Tax Tip Thursday

Let’s Talk RRSP!

Since we are in the last couple of weeks of February with the RRSP deadline coming up, I thought I would talk about RRSPs!

I get 3 questions every year around this time

  1. Should I contribute
  2. If so, how much should I contribute
  3. Should you borrow to contribute to an RRSP

Should I Contribute and How Much Should I Contribute?

There are various reasons why people are asking these questions, but usually it because they do not want to pay tax on the current return.

That being the case, if you have all your tax information available to you, we can estimate your tax payable.  There is a fee for this service, as we will run a couple of scenarios for you and likely have to prepare your return a 2nd time when all the tax slips are complete and available.

If you want to look at tax planning and being tax efficient, there are many variables that will play into that answer, such as:

  • How much do you and your spouse (if applicable) make last year
  • How much do you and your spouse (if applicable) expect to make this year and your expectations of income forward
  • What are your expectations for retirement income
  • Do you have free cash flow available now
  • Do you have a TFSA and what is your remaining limit.
  • Do you have a pension or other expected sources of income in retirement
  • Do you have an expectation of needing that money before retirement

If you are tax planning for your family, those questions can all come into play.

In general, (but every situation is different), I do NOT recommend contributing to an RRSP unless you make at least $60k.  The tax benefits are minimal, and I believe you are better off contributing to a TFSA.

Should you borrow to contribute to an RRSP

Again, in general, I am not in favour of borrowing money to contribute to an RRSP.  There are definitely circumstances, where the situation will support that strategy.

It is definitely the exception, not the rule

A couple of situations where one might consider it:

  • very high income, which would translate to a higher rate of tax savings from an RRSP contribution and enough free cash flow to repay the loan. Remember BEST case scenario you will get a refund of 53% of your contribution!
  • If you receive a large 1 time income amount that is going to be included in income.

Some things to consider if you are going to borrow the money to make a contribution:

  • Are you able to make the loan payments every month?
  • If that is the case, you should have just contributed on a monthly basis in the first please.  In most cases, I find that people are not cash flow positive to make those loan payments.
  • The interest is NOT deductible as it is for investment loans in unregistered accounts.
  • By borrowing money for last year’s contribution, it will be difficult to either contribute this year
  • You will likely be in the same position next year, forcing you into a vicious cycle of having to continuously borrow money for your RRSP contributions.

If you are going to take out a loan, be sure you have the plan in place to get it paid off as quickly as possible.

Let us help you make the best decisions for your RRSP contributions! Make An Appointment today!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.