The 7 most-common RRSP questions
By Diana Cawfield • Bankrate.com

If you leave your RRSP decisions to the final hour, you aren't alone. But when it comes to investing, a little effort can make a big difference to your retirement lifestyle. To help you get a head start in your planning, here are the answers to the six most common questions about RRSPs.

1: What is an RRSP?

RRSP stands for Registered Retirement Savings Plan, and as its name implies, it's a savings plan registered with the federal government. Contributions are tax sheltered in two ways: Donations you make to an RRSP are deductible from your taxable income, and your money is allowed to grow tax free.

2: Should I borrow to invest in an RRSP?

A lot of people have unused RRSP contribution room from previous years and wonder if they should borrow to catch up.

In many respects, getting a low-interest loan to fatten your RRSP portfolio is a good choice. Chances are good the long-term benefits of the extra RRSP contribution will more than offset the cost of the loan.

"I think it's a really good way to get caught up on the contributions that you haven't made, but you do have to be very very certain that your income going forward is going to be secure," says Erika Penner, a certified financial planner in Richmond, B.C.

"I say that because I've had situations where someone's thought that their income is secure, they're laid off, and then what happens is they have to collapse their RRSP to pay that loan. The RRSP room is gone and they never get it back again."

If you're at all concerned about job security, a safer alternative to borrowing is to set up monthly pre-authorized savings plan. Then, if anything should happen to your job or financial situation, you can stop the payments at any time. With a loan, you're stuck with the payments even if your financial situation takes a turn for the worse.

3: What should I invest in?

Investors learn the hard way that buying last year's hot stocks can turn sour in short order, and not everyone has time to thoroughly investigate their choices.

Luckily, new conservative investment products have cropped up in the past few years that balance return with risk.

"You can get yield and income from investments such as income trusts, preferred shares and high-quality, high-yield bonds," says Jason McIntyre, vice president of regional sales at GGOF Guardian Group of Funds in Calgary.

Regardless of how safe an investment might appear or how high a return is promised, you shouldn't put all your eggs in one basket. To reduce risk and volatility, it's important to spread investments across asset classes.

4: My RRSP has earned zilch in the past few years. What should I do?

Many investors overloaded in technology-related equities in the late 1990s and are still trying to recover their losses. Those investors have become understandably cautious.

"If you were over-weighted in ... a technology fund that lost 75 percent of your money, no, I probably wouldn't say, 'stay the course,' " says McIntyre. "What I would probably say is let's cut our losses and start to rebuild the financial plan."

Having a financial plan -- and reviewing it every six months -- is critical to successful investing. If you haven't taken a good look at what's in your portfolio lately, there's no time like the present.

Ask yourself: Has your financial situation changed? Your risk tolerance? Your goals? All these factors come into play when you assess your portfolio to meet your investment goals.

If you're a do-it-yourself investor, there are plenty of financial planning tools available, but a professional adviser can add considerable value to your investments.

5: Should everyone contribute to an RRSP?

According to Penner, there are some people for whom RRSPs are not your best investment , including:

• Low-income earners,
• People who are in their first year of retirement, and
• Those who are thinking about becoming self-employed.

"Someone in a lower income level, for example, is not going to get the same tax advantages as someone in a higher tax bracket," says Penner.

"If you choose to invest outside an RRSP, make sure the investment is tax efficient so you don't end up in a higher tax bracket."

6: How much money will I need in retirement and when can I retire?

You've heard it before, but if you don't know where you want to end up or what your goals are, chances are you'll never achieve your retirement dreams.

"You can't answer those questions without having a plan in place," says Tessa Boyce, regional manager of BMO Mutual Funds in Toronto.

For many people, it's not as simple as just investing in an RRSP. You must also consider your company pension, government benefits and whether you want to stay in your home or sell it. You need to look at your entire financial picture -- of which an RRSP is just one part -- to make sound investing decisions.

7: Should I contribute to an RRSP or pay down my mortgage?

This is another hotly debated question. With mortgage rates at their lowest point in four decades, you can probably get more bang for your buck by choosing the RRSP route. This is because the low interest rate on the mortgage makes it an easier debt to manage, and it's likely that you'll earn more interest on your RRSP than you would pay out on your mortgage.

But -- and this is a big but -- it boils down to knowing your comfort zone.

As a general rule, it tends to be more advantageous to put money into an RRSP, says Penner. "But if they're not going to be comfortable with it, you meet the needs of each individual."

So if you aren't comfortable with debt, concentrate on getting rid of it first.

Diana Cawfield is a freelance journalist and editor based in Ontario.