Over the past 15 years, the number of RRSP contributions and the amounts contributed have increased. But despite the upward trend, there is still much room for growth.

Canadians use only about 7% of their total RRSP room. The median annual contribution in 2005 was $2,630 and only 26% of Canadian taxpayers made RRSP contributions at all, according to the most recent Statistics Canada report.

With so many demands on taxpayers’ paycheques, many feel their income won’t stretch far enough to include RRSP contributions. Contributing early and maxing out contribution amounts may seem impossible for these people. But there are ways to approach putting aside RRSP money of which clients may not be aware.

The best approach is to free up money being used in other ways — and the first place to start is the monthly budget, says Tony De Thomasis, president of De Thomas Financial Corp. in Thornhill, Ont.: “If their budget is really tight, clients have to find where they can squeeze some savings. In these situations, it’s critical to maximize every dollar they have coming in.”

Sitting down with clients and rearranging monthly spending can free up money, allowing taxpayers to contribute to an RRSP on a monthly basis. For example, if a client is paying a relatively high car insurance premium, he or she might consider raising the deductible to $1,000, thereby lowering monthly payments. “If the client can free up $200 to $300 a year in premiums, that is not a bad start for the RRSP,” says De Thomasis. When the tax refund arrives, the client can add it to the RRSP for additional savings.

If clients are carrying outstanding balances on credit cards and making high monthly payments, De Thomasis recommends obtaining a line of credit and paying off the cards. “This allows a lower monthly payment because, instead of paying 18% interest on an outstanding balance, the client can lower the interest charge to 6% or 7%,” he says.

The savings that result can become a monthly RRSP contribution. When the tax refund arrives, the client should apply it directly to the line of credit’s outstanding balance. The line of credit can be paid off within a two- to three-year period and, if the budget is kept in order, the client can increase monthly RRSP payments. “It’s an easy way to pay off debt and still contribute to a plan,” De Thomasis says.

For clients getting a late start on contributions, there is no better time than today to go through daily budgets. “It’s like David Bach says in The Latte Factor,” says David Salloum, a certified financial planner with RBC Dominion Securities Inc. in Edmonton. “If you can save $5 a day on a coffee and a muffin, you could be contributing that amount, with an annual rate of return, to your RRSP. That could result in $60,000 of retirement savings.”

Earlier education and in-depth conversations about basic retirement needs are much needed in today’s free-spending society, says Salloum. He believes that if clients knew how much they would need to survive in retirement, they would begin contributing at an earlier age.

Statistics Canada reports that, in 2005, the average age of an RRSP contributor is 44, and only 20% of contributors are 25 to 34 years old.

“Clients need to know that they have to plan ahead,” says Salloum. “Getting an earlier start would be ideal. I always say the best time was 20 years ago and the second best time is tomorrow.”

He gives his clients blank budget sheets so they can track their personal spending habits. Clients are able to see how much they spend on things such as non-deductible loans, entertainment, eating out, coffee, etc.

“They come back with epiphanies; they had no idea how much extra spending they were doing,” he says. “It’s better for them to discover it on their own. Then we can sit down, re-budget and start thinking about RRSP contributions.”

A client in a low income bracket may want to hold off on making an RRSP contribution, allowing contribution room to accumulate until he or she has a higher income and thus earns a larger refund. “We dislike postponing contributions,” says De Thomasis. “But that would be the best recommendation in terms of tax efficiency.”

@page_break@With RRSP season upon us, clients may find they are running out of time for monthly contributions or re-budgeting. An RRSP loan can be a quick but temporary solution, says Warren Baldwin, regional vice president of Toronto-based T.E. Financial Consultants Ltd. RRSP loans usually have better interest rates than regular loans, although the RRSP cannot be used as collateral. Clients should budget to pay back the loan within a year, and apply the tax refund to the loan balance.

Once the loan is paid off, clients can continue making monthly payments into the RRSP. “Budgets reset themselves, and everyone gets used to money not being there,” says Baldwin. “If you and your client have done the arithmetic correctly, it should work out in the end.”

Once your client’s income increases or a career change occurs, you can reset the budget and increase RRSP contributions. IE