Should you borrow to make RRSP deadline?
By Gordon Powers, Sympatico / MSN Finance
With interest rates low and likely headed lower, does it make sense to borrow for RRSP purposes? Maybe. It certainly gets more attractive as your tax bracket increases – here’s a simplified scenario.
Suppose, for example, that you’ve got about $62,000 in taxable income and you’re managing to put away $500 each month towards your RRSP. For the year, you can expect to get a RRSP receipt for that $6,000, which will trigger about a $2,000 tax refund, depending on the province you live in.
Instead, consider borrowing about $9,500 to fund your contribution, getting your receipt as quickly as possible. Some institutions are offering short-term RRSP loans with discounted rates right now, so shop around.
Then, contact the Canada Revenue Agency and ask them for a confirmation letter allowing your employer to reduce your source deductions to reflect this contribution. You can do this by filling out CRA’s Form T1213.
Depending on how quickly your employer reacts, this will translate into roughly an extra $300 per month in your pay cheque to help make the payment on your loan, which is going to be something like $800 per month. $500 of that will come from you as it would have anyway and the remainder will come from the boost you’ll get in take-home pay each month.
This way, instead of steadily putting $6,000 into an RRSP over the course of a year, you’ll actually have $9,500 working for you right from the beginning. Once you get started, the result is an extra year of tax-free compounding, without any significant out-of-pocket expense, assuming the RRSP return is within shouting distance of the loan rate.
Keep in mind though that a lower tax bracket will mean a smaller refund – and therefore higher interest costs – and that RRSP values can fluctuate, unless you stick with GICs.
Posted by: ken the mad one | Feb 23, 2022 9:03:12 PM
Everyone should be very carefull when they get any money out of this economy.
Posted by: Tara | Mar 1, 2022 10:32:19 AM
This is really good information. Thanks for sharing.
Posted by: nohomejoe | Mar 1, 2022 10:16:35 PM
"assuming the RRSP return is within shouting distance of the loan rate" will almost never be the case. This is just a great way for banks to make even more money on loans. Figure right now: the prime rate is what, 3%, so add at least a couple % for a personal loan=5%. What rrsp is forcasted to returning 5% right now? (and don't forget about compounding interest on your loan - so it should return closer to 7%. in todays economy-not probable....and wait... your money will also be worth around 2% less next year (current value-inflation).
Hope your RRSP grows by 9%--- good luck
just my 2 cents worth