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Can an RRSP loan work magic?

Can an RRSP loan work magic?

I'm not the type to wince with excitement at seeing that happen, any more than you are. Let us still give it back what is its own, for it has that quality that brings us to the gates of March and its spring light.

On a practical level, we must also recognize some virtues. Among other things, it provides some taxpayers with the opportunity to improve their tax planning, and I'm particularly thinking of self-employed people who anticipate a larger-than-expected tax bill.

The RRSP period is still a bit long, even longer than Lent. It extends over the first 60 days of the year, and is the last right to fill your nest egg and claim the previous year's tax deduction. This takes us to February 29th. If you didn't know, you now know that we are in a leap year.

During this window we receive offers for an RRSP loan. I've been called three times already, with prior approval and everything, without even asking for anything!

I'm not against the idea of ​​borrowing to replenish your retirement savings when the process is well planned. However, loan proposals conditional on purchasing in-house financial products from the lending institution leave me cold. The bank then finds itself winning on both counts, by receiving on the one hand interest on the loan and, on the other hand, higher management fees on investment funds in general. decent.

Be especially wary of loans that are due over a long period of time, which may undermine the profitability of the strategy, and be especially careful not to waste your tax refund. It is essential that this is used to repay the loan.

Also, don't let yourself be dazzled by what may seem like magic to you. It doesn't exist in finance, like anything else.

Someone sent me an article from Globe and Mail Which had the effect of the Luc Langevin number, specifically. The title was catchy as hell: Give your RRSP a big boost every year without needing more money. [Traduction libre : Donnez plus de tonus à votre REER chaque année sans que vous ayez besoin de plus d’argent.] If it didn't leave the impression right off the bat that money was falling from the sky, I'd give the show a 100% rating.

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The strategy presented is worth knowing, as it highlights the connected vessels at work during an RRSP contribution, while revealing the nature of the resulting tax refund. It allows you to accelerate nest egg growth in certain conditions, but you must understand its limitations. It involves an RRSP loan, and that's what we're talking about.

To make the demo as simple as possible, let's start with a rough number: $10,000. This would be the annual RRSP contribution the saver would reach if they contributed $384.62 per paycheck. Now assuming this person is taxed at a marginal tax rate of 40%, his contributions to the RRSP would qualify him for a 40% tax refund, or $4,000, in the spring.

Smartly, he could have decided to borrow $4,000 before February 29 in order to contribute an additional amount to his bailout plan, a debt he could easily clear by paying it off. His total contribution will be $14,000. This is good, but admit there is nothing impressive about it. The strategy in question goes further.

Our saver must borrow not $4,000, but $6,666. The famous one enhances What the author of the article is talking about is $2,666 added to $4,000.

Where does this amount come from? The additional $4,000 RRSP contribution made with the planned tax refund allows for another $1,600 in tax savings. Paying that amount into the RRSP, in turn, lowers the bill by $640, a dollar amount that, once included in the RRSP, equates to a payment of $256. And so on. I've broken down the numbers in this table:

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In the end, we find ourselves investing $16,666 [10 000 $ + 6666 $] In the registered account, resulting in a total repayment of…$6,666, which is enough to settle your loan. Let's stress: The trick works if you've already contributed to an RRSP during the year, without getting a tax refund.

Good strategy?

The strategy is flawless if you have RRSP space that you want to fill quickly. On the other hand, saying that it doesn't take more money is an illusion. The tax refund is used to erase debts contracted to pay contributions. It cannot be used, for example, to top up your TFSA, accelerate your mortgage payment, pay off consumer debt or contribute to your RRSP the following year.

If the saver had systematically contributed $10,000 to their trust fund during the year (assuming they had unused space), the result would be the same! He certainly wouldn't have been entitled to a tax refund, but “on net” the savings would have been identical.

For taxpayers taxed at 40%, $16,666 from an RRSP (taxable withdrawal) is equivalent to $10,000 from a TFSA (tax-free withdrawal). Let's return to the sequence presented a few paragraphs above. By making the TFSA the destination for his systematic savings of $384.62 per paycheck, the squirrel would end up with $10,000, tax-free.

The big advantage of this strategy involving an RRSP loan is that it protects you from the temptation of wasting your tax dollars, as if money were falling from the sky.

Because money does not fall from the sky.

If you would like to respond to this column, write to us at [email protected]. Some responses may be published in our opinions section. If you want to contact our columnist directly, you can do so at [email protected].

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