:
Plan your withdrawals carefully. Only access your RRSP under eligible circumstances or as a last resort.
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3. Inappropriate Income Splitting: A Spousal RRSP Trap
What is the rule?
Contributing to a spousal RRSP is an effective strategy to balance income in retirement. However, if your spouse withdraws funds within three years of the contribution, the amount may be attributed back to you as income, triggering additional taxes.
Why is it risky?
Unexpected tax liabilities can undermine the purpose of income splitting, especially if the contributor is in a higher tax bracket.
How to avoid it:
Follow the CRA’s three-year rule for spousal RRSP withdrawals. Plan withdrawals strategically to ensure they occur after the required timeframe.
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Secure Your RRSP and Build Wealth with Confidence
Avoiding CRA red flags is critical for RRSP millionaires aiming to maximize their retirement savings. By monitoring your contributions, planning withdrawals wisely, and adhering to spousal RRSP rules, you can steer clear of costly mistakes.
Investing in a diversified, high-performing ETF enhances your portfolio’s resilience, ensuring steady growth while mitigating risks. With strategic planning and disciplined investing, your RRSP can become a powerful tool for a financially secure retirement.
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