Last week, I’d discussed three TFSA mistakes that investors need to avoid in 2019 and beyond. Today, we are going to look at three mistakes to avoid in your Registered Retirement Savings Plan (RRSP). I am partial to the TFSA, but the RRSP is an extremely effective vehicle to save for retirement in Canada. That is why it is important to avoid crucial mistakes that will cost you financially.
Early withdrawals
The RRSP is an account designed for long-term retirement savings. Early withdrawals attract a punishing withholding tax on investors who choose to dip into the account. An RRSP withdrawal up to $5,000 carries a 10% withholding tax, excluding Quebec, where the penalty is 21%. Withdrawals between $5,000 and $15,000 carry a 20% withholding tax, and withdrawals of $15,000 or more carry a 30% withholding tax.
In addition to the tax penalty, most investors will also permanently lose this contribution room in their RRSP. Withdrawing early from an RRSP is a costly decision that can really hurt investors in the long term. Investors need to avoid it unless they have exhausted every other financial option.
Excess contributions
Just as with the TFSA, it is possible to over-contribute to your RRSP. The Canadian government publishes the maximum amount you can contribute to your RRSP every year. In 2019, the RRSP contribution limit was set at 18% of the earned income in your 2018 tax return, up to a maximum of $26,500. This was a slight increase from the upper limit in 2018 of $26,230.
Fortunately, the government does give investors a $2,000 buffer for over-contributions. When investors exceed this amount, they are subject to 1% monthly tax kicks on excess contributions.
Failing to maximize employer RRSP matching contributions
Back in March, I’d discussed why it was more important than ever for investors to utilize their RRSPs. This is especially true in the face of the decline of defined-benefit pensions plans in the private sector. We have also seen the growth of self-employed and contract work in recent years.
Many employees can still take advantage of Group RRSPs where employers offer to match employee contributions up to a specific percentage. Investors who have this option offered to them should be as aggressive as possible in maximizing the offer to match.
RRSP stock pick for today
With all that in mind, here is my top stock to snag for your RRSP today.
BCE (TSX:BCE)(NYSE:BCE) is a fantastic option for RRSP investors on the hunt for growth and steady income. The stock has climbed 12.5% in 2019 as of close on April 15. Shares are also up 12% from the prior year. In 2018, BCE achieved operating revenues of $23.46 billion, which were up 3.1% from the prior year. It reported adjusted net earnings of $3.15 billion, up 3% from 2017.
A dovish interest rate environment is great news for telecom stocks, which had fallen out of favour as rates rose with bond yields. Now income investors can feel comfortable in turning back to these reliable income-generating equities. In its Q4 2018 report, BCE announced a 5% dividend increase to an annual payout of $3.17 per share.
BCE last paid out this quarterly dividend of $0.7925 per share on March 14. This represents an attractive 5% yield. The company has achieved dividend growth for 10 consecutive years.
