RRSP Myth #1

Every year when The Season rolls around we are inundated with articles and advertising about RRSPs, why you should have one and how best to use them to save for the future. And yet myths abound.

Perhaps the biggest myth of all is that an RRSP is an investment. I hear this all the time.

I ask, “So what did you invest in this year?”

They say, “An RRSP.”

I smile, “It’s great that you put your money into an RRSP, but what investment did you choose?”

They, with a quizzical look on their faces, “What do you mean, I bought an RRSP. That’s what I invested in.”

While a lot of people are under the impression that they can invest in an RRSP, they can’t. It’s not an investment at all. It’s a plan registration, that’s all. By putting the RRSP plan number on the paperwork that signals the Tax Man to treat the money in a special way.

(If I’m getting a little too basic for you, skip on to the next myth. Believe me, there are still a ton of people who don’t get this, so I’m going to throw an imaginary visual aid at this.)

Imagine that you have a ball, a box and an umbrella. The ball is your money. The box is the investment you’re putting your money in. It could be a savings account. It could be a GIC. It could be a mutual fund, or individual stock or bond. Okay, you’ve put the ball in the box. Now slide the box under the umbrella. There ya go, you’ve just put the money into an RRSP.

The problem for most people is that they often contribute to an RRSP before they decide how they’ll invest their money. So they put the ball under the umbrella first. Then later, they choose the box that best fits their ball. What’s important to remember is that until you choose a box, no money has been invested. While the money is under the umbrella, it’s registered, but until you put that ball in a box, it’s just sitting there earning not a red cent in return. You’ve saved it. But now you have to put those savings to work.

Next Tuesday, Myth #2.

18 Responses to “RRSP Myth #1”

  1. Count me as dummy #1. Never did have it explained that way before.
    Fortunately we invested in a product reccommended by our insurance agent – lo’ these many years ago and we are happy with the performance. At that stage of our life, it was a HUGE step for my DH since we had just witnessed the breakup of a marriage in the family and the wife “took” all the RRSP’s in the settlement.

  2. Big ‘HECK YEAH’ to this post today. This is one of the biggest misunderstandings out there – if it’s not clear, please re-read the post until you understand the concept that Gail’s outlining. It’s important.

    >>>Fortunately we invested in a product reccommended by our insurance agent

    I recommend that your financial advisor and life insurance agent be two different people. Too much risk someone will get sold an insurance policy as an investment, and that’s nothing but bad for you. Alternatively you’ve got someone who’s a specialist on investments selling you insurance when they’re not up to speed on risk and insurance products. There’s no reason someone couldn’t be fluent in both,it’s just very unlikely.

  3. avatar RichUnderTheRadar Says:
    January 3, 2013 at 10:07 am

    Thanks Gail!

    I have always had a hard time explaining this to people when the subject comes up. I will definately be borrowing your analogy. Another myth to be busted is definitely that somehow people don’t understand the potential tax benefits of using a TFSA as a retirement vehicle and that it is in no way inferior to an RRSP it just depends on your current and potential future tax situation and can be invested in the same products such as index funds.

  4. Thank you for this blog.

    It is challenging even to encounter critics in internet posts and in personal life who are confused, challenged, and even downright negative about the RRSP, all because they confuse it with the investments it holds.

    I know many of them would be happier in their retirment planning if they better understood just where it was they were parking their money, and how they could manage the funds.

  5. avatar CreativeNige Says:
    January 3, 2013 at 11:20 am

    OK, Gail. I have my ball under an umbrella; I get it now. But where and/or how do I find a box that best fits my ball?

  6. Could you maybe address the “contribute to RRSPs and then claim the deduction later when your salary is higher” thing? I’m still confused about that, because from what I’ve read, you can only claim the deduction a maximum of 1 year later. How much more could you be making?

    But maybe I’m wrong?

    Also, for the technically minded, today’s myth is like people thinking The Internet = web surfing (or in extreme cases, The Internet Explorer icon). Sure, using websites is one of the things the Internet is used for/contains, but there’s more.

  7. Great post Gail. I’m looking forward to RRSP myth #2!

  8. Thanks Gail! I remember going around in circles with my mother in law when I asked what kind of RRSP’s they had. She just kept saying “It’s an RRSP” louder and louder, as if I would understand if she said it louder. When I tried to explain that RRSP was just a “Registered Retirement Savings Product” and there were a lot of options under that name she got frustrated with me and ended the conversation. I think she figured RRSP’s were like bonds.

  9. Jay
    Currently no limit on number of years you can hold off on claiming the RRSP deduction. It used to be 7 years but no longer. Government happy as you are not claiming a deduction yet, so they’re keeping all taxes you’ve paid.

  10. I usually have to explain these things in terms of ‘buckets’ – so an RSP is a bucket, a TFSA is a bucket, an RESP is a bucket. And what you put in those buckets – whether it’s cash, mutual funds, gold, us dollars, whatever, is up to you.

  11. >>>>But where and/or how do I find a box that best fits my ball?

    Google ‘index funds’. Then start reading :)..

  12. […] When it comes to investments and RRSPS, now is the time of year when you should consider contributing or opening one.  However, Gail Vaz-Oxlade wants to make sure you know this RRSP Myth #1. […]

  13. Thanks Judy – I just haven’t been able to find that on CRA sites when I’ve looked.

  14. Love the example! While I did understand the concept, I think it would be a great way to put it to someone just starting to think about one, I know I would have found it helpful when I first started working and went to start mine.

  15. oh the anguish of not knowing enough!
    I’ve been investing in whatever RRSP diverified fund is recommended to me (by hopefully smarter money professionals) since I was in my early 20’s. The growth is slow and sometimes the losses are tragic, but theoretically by “dollar cost averaging” with the same contribution month after month, I will end up ahead of the game by the time we need it to retire. (Neither me nor the hubby have pensions coming so it’s all up to us.)

    In effect we have been “trusting our balls” to our broker to put in the right boxes under that umbrella. LOL!

  16. I have a self-directed RRSP with questrade. That way I decide how my money is invested.

  17. A good financial planner can help you decide what is best put in the box and which box is best in your circumstances. Investing is only part of the complete financial plan and everyone should have a plan.

  18. It’s hard to believe that people are so ignorant. In my more than 10-year carrier of a financial planner, I have not met a single person, who would fall into this category. In addition, technically it is not possible to write a check, hand it to a bank or a financial adviser and say “put it in my RRSP”. This industry is so well regulated that your financial representative has the duty to explain where your money would go and you have to agree by signing the required paperwork.

    It is hardly a myth, but the reality is that many RRSP investors struggle to decide where to put their money (meaning in what financial instruments).

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