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Old 02-21-2018, 03:15 PM   #1
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Join Date: Dec 2006
Location: Calgary, Alberta
Default A bigger bang for your RRSP contribution

Well, it's nearing the RRSP deadline (which this year is March 1). Maybe you're looking at making a contribution so you can save a few bucks on your tax return and of course the extra money for your retirement is nice as well. It probably doesn't need to be said that if you took those tax savings and put them into your RRSP when the tax return arrives, you're further ahead. The strategy I'll explain below incorporates that today.

Let's say that you are going to contribute $5,000 to your RRSP, and you're in a 40% bracket. Clearly, this is for illustration and your specifics might vary. If you put the money in, you save $2,000. Truthfully, you might invest that $2,000 in the RRSP, but you might not. Plenty of people get that $2,000 tax return and tend to find other places for that cash.

Instead though, if you were to take out an RRSP loan for the return, you could invest that tax-return now, with the addition of getting a better tax return for your 2017 filing as well. So in this example, you would now plan to deposit that $5,000 and add a loan of $3,333. This gives you a contribution of $8333 now, and the tax return based on the tax bracket is $3,333 (by sheer coincidence ) The RRSP loan can be deferred for 90 days, which allows you to file your taxes and get your return. Once you receive that you pay the loan. There is a cost here. Let's say the interest is 3.95%. The cost of borrowing this $3,333 for 90 days is approximately $32.91.

To recap then, here is the traditional RRSP contribution:

RRSP Contribution: $5,000
Tax Return, based on 40%: $2,000
Total RRSP Contribution: $7,000 (assuming that second deposit takes place)

And in contrast here is the alternative strategy:

RRSP Contribution: $5,000
RRSP Loan: $3,333
Total RRSP Contribution: $8,333

If you want to deduct the interest this would cost, you have a total of $8,300 as opposed to the $7,000. In other words, that extra $32.91 you spend would put you ahead by about $1300, which is a great deal by any measure!

Contact me if you would like any details or to go through your personal situation.
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