Home > Resources > Consider an RRSP Loan
Consider an RRSP Loan
As we get closer to the end of February many Canadians are making last minute RSP contributions.
Whether they make a single lump-sum contribution each year or contribute year-round with a ‘top up’ before the annual RRSP deadline, ‘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 determine with your advisor how much to contribute each year to attain your retirement goals. But not everyone has the cash on hand to contribute that amount. In that case there are two options.
- Contribute something now and then contribute the tax refund when you receive it.
Suppose someone with a marginal tax rate of 30 per cent has $4,000 ready to contribute during the first 60 days of 2015 to claim a deduction on his/her 2014 tax return. The tax refund of $1,200 ($4,000 x 30%) can be contributed when received and claimed on his/her 2015 tax return. This is a better strategy than simply spending the refund, because it results in a total RRSP contribution of $5,200. Let’s look at that idea.
- Contribute a higher amount first using an RRSP loan and pay off the loan with the refund.
If you add an RSP loan to your lump sum you have available in the estimated tax refund, it is possible to contribute a higher amount. The loan can be then paid off in full when the tax refund arrives. The result is a bigger tax refund for the 2014 tax year and more money growing earlier in a tax-deferred plan.
Here is the example:
$4,000 (your money) x 30% tax rate ÷ 100% - 30% tax rate = 70%
So, $4,000 x 30% = $1,200 ÷ 70% = $1,714
Borrow $1,714; add that to your original $4,000 which now equals a $5,714 contribution to your RSP.
$5,714 x 30% tax rate = $1,714 tax you borrowed.
Tax refunds come in 8-10 weeks and if filed early, can arrive sooner.
Of course, you need to make sure you have the contribution room. This amount is generally found on your assessment form that arrived last year.
An RRSP loan – what to look for
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.
Ideal person for an RSP loan
An RRSP loan strategy is best suited for those who:
- Want to make an RRSP contribution in the first 60 days of the calendar year
- Have less cash on hand than the amount of the RRSP contribution they want to make
- Have sufficient RRSP contribution room to accommodate the top-up provided by the RRSP loan
Speak with your advisor
Together we can calculate and evaluate the pros and cons of an RSP loan. Call me today.
SPEAK WITH YOUR ADVISOR
For a thorough evaluation of your insurance needs, please speak with our advisor.