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Plan to use unused RRSP contributions

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(Special) - The government set up Registered Retirement Savings Plans in 1957 as a vehicle for Canadians to save for their retirement. But more than five decades later data shows they have not used it to their fullest and Canadians now are sitting on some $600 billion in unused contributions.

"A lot of people just don't have the income to be able contribute to the maximum," says Jonathan Rivard, an investment adviser with Edward Jones. "They have a lot of other priorities like a mortgage, children's education, cars, entertainment and travel. With everything else they have to do it's just not that high a priority."

How can Canadians catch up on their RRSP under-contributions and help ensure they have enough money tucked away for retirement.

"Budgeting is key," says Rivard. "Do an analysis of your retirement - what do you want to do in your retirement, how much you will need to maintain that lifestyle and then how are you going to fund it. It's important to understand why you are contributing."

One financial question that seems to come up continually in financial planning is whether it is better to pay down your mortgage or contribute to your RRSP.

Unfortunately, there's no easy answer. A lot will depend on individual circumstances such as lifestyle, debt level and interest rates, but there are some things to consider.

"A lot of people believe real estate is one of the best long-term investments you can make," Rivard says. "There are a lot of costs associated with real estate like taxes and repairs and maintenance that can really add up over time. Investments, however, tend to be more passive when it comes to costs although fees sometimes can be a discouragement as well."

"So it's really important to get some professional financial advice for the best solution for you based on your personal situation," Rivard says.

RRSP contributions also tend to be impacted by the economy and performance of financial markets.

"When the markets do well we tend to see better RRSP seasons," Rivard says. "A lot is driven by emotion. When people feel good they are more inclined to invest but during the recession of 2008/09 investment was down. It's pretty cyclical."

Another major RRSP decision is whether it makes sense to borrow money to invest and use up some of that contribution room.

The Investor Education Fund (IEF) recommends investors ask themselves three main questions - are interest rates low? Can you pay off the loan quickly? And do you have other high-interest debt?

Borrowing money when rates are high can be costly and offset the benefit of getting a tax refund from your contribution. Also, interest on borrowed money to contribute to an RRSP is not tax deductible.

Can you repay the loan quickly? You can use your tax refund to apply to the loan, but generally if you can't pay it off within a year it may not make sense to add to your debt load. If you can\t pay off the loan as scheduled you may end up paying more in interest than what you get back in a tax refund.

If you're already paying off high-interest debt such as credit cards, your priority likely should be on paying down this debt as quickly as possible, not adding more.

The IEF suggests you may want to consider a couple of other strategies instead of borrowing to contribute to your RRSP.

Contribute what you would have paid to service the loan. If you were going to borrow and make a $350 monthly loan payment contribute that amount to your RRSP. This way you'll pay no interest and you won't be affected if interest rates rise.

Take out a series of smaller loans instead of one big one. If you have a lot of RRSP contribution room and are not comfortable taking on a lot of debt, take a series of smaller, one-year loans. You pay less interest, take on less debt and use your RRSP refund to pay off your catch-up loan.

"What's most important is to create a budget, understand when you want to retire and the type of lifestyle you want in retirement, and then get active in planning your financial future, because if you don't the chances are you won't take action and contribute," Rivard says.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

Copyright 2014 Talbot Boggs

Note to readers: This is a corrected story. An earlier version had an incorrect spelling for Jonathan Rivard.

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