To make the right choices, you need to do a bit of planning. There’s no right answer for everyone, and much depends on your priorities and the setbacks you face along the way. Just ask Scott and Erin Parkin of Brantford, Ont. Erin, 33, has been a stay-at-home mom to her two kids, Owen, 10 and Molly, 6, for the past 10 years. Scott, a 39-year-old engineer, has been the sole income earner and since he’s in a high tax bracket, he has always contributed to RRSPs—his own plan plus a spousal RRSP for Erin. Over the years they’ve accumulated $66,800 in Scott’s RRSP and $20,000 in Erin’s.

But those contributions came to an end in 2009. That’s because the Parkins aren’t comfortable with the way their RRSP money is invested. Their entire portfolio is made up of segregated funds with annual fees over 3%, and they don’t know what to do about it. But the bigger reason is that they are trying to stay on track to pay off their $198,000 mortgage in 15 years. “We put the little extra money we have—about $3,600 a year—towards the mortgage,” says Scott.

The couple also say they could probably squeeze an extra $200 a month from their budget to put towards either the RRSP or the mortgage, but they aren’t sure which option is best. These competing priorities are typical for people in their 30s. “It’s a constant battle,” says Scott.

Megan and Matthew Shaw of Thunder Bay, Ont., share the Parkins’ concerns. They too, are trying to raise a family (they have three kids, ages 9, 4 and 2) and pay off their $99,000 mortgage solely on Matthew’s $85,000 salary. (Names have been changed to protect their privacy.) “We have no consumer debt so we’re happy with that,” says Matthew, 35, a police officer for the last six years. “But after expenses we usually have about $5,000 annually to invest, and we don’t know where to put that money—the mortgage or RRSPs?”

What makes the choice more vexing is the fact that the Shaws are at a loss over how to fix the stagnant returns on their $150,000 RRSP nest egg. They feel they need a whole new strategy. “Why are we putting all this money into RRSPs and not getting any returns?” asks Megan, 38. “Our annual fees, which average about 2.8%, are ridiculously high.”

The Shaws feel stuck. Most of their mutual funds have deferred sales charges (DSCs)—a penalty you pay when you sell the fund before a certain number of years. These charges usually go down to zero after seven years, but before then the charges can be steep. “We’re debating whether to bite the bullet, sell the funds and pay the penalty, which could amount to several thousand dollars,” says Matthew. “Or, should we wait and sell them when the deferred sales charges reach zero in a few years? We just don’t know.”

What the experts say

In your 30s—like Scott and Erin Parkin, and Megan and Matthew Shaw—you’ll often feel frustrated at not making much financial progress. The good news is that focusing on paying down a mortgage is an excellent strategy. “It’s the highest-return risk-free investment the average person can make,” says Schlenker, the planner. “Most mortgages allow extra principal payments, up to 10% of the balance, on anniversary dates. Take advantage of that opportunity.”

Still, if saving is a huge motivator for you, it may make just as much sense for you to contribute to an RRSP. “Mortgage vs. RRSP? I get asked that question all the time,” says Lamontagne. “If it’s strictly a financial decision, then typically high-income individuals in the top tax brackets are better to maximize their RRSP room before making additional mortgage payments,” says Lamontagne. “The key is not to spend that refund. If the Parkins contribute the refund back to their RRSPs, or even use it to pay down their mortgage, then they will be compounding their savings.”

Something should also be done with how the couples’ existing RRSPs are invested. The Parkins and the Shaws have their savings tied up in high-fee investments, and the costs of their funds are eroding their returns. “In reality, investors can control only two things that affect the returns on their investment accounts—their own behaviour and the fees they pay,” says Schlenker. “Both the Parkins and the Shaws are paying fees of $3,000 to 4,000 a year, far higher than seems warranted.”

Lamontagne agrees. “If they can lower their costs by even 0.5%, that will leave thousands of dollars more in their accounts by the time retirement rolls around.” The Parkins and Shaws should start shopping around for a fee-based adviser, rather than one who receives commissions from the funds he or she sells. Ideally, their adviser should be using low-cost exchange-traded funds (ETFs) or index mutual funds to build their RRSP portfolios.

In the Shaws’ case, they can begin the transition by transferring at least some of the money out of their mutual funds. You can usually transfer 10% of the balance each year without being hit with the deferred sales charge. A low-fee investment portfolio split 60% equities and 40% fixed income—similar to the MoneySense Couch Potato Portfolio—is a good place to start. (See MoneySense.ca for details.)

