By: Laura Ramsay

 A new millennium has dawned and, more mundanely, RRSP season is in full swing. Straight through until the end of February, you'll be bombarded with ads urging you to put your money into RRSP-eligible mutual funds and investment products with promise of dependable returns and significant tax savings. For low and middle-income investors these promises don't always ring true. Here are 10 traps for the low- or middle-income investor to be wary of:

1. If the primary breadwinner earns less than $20,000, and the spouse, if one exists, earns even less - ie: is unlikely to earn over $20,000, which with tax credits and deductions will bring the spouse's taxable income to close to zip - the family is best served by paying off their mortgage and putting savings into something outside an RRSP, says Richard Shillington of Tristat Resources in a paper published by the C.D. Howe Institute. Money put into an RRSP is only taxed when it is withdrawn. The tax is generally about 25 cents on the dollar for taxable income between $7,000 and $29,580. But when a low-income earner starts to draw income from an RRSP, they may lose 75 to 125 per cent of their income from savings to taxes and clawbacks on benefits such as the guaranteed income supplement (GIS).* GIS benefits are reduced by 50 cents for each dollar of non-old age security income which include RRSP savings and, often, benefits such as public drug plans, meals on wheels, subsidized housing and long-term care. In an example, Shillington shows how $1,000 put into an RRSP at 45 might grow at 5.6 per cent interest to $3,942 by retirement. But if the individual's effective tax rate is 50 per cent the amount available would be $1,971; if it's 75 per cent the amount drops to $936, meaning the saver would enjoy less money than he put in. Meanwhile, someone who saved outside of an RRSP could be left with $2,276 to spend.

Check out Richard Shillington's Straight Goods article - Are RRSPs really for you?

2. Investing in RRSPs or stocks instead of first paying off high-interest debts, such as credit card balances.
3. Borrowing money to put in an RRSP, then not paying the loan off quickly. If you can't afford to repay the loan in less than one year, you may end up paying more in interest to the lender than you earn on your investment or in tax savings.
4. One spouse builds up disproportionately large RRSP savings. The couple will be paying taxes at the maximum rate on this income upon retirement. Instead, the higher-income earner should make contributions to a spousal RRSP to even things out. Similarly, if one partner receives a bigger Canada Pension Plan cheque than the other, ask to receive two equal cheques. Your total benefits won't change but your family's total tax bill could drop.
5. Getting a tax refund every April. This means your employer is withholding too much money from each of your pay cheques and you're giving Ottawa free use of your money for a year while you lose out on its investment potential. Arrange to have less money deducted at source and invest the difference.
6. Investing money you may need to live on in the near future. This applies particularly to self-employed people who should instead be dramatically increasing their liquid assets, so they can weather periods of unemployment and fluctuations in income and not have to use high-interest credit cards to pay for basic necessities during cash-flow crunches.
7. Investing all your savings in mutual funds if you don't have a pension plan or other income to fall back on. You could lose your life savings if the market turns. Remember the "don't put your eggs in one basket" caution.
8. Buying mutual funds at the end of the year. You're likely to get hit with the cost of distributions paid out to fund-holders for capital gains realized over the previous year, even though you didn't own the fund during that period and haven't shared in its growth. Your bad timing will cost you in April because you'll have to pay tax on that distribution amount.
9. Holding the wrong investments inside your RRSP. Keep investments that bear taxable interest inside your RRSP (such as GICs) and hold stocks and other equity investments that yield dividends and capital gains, which are taxed at a lower rate, outside your RRSP. That way you'll minimize the amount of tax you have to pay on your total earnings.
10. Giving your money away to your children as a means of lowering taxes on your estate. You may still need these funds yourself. Unexpected illness can wipe out savings in no time. "You are not in control of what is going to happen in your children's lives, things like divorce or business failure. If you need the money back, they might not have it" or be unwilling to return it, says Karen Troy, senior advisor, personal wealth management services with Royal Trust in Vancouver. "Having to pay taxes on that money is better than not having it" when you need it.

Laura Ramsay is a freelance writer specializing in personal finance and workplace issues.