The “bigger bang” RRSP strategyJan 05, 2018 AS THE CALENDAR YEAR WINDS DOWN, many Canadians start thinking about contributing to a Registered Retirement Savings Plan (RRSP). Whether they make a single lump-sum contribution each year or contribute year-round with a “top up” before the annual RRSP deadline,1 there’s a strategy that can help save more taxes this year and provide a head start on tax-deferred compounding. The first step is to work with an advisor to determine how much to contribute to help reach retirement goals. Of course, not everyone has enough cash on hand to contribute that ideal amount. In that case, there are two options
Let’s say someone with a marginal tax rate of 40 per cent has $7,000 ready to contribute during the first 60 days of 2019 to claim a deduction on his/ her 2018 tax return. The tax refund of $2,800 ($7,000 x 40 per cent) can be contributed when received and claimed on his/her 2019 tax return. This is a better strategy than simply spending the refund, because it results in a total RRSP contribution of $9,800. However, there is an alternative.
Sample calculations Here’s how to calculate a loan amount that can be completely repaid with the tax refund: (cash on hand x marginal tax rate) (100% – marginal tax rate) In our example (for illustration purposes only): ($7,000 x 40%) = $4,667 loan 60% Borrowing $4,667 boosts the total RRSP contribution to $11,667 from $9,800 – an extra $1,867 – and the entire amount can be claimed as a deduction on a 2018 tax return. Tax refunds generally take no more than eight to 10 weeks to arrive – and returns filed early and electronically are often processed by the Canada Revenue Agency within 10 days. Even if a refund takes a full 90 days to arrive, the cost of the RRSP loan is minimal – in this example, just $48.
What to look for in an RRSP loan Many institutions offer RRSP loans at very competitive interest rates, and some will defer the payments long enough so that you have plenty of time to receive your refund before making the first installment. Interest accrues on the outstanding balance, but the loan can be paid in full without penalty at any time.
An RRSP loan strategy is best suited for those who:>li>Want to make an RRSP contribution in the first 60 days of the calendar year
Speak with your advisor
Carefully evaluate the pros and cons of an RRSP loan strategy with your advisor. If you decide together that it is an appropriate approach for you:
Crunch the numbers with your advisor to see if an RRSP loan is right for you.
Investment Advisor at Savanti Wealth
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