Finally, the Shaws need to realize that police officers such as Matthew stand to collect a very generous pension in retirement. That means having a large RRSP would result in that money being taxed heavily when mandatory withdrawals start at age 72. So a better option for the Shaws may be to use extra money to pay down the mortgage and max out their TFSAs before they save more in RRSPs.

For many young people, such as 28-year-old Toronto actor and model Lori Bassarab, their first goal is paying down debt. When Bassarab graduated from the University of Western Ontario and got her first full-time job as a marketing manager, she was focused on paying off more than $10,000 in student loans. “I cut back on concerts, vacationing, food and alcohol consumption until it was entirely paid off,” says Bassarab, who is now debt-free.

Bassarab also made some RRSP contributions in her early 20s. “I was interested in reducing taxes,” says Bassarab. “My parents suggested I do it, and I did.” Right now, she holds a couple of stocks in her RRSP but hasn’t checked up on them or made another contribution for a couple of years. “With my modeling job, entertainment and clothing bills are stupid,” says Bassarab. “Once I pay all my expenses, there’s just nothing left at the end of the year.” Her goal? To eventually use her $15,000 or so in RRSP savings to make a down payment on a small condo. “I wish I managed money better. I worry about saving for retirement, so anything that would help make that easier would be great news.”

Kimberly and Brad DeLenardo, both 28, sympathize with Bassarab. The DeLenardos both work for social service organizations in Kirkland Lake, Ont., but say their financial life has become more complicated since their two young daughters—Adriana, 22 months, and Leyla, two months—were born. And even though the couple earns a respectable $110,000 in total annually, they’re stretched to the limit.

That’s because on top of carrying $20,000 in student debt and a $45,000 mortgage on their home, the couple’s expenses just keep mounting. They include a huge $15,000 annual daycare bill when Kimberly returns to work from maternity leave next fall, a much bigger mortgage when they buy a larger home in a couple of years, as well as the $1,000 a year that they contribute to their kids’ RESPs annually. That leaves only about $2,400 a year for RRSPs. “Neither one of us has a company pension, and we won’t be able to contribute much more than this to our RRSPs for the foreseeable future, so we worry,” says Kimberly.

Right now, Brad has $10,000 in his RRSP while Kimberly has $17,000, mostly in bank mutual funds. “I’ve been too busy to monitor returns or look at the fees we’re paying,” says Kimberly. “It gets pushed aside because life gets in the way. But it’s on our to-do list for this year.”

What the experts say

Don’t worry if you’re not building up a large RRSP during the early years of your career. “Saving for retirement is unlikely to be a top priority in your 20s,” says Norbert Schlenker, president of Libra Investment Management Inc. in Salt Spring Island, B.C. “Instead, do what you can to increase your income, cut your expenses, and start cutting your debt.” Remember that reducing debt and saving for retirement are not competing goals: both work together to shore up long-term financial health.

Start by eliminating student loans and other non-mortgage debt—the interest you pay on these loans is usually higher than the guaranteed interest you can earn on investments. Once you’re in the black, you may want to park some money in a high-interest Tax-Free Savings Account (TFSA) to cover unforeseen emergency expenses, like rent if you lose your job suddenly.

This may mean you don’t even make an RRSP contribution in your 20s, but that’s okay: unused RRSP room is carried forward. This works out well, since you will likely earn more money in your 30s, 40s and 50s, and contributions made during higher-income years mean more tax savings. However, if you’re earning a substantial full-time salary in your 20s—$50,000 or more, say—an RRSP contribution could be a good idea if you’ve paid off all your consumer debt and student loans.

The key is to focus on developing good savings habits. “You can start by paying yourself first,” says Marc Lamontagne, a fee-for-service adviser with Ryan Lamontagne in Ottawa. Both Bassarab and the DeLenardos can do that by setting up an automatic contribution to their RRSPs. “Every time they get paid, they should put a percentage, say 10%, towards their RRSPs before paying any other bills,” says Lamontagne.

The trick to building savings is increasing your contribution amount every time you get a raise, says Lamontagne. “You are probably used to living on your current salary, so there is no loss if you divert every raise—or part of it—to savings.” You can also boost your savings by using any tax refunds to make another contribution to your RRSP. This in turn will generate a larger refund next year.

