Navigating the complexities of Registered Retirement Savings Plans (RRSPs) is crucial for Canadians aiming to maximize their retirement savings while staying compliant with the Canada Revenue Agency (CRA). Three common pitfalls can lead to significant tax consequences. Plus, investing in a diversified exchange-traded fund (ETF) like iShares S&P/TSX 60 Index ETF (TSX:XIU) can help mitigate these risks — all while still making tons of cash to save for retirement.

Excess contributions

The CRA sets annual RRSP contribution limits based on 18% of your previous year's earned income. This is up to a specified maximum, plus any unused contribution room from prior years. Over-contributing beyond a $2,000 lifetime buffer incurs a 1% monthly penalty on the excess amount. To avoid this, it's essential to monitor your contribution room carefully.

Investing within your limits, such as purchasing units of XIU, ensures compliance, helps prevent inadvertent over-contributions, and will keep you away from those interest penalties.

Unreported early withdrawals

Withdrawals from an RRSP before retirement are generally taxable and must be reported as income — that is, unless these qualify under specific programs like the Home Buyers' Plan or Lifelong Learning Plan. Failing to report these withdrawals can result in penalties and additional taxes.

Yet again, by maintaining investments within your RRSP, such as holding XIU, you can minimize the need for early withdrawals, thereby preserving your retirement savings and avoiding unnecessary tax liabilities.

Inappropriate income splitting

Contributing to a spousal RRSP is a legitimate strategy to balance retirement income between partners. However, if the spouse withdraws funds within three years of the contribution, the amount may be attributed back to the contributor, leading to unexpected tax consequences.

To prevent this, ensure that any spousal RRSP withdrawals adhere to the CRA's timing rules. Investing in stable, long-term assets like XIU within a spousal RRSP can reduce the temptation or need for premature withdrawals and, again, continue to bring in more income for you and your partner.

Why XIU?

There are many ETFs out there, but XIU is certainly a top choice. The ETF offers exposure to 60 of Canada's largest companies, providing diversification across various sectors. This diversification helps mitigate sector-specific risks and contributes to a balanced portfolio.

XIU has demonstrated robust performance, with a year-to-date return of 20.41% as of the writing of this article. Over the past year, it has achieved a 30.01% return, and it has a three-year return of 8.12%. These figures reflect the ETF's ability to deliver consistent growth. Thus aligning with long-term retirement objectives.

Given its diversified holdings and exposure to leading Canadian companies, XIU is well-positioned to benefit from the country's economic growth. While market conditions can fluctuate, the ETF's broad sector representation offers resilience against volatility, making it a prudent choice for RRSP investors seeking steady, long-term growth. By investing in a diversified ETF like XIU within your RRSP, you can align your portfolio with CRA regulations while reducing the likelihood of triggering red flags and work towards a secure retirement.