RRSP contribution tips for your clients

For some clients, contributing to their RRSP is harder to do than visiting the dentist. Last year Canadians used just 7% of the total room available to eligible tax filers, despite a record 6.2 million Canucks contributing.

Why aren’t people saving more? Because Canadians like their stuff. “It doesn’t come as second nature to go put money in an RRSP when you can buy something with those funds,” says Gena Katz, executive director at Ernst & Young. “But it makes good sense. The earlier your clients start, the better off they are. It’s something advisors should always encourage clients should do.”

To help advisors convince their clients that making an RRSP contribution is beneficial, the company put out its list of “Eight Tips to Tackle RRSP Crunch Time.”

One of the suggestions on the list deals with a problem that’s likely common to many of your clients: they don’t have enough cash to contribute this year.

Katz says borrowing money to put into an RRSP is a good option for those Canadians lacking funds. “The borrowing often comes up because people go on their merry way all year and don’t put money in an RRSP.”

However, she adds that using borrowed money is not for everyone. The benefits depend on a number of things, including age. If a client is 60, contributing with loaned money doesn’t make much sense, as the investment will not likely grow significantly before he or she retires. It’s a different story for someone who’s 30 and will see his or her investment grow substantially over 40 years.

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Borrowing also makes sense if the client can pay off the loan in a reasonable amount of time. “If the funds are going to be there for quite a number of years, and the client can repay the loan in a reasonable amount of time, like one to four years, then borrowing does make sense,” Katz says.

Clients can also make contributions with non-registered investments, but there will be an accrued gain if that contribution is in the form of stocks. “The client will be paying tax up front right now, and later on they’ll be taxed on the full amount coming out,” says Katz.

But with equity markets in turmoil, dumping your lower-priced stocks into an RRSP might be a wise move, as your gains could be less than they would be in an up market.

Another tip that Ernst & Young offers is contributing to a spousal RRSP. Katz says a lot of people think pension splitting, which was introduced in 2007, replaces spousal RRSPs, but that is not the case.

“Spousal RRSPs still make sense because there’s no limitation,” she says. “Income splitting is only half of eligible pension income. For spousal RRSPs, individuals can potentially put all contributions in the plan and they can get more income in their spouse’s hand. And they’re not limited by eligible pension income.”

Ernst & Young lists several other ways to maximize your clients’ RRSP contributions, like suggesting they pay the $2,000 penalty-free excess contribution so they can contribute less down the road or, if they’re making a large “catch-up” contribution, spread the deduction over a couple of years to increase the related tax benefit.

But more important than any of these strategies is to make sure your client contributes sooner rather than later.

“The final suggestion is ‘now that you know that your RRSPs are so wonderful, instead of just doing 2007 now, how about contributing for 2008 too?'” says Katz.

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(01/29/08)

Bryan Borzykowski