You may have heard that when you’re young, RRSPs should be invested mostly in stocks. However, you may want to buck conventional wisdom and invest more conservatively. If you plan to use your RRSP for a down payment, or if you think you might tap it for emergency funds, then it should be in cash, GICs or short-term bonds. “Those small RRSPs may be the only emergency savings you have and if, like Lori, you plan to withdraw the funds in the next couple of years, you don’t want to have to delay buying a home or condo if the market is down,” says Lamontagne.

If your RRSP is truly for retirement savings and you don’t plan to touch it until you leave the workforce, then you can invest more aggressively. A good plan is to invest 60% of your RRSP money in equities and the remaining 40% in fixed income (bonds) using low-fee investments such as index mutual funds.

As for the DeLenardos, they’re ahead of the game and shouldn’t worry too much about saving for retirement yet. “You can always catch up later,” says Schlenker. “And given the small size of the existing RRSPs, high fees shouldn’t be a big concern now.”

For the 2011 tax year (which includes the first 60 days of 2012) you can contribute up to 18% of your earned income in 2010, to a maximum of $22,450, plus more if you have unused contribution room from previous years. But even a much smaller RRSP contribution can help.

To maximize the benefits of RRSPs, you need to make the right financial moves at every stage of life—your 20s, 30s, 40s, 50s and 60s. With a section for every age, we’re going to show you how to make the tough decisions needed to stay on course. To help, we’ve asked other Canadians to share their own struggles and successes at each stage of life. So if you feel you haven’t been making the most of RRSPs, read on.

Maximize your RRSP: Your 20s, Getting started
Maximize your RRSP: Your 30s, Learning to juggle

The biggest mistake you can make financially as a new Canadian is to jump into something you don’t understand simply because it’s the way everyone else is going. While seeing the opportunities and making them work for you makes good sense, adopting bad habits does not.

You also can’t assume that the universal benefits you hear about will apply to you. Everything has a rule, and if you don’t fit the rule, you don’t get to play in the game. Our government pensions are a good example of this. You can’t assume you’re going to get the maximum amount talked about in the media and in financial brochures. There are specific rules for qualifying for the maximum and anyone who has lived in Canada less than 40 years likely won’t get the maximum amount available from Old Age Security (OAS). (See my next blog for more on this.) Since the Canada Pension Plan is a contributory system—what you take out is based on what you put into the plan—you might not get the maximum from that plan either.

If you come from a tradition where children take care of their elders and your family maintains that tradition, then you’re very lucky. However, know that life for your children in Canada will be very different than you might now imagine. They will experience their own struggles to make a home for their family. If they marry out of your culture, that may create tension if you try to move in later. And if they must relocate for work—and relocation is a way of life in North America—will you want to move away from everything you have to live with your immediate family? If not, you better have enough money to take care of yourself.

1. You’re in the highest tax bracket AND

2. You can pay off the loan within one year AND

3. You’ll still be able to make the current’s year RRSP contribution from your cash flow.

This isn’t a case of meeting any one of the conditions; all THREE have to be in place before borrowing makes sense for you. Sure, lenders will push you to max out your RRSP for future growth and they’ll waive the tax refund under your nose as a way to pay off the loan faster. But don’t do it. Here’s why:

1. Unless you’re in the highest tax bracket, those magical refunds you’re being promised won’t show up. Lenders don’t calculate your refund on your declining marginal tax rate when doing a refund projection. They know you’re a sucker for a positive story, so they give you one. They’re banking on the fact that you won’t have considered how a big deduction will reduce your marginal tax rate, which also reduces the refund you’ll get. So you may be expecting a huge refund cheque and be disappointed when it comes in smaller than expected. Less to pay off the loan you took out and more interest to pay in the long run.

2. If you can’t pay the loan off in one year, the interest rate—which isn’t tax deductible—won’t stay the same. Sure, lenders use a constant interest rate in their projections, but with rates as low as they are right now, that’s not going to last. Each time rates go up, so do the interest costs on that RRSP loan. Since you’re paying for that interest with after-tax dollars, your investments’ returns will have to be really great to make up for the interest cost on the loan.

3. If the loan straps your cash flow to the point that you can’t make your current RRSP contribution monthly, next year you’ll be back in the borrowing game. Nice for lenders, but a hamster’s wheel for you. Skip it.

If you’re determined to max out your RRSP for the future, double up your monthly contributions this year. You’ll be catching up on your unused deduction from last year. And you’ll be making this year’s contribution too. Interest cost? None. Hamster wheel? Nope. Smart consumer? You betcha!

