After RRSP-season, when the deadline has passed and your clients have made their last-minute contributions, you have a good opportunity to meet with clients again to plan next year’s contributions and review their investment strategies.
You don’t have to conduct a post-RRSP review for every client, says Heather Holjevac, senior wealth advisor at Tridelta Financial Partners Inc. in Oakville, Ont., because many clients already benefit from periodic reviews at least once or twice a year. However, in some cases it is necessary, especially for clients who make last-minute, lump-sum RRSP contributions.
Prevent the annual last-minute pain
If clients are in the habit of rushing to make their RRSP contributions just before the deadline, explain the benefits of making periodic contributions throughout the year. This way, clients can avoid the pain of finding the money to make a lump-sum contribution.
“Making regular contributions is a good habit for clients to get into,” says George Hartman, CEO of Market Logics Inc. in Toronto.
They can always make a “top up” contribution, if necessary, prior to the contribution deadline, Holjevac says. Generally, though, meeting the contribution deadline should be a non-event if clients make regular deposits.
Review asset mix
When clients make a lump-sum RRSP contribution just before the deadline, it is necessary to determine how to allocate that contribution, Hartman says.
This is particularly true for newer clients, who might have been advised only to make a contribution to beat the deadline and get a tax receipt.
Post-RRSP reviews also are a good time to rebalance client portfolios to take into account the impact of market behavior over the past year.
Review RRSP loan strategies
Borrowing to make RRSP contributions can be a viable plan for some clients. However, Hartman says, “Borrowing to invest can be a double-edged sword.”
Make sure clients understand that the eventual return on the investment made using borrowed funds must be greater than the interest they are paying on the loan. Otherwise, the strategy is costing the client money.
And, Hartman adds, if the client’s investment declines due to market conditions, they are still responsible for repaying the loan. As well, clients should know that while they might use their tax refund to repay the loan, it will be enough to repay only a portion of it.
To contribute, or not to contribute?
In some cases it might not make sense for clients to continue to make RRSP contributions, Holjevac says.
For example, if the client’s projected retirement income, based on their current RRSP savings, is going to push them into a higher tax bracket, the only benefit they will get from making additional contributions to an RRSP is tax deferral.
“This [may create] too much of a tax burden during retirement,” Holjevac says. In such cases, Holjevac recommends that clients save and invest through a TFSA. Reviewing the impact of taxes, she says, is one of the most important parts of the review process.