By Sharon Adams
The Vancouver Sun
RRSP Extra
Monday, February 05, 2007

Also published in:

If you're one of the lucky few who've actually managed to max out their Registered Retirement Savings Plan contributions, what's the wisest thing to do now?

Adrian Mastracci, fee-only portfolio manager at KCM Wealth Management in Vancouver, says, "I get my clients to do their RRSP contributions as early as possible. If they've made their maximum $18,000 contribution for 2006, I'd tell them to start making contributions for 2007."

"It's a nice, but unusual, problem to have," says Adrian Mastracci, private client portfolio manager at KCM Wealth Management Inc. in Vancouver.

"The number of Canadians who max their RRSPs is certainly not 100 per cent," agrees Michael Higgins, senior manager of investment communications with RBC Asset Management.

"It becomes more and more difficult to catch up for people who don't focus on savings until their 30s or 40s."

So maxers tend to fall into two groups: young people who stay on top of their contributions from the get-go, and investors with large earnings, usually at the other end of the spectrum in their working lives.

And advice for what to do with those extra funds varies accordingly.

First, these experts agree, pay yourself.

"I get my clients to do their RRSP contributions as early as possible," says Mastracci. "If they've made their maximum $18,000 contribution for 2006, I'd tell them to start making contributions for 2007."

Young investors can continue to find the money for maxing out by asking their employers to arrange to lower the amount deducted for income tax from their pay packets, then applying that amount to an automatic contribution to their RRSPs, advises Mastracci.

Next, get rid of non-deductible debt.

Begin with the highest interest debt first, says Mastracci. This is usually on credit cards, which typically range from about 18 per cent to nearly 29 per cent interest per year.

Then look at other loans like your line of credit. And finally, your mortgage and RRSP loan. Next, attack deductible debt, such as a loan or mortgage being used for investments.

"I would want to get that liability off my books," says Mastracci.

Older investors who've maxed out might consider building an investment portfolio outside their RRSP.

"It makes sense to look at assets in both your registered and non-registered portfolios [to determine the best tax strategy]," says Higgins.

Interest-bearing accounts, which would otherwise be taxable, should stay in your RRSP account.

"Assets that pay dividends or capital gains, which are taxed more favourably," should go into the non-registered portfolio.

Also consider spreading the wealth to spare the taxes.

"If you look at the family situation, figure out which spouse has the lower tax rate, then try to realize savings in that spouse's hands," says Mastracci.

You can invest in your spouse's RRSP (assuming that income is less than yours) to even out your incomes and lower your family tax burden after retirement.

Two $40,000 incomes will be taxed at a lower rate than one $80,000 income, points out Robin Quelhas, senior manager of communications and sales for RBC Asset Management.

Not only does it minimize taxation after retirement, but it increases peace of mind, he says. When both spouses have a relatively equal income, if something should happen to one, the other is not thrown into financial crisis. It's common that pension benefits cease or are interrupted if one spouse passes away.

And you can think of other family members, too.

"If you have children, establish a Registered Education Savings Plan," says Mastracci.

Parents, grandparents, relatives or friends may put a combined total of $4,000 a year, to a maximum of $42,000, into RESPs per beneficiary.

Although there are no tax savings in opening the account, having the account lets you apply for a Canada Education Savings Grant on the child's behalf. The plan grows tax-free until the child is ready for post-secondary education, when it can be used for tuition, residence costs and other educational expenses.

If you have two or more children, a group RESP allows the accumulated money to be distributed among beneficiaries, "so if one does not go on to post-secondary education, it can be used by the ones that do," says Mastracci.

Although it's unusual now for people to max out their contributions, it will likely become more common in the future as more young people commit to RRSPs.

That number has been growing, Higgins notes.

Five years ago, only 44 per cent of 18- to 34-year-olds had RRSPs but that's grown to 62 per cent today, according to RBC Financial Group's 16th annual RRSP survey.

"Younger Canadians starting to invest earlier can take advantage of existing contribution room," says Higgins.

"It's easier to reach the maximum contribution than later in life," when tens of thousands of dollars of contribution room has usually been accumulated.

"The important thing for young investors is to get into the habit of doing that early in life," he says.

Find the contribution limit on your income tax assessment, divide that by 12, and arrange for automatic monthly contributions.

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.