It can be daunting to close in on retirement and realize you haven't saved enough money in your registered retirement savings plan.
"Although people have the intention of doing the right thing and trying to save for retirement, they don't really know where to get started or how to find the money to start saving," says Todd Sigurdson, a tax and estate planning specialist with Investors Group Inc. in Winnipeg.
But it's never too late to start – and the earlier that realization comes, the better, experts say. They point out that while the compounded interest and earnings that otherwise could have accrued inside an RRSP are irrevocably lost, the damage can be mitigated with regular annual contributions starting now.
If an investor begins contributing $7,000 a year to an RRSP at age 45, and that money grows at a compound rate of 6 per cent annually, the investor would have $446,000 by 71. If investors start at 50, the amount accumulated would drop to $304,000. And if they wait till 55, the total would be $198,000, says Lorn Kutner, a partner with Deloitte Canada LLP in Toronto.
One advantage for many middle-aged workers is that their salaries are at or nearing their peak, says Arthur Azimian, a financial adviser with Edward Jones in Port Credit, Ont.
Investors could also apply for an RRSP catch-up loan. Financial advisers stress, however, that such loans should be paid off quickly.
"Extreme due diligence must be paid on the interest rate and on the duration of the loan. It must not become a lingering matter," Mr. Azimian cautions. "I'd like that loan to be paid off in the first year."
The RRSP tax deduction itself can be used to pay down the loan, Mr. Sigurdson says.
"If you take the entire deduction in the year that you take the loan out, you'll get a significant refund," he says. "If you're in the highest marginal tax bracket in Ontario, for example, you'll essentially get 50 per cent back as a tax refund.
"If you use that tax refund to apply as a payment on your loan, you can knock off half the proceeds right there," he says.
Taxpayers also can spread their RRSP deductions over more than one year if it is tax-advantageous to do so, Mr. Kutner says. "Obviously the earlier you deduct it, then the earlier you get a tax refund, and the more money you have today," he says. But, he points out, if you wait for a year in which your income is higher, you might get a bigger bang for your buck.
People who don't have much cash on hand might want to consider making an RRSP contribution with something else. Products such as guaranteed investment certificates, publicly listed stocks, corporate bonds, Canada Savings Bonds and mutual funds are eligible to be tranferred "in kind" into an RRSP.
There would be a deemed sale, or as it is referred to in finance terms, a "deemed disposition" of that asset, with any income taxes owing payable, and then its value could be transferred into the RRSP.
The key is whether you can claim significant capital gains or losses on those investments, Mr. Sigurdson says, "because you really don't want to be triggering a significant tax event in order to get the tax break." Holders of securities cannot recognize a capital loss if they liquidate those investments to transfer into an RRSP.
"In that situation it would be better to sell the stock first, realize the loss, and then contribute the cash [to the RRSP]," Mr. Kutner says.
It is also important to know that once instruments such as mutual funds or stocks or GICs have been transferred inside an RRSP, they technically continue to exist in their original form. But they are no longer capable of generating capital gains. Instead, any gain will be taxed as regular income when the funds are withdrawn, with 100 per cent of the amount taxable.
Investors looking for cash for RRSP contributions should also consider lifestyle issues, from working longer to cutting costs by downsizing to a smaller home, says Cherith Cayford, a facilitator of CMG Financial Education in Victoria.
Mr. Sigurdson says, "The sale of a principle residence would essentially create tax-free cash for the individual."
Another possibility for people who are older than 40 and run a successful incorporated business is to set up an individual pension plan inside their corporation, says Mr. Sigurdson.
"If they have been paying themselves a T4 income, or a salary income under their corporation, an individual pension plan can maybe allow them to have the corporation make a large lump-sum payment for a past service contribution to a pension plan that they establish inside the corporation," he says.
So now you have money to invest. But how should you invest it?
Experts caution against taking on too much extra risk. Investment advisers say an investment portfolio should generally become more conservative the closer a person is to retirement. While equities generally provide the highest return over time, they are risky – witness the financial crisis of 2008. Nobody wants to be caught in a downturn with precious little time to recover.
But Mr. Sigurdson believes that older investors should still invest in equities, noting that many people nearing retirement today might live for an addional 20 or 30 years.
"You don't want to get too conservative too early," he says. "You want to have a good mix in your portfolio, [including] some equity when you're talking about an investor in their 40s or 50s or even early 60s."