RRSPs: Four ways to boost contributions

How can you urge your clients to put money aside for retirement? Jolene Laing, branch manager and associate portfolio manager with ScotiaMcLeod Inc. in White Rock, B.C., shares four techniques to help make contributing easier for clients:

1. Have the RRSP discussion year-round
While January and February are usually considered “RRSP season,” educating your clients on RRSPs and evaluating their contribution options should take place throughout the year.

For Laing, RRSPs are a part of any conversation with her clients. She discusses ways of investing to produce tax savings, and any other opportunities that might be available to help her clients reach their financial goals.

Laing recommends having a thorough discussion with your clients just after they have filed their income-tax returns. This timing enables you to access the amount of contribution room the client has and whether maxing it out for the upcoming year is affordable.

This is the most productive time to for such a discussion, Laing adds, because clients will have a clear picture of their taxable income and past RRSP contributions.

2. Encourage scheduled monthly contributions
Setting up small monthly RRSP contributions relieves your clients of the burden of having to come up with a large amount all at once.

Says Laing: “If you systemize things, people don’t even notice that they’re happening anymore. It’s just making it a part of their cash flow.”

Start small. If your client is employed, a scheduled RRSP contribution of $25 from his or her bank account each payday should be affordable.

Next: Discuss borrowing to invest
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3. Discuss borrowing to invest

While Laing generally does not agree with borrowing to invest, she says RRSPs can be the one exception to that rule under certain circumstances.

Borrowing can allow clients to contribute funds they may not immediately have on hand, which can generate significant income-tax refunds. However, Laing says, borrowing is a more suitable option for clients in higher tax brackets, who would receive larger refunds.

Take, for example, a B.C.-based client whose federal and provincial tax obligations add up to 43%. If this client has $10,000 in contribution room but doesn’t have that on hand, he can borrow the money and place it in an RRSP. The resulting tax refund of $4,300 can then be put toward his line of credit. As for paying off the remaining debt, a feasible plan to do so should be developed first. And while the client is paying off the loan, the full $10,000 is invested.

Laing cautions that the client’s accountant should be brought into this conversation before taking any action.

4. Emphasize the importance of emergency funds
Make sure your clients understand that they must have emergency cash reserves outside their RRSPs and that withdrawing funds from RRSPs negates the tax benefits.

“Contributions are only good if they stay in,” Laing says.

Laing suggests a tax-free savings account for this purpose.

Make the emergency fund part of your clients’ retirement plan. If your client has authorized automatic RRSP contributions, talk to him or her about dividing this amount equally between an RRSP and an emergency fund.