My Early and Costly RSP Mistake
Written by Kelley Keehn

Tuesday, May 11th, 2021

When I turned 18, I was set to receive what I thought was an astronomical amount of money: $10,000!

This was an award from a horrible car accident I suffered when I was very young. At age 12, I learned about the settlement and quickly went to work studying all I could about investments. Being raised by a single mom where money was nonexistent, I vowed to make good on this windfall when I received it at age 18.

Looking for the Long Term with an RSP

Determined to learn the inner workings of stocks, bonds and my other options, I scoured the few financial books available at the time, interviewed my banker and my mom's insurance agent and soaked up everything the library offered (I'm 45 so there wasn't much on personal finance back then – Google didn't even exist yet!).

When I finally received my pot of money, I was doing a practicum at a financial planning firm. The wise saying, "a little information can be dangerous" certainly rang true for me.

I invested 100% of my settlement in high-risk mutual funds in an RSP. I felt I had researched all my options. With a very long-term investment horizon (I was only 18 and decades away from retirement), I'd give my portfolio the best chance to grow by taking a high-risk strategy, knowing I had loads of time to weather the ups and downs.

Also, by investing in an RSP, I thought I'd not only grow my money faster by sheltering it from tax, but I would get a juicy tax refund too!

Here's Where My Plan Fell Apart

  • I invested in a high-risk mutual fund RSP in February of that year.
  • There weren't many tax calculators easily accessible back then, and I didn't realize that because my marginal tax bracket was so low, I wasn't going to get much of a refund.
  • In May, I decided to move out of my mom's home. Disenchanted with the rentals available, my older brother convinced me I should buy a condo. Guess where the down payment came from? You presumed right! I had to withdraw all of my RSP funds. Because tax was deducted at source, I didn't get my $10,000 back, plus, since I invested in super risky mutual funds, those had dropped too. A third whammy? I had to include the money I received from the RSP as income the following year and had to pay even more tax!
  • I was ignorant to the fact that the Home Buyers Plan was just being discussed in parliament at the time and unfortunately for me, it wasn't available when I decided to cash out.

My Lessons Learned for the Future

  • When you receive a pot of money, either from an inheritance, tax refund or other perceived windfall, sit on that money for a while. Do your research and even consider reaching out to a financial or tax professional before acting.
  • Don't rush into RSPs. They're brilliant tax vehicles, but so are TFSAs for saving. If you're unsure that you can lock your money away for retirement and the long haul, you can always invest in your TFSA and, before the RSP deadline, flip the money over to that shelter.
  • Lastly, be super clear on your short-term and long-term goals. That way, your investments can compliment your intentions instead of complicating them.
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