• Looking to save more money this year? Check out these free activities to help you save money.

• It’s RRSP season as you probably know. Here are some portfolio picks for your RRSP.

One of the most important points to understand about a spousal RRSP is that the plan belongs to the plan’s owner—the person in whose name the plan is registered to —not to the person who made the contributions.  Only the plan owner can make investment decisions or withdrawals from the plan, but only the contributor gets the deduction.

You can contribute as much as you want to a spousal RRSP for your mate, as long as you don’t go over your own contribution limit for the year. If you had a contribution limit of $10,000, you could put the whole $10K in a spousal RRSP. Or you could put $4,000 in a Spousal plan and keep the other $6,000 for your own RRSP. You can divvy up the money in any way that works best for you and your mate.

Just because you make a contribution to a spousal RRSP for your mate, doesn’t mean your partner can’t make a contribution to his or her own plan. Since your spouse’s contribution would be based on your spouse’s income, the spousal RRSP doesn’t affect the individual RRSP contribution limit in any way.

However, it does matter when you make the spousal RRSP contribution.  Spousal RRSP withdrawal rules are based on “calendar” years. Make a contribution for 2012 by December 2012 and then no further contributions, and you’ll be able to withdraw money attributed only to the plan holder as soon as January 2015. Make that contribution within the first 60 days of 2013, and you’ll have to wait until January 2016 before withdrawals are taxed solely in the plan holder’s hands.

While it’s pretty typical for higher income earners to contribute to spousal RRSPs for lower income partners, that’s not always the case. If you have an excellent pension plan and your better half doesn’t, it may make sense to give your entitled RRSP contribution to your partner’s spousal RRSP.

Also, think about using a spousal RRSP if your partner earns more, but your RRSP is much larger because you started investing earlier or made larger contributions. Ditto if your partner earns more now, but plans to take time off to raise kids or return to school.

Whatever you do, DON’T mix individual RRSPs with spousal plans. The taxman hates that and will treat the whole plan as a spousal one.

The deadline for RRSP contributions is always 60 days after the end of the previous year if you want to be able to claim the deduction for the previous tax year. Since 2012 is a leap year, the deadline is February 29.

Keep in mind that a contribution made in the first 60 days of 2012 can be applied against your 2011 income or any income you earn in 2012 and beyond.

If you’re turning 71 this year, this is the last year you can contribute to your own RRSP since you must convert your RRSP by December 31. However, if you have a younger spouse, common-law or otherwise and you continue to have earned income, you can contribute to a spousal RRSP up until your partner turns 71.

Anyone who has earned income, a social insurance number and files a tax return can contribute to an RRSP up until the end of the year they turn 71 (or their spouse turns 71 in the case of a spousal plan). Kids CAN have an RRSP although they can’t have a TFSA until they’re 18. If you make a contribution when you don’t have to pay any tax (or very little tax) don’t claim the deduction. Hold it for later when your income and your tax rate go up so you get a bigger bang for your buck.

You can contribute the lesser of 18% of your earned income from 2011, or the maximum annual contribution limit. If you’re contributing for the 2011 tax year, your maximum is $22,450. If you’re contributing for the 2012 tax year, your maximum is $22,970. If you belong to a company pension plan, your RRSP contribution limit is reduced by a pension adjustment or PA. The PA represents the value of any pension benefits accruing from participation in a registered pension plan or deferred profit sharing plan.

Review last year’s Notice of Assessment. It will show you both your 2012 contribution limit and any unused contribution room you may have built up. Can’t find your Notice of Assessment? Call the TIPS number (blue pages in your phone book under “tax services”); have your SIN and last tax return handy.

For most T4-grunts, your “earned income” is the amount that shows up in box 14 on T4 slips. If you’re self-employed, it includes your employment income after expenses have been deducted. If you’re a landlord, it includes your net rental income. And if you’re getting CPP/QPP disability payments, those count too. What doesn’t count? Investment income, pensions and retiring allowances, death benefits, taxable capital gains and limited-partnership income aren’t included.

What if you don’t have any cash to contribute? You don’t necessarily need cash to make an RRSP contribution. You can contribute a security, like a mutual fund, stock or GIC you already own to a self-directed RRSP. The contribution is equal to the fair market value of the security when you stick it into the RRSP. The security is deemed to have been disposed of—meaning that it’s treated as if you SOLD it to the RRSP—at time of contribution, and this can have tax consequences, so check with your tax advisor.