I’ve got a fun tax fact for you, friends!
Yes it’s a fun tax fact.
No I’m not joking.
Yes you should keep reading.
Did you know that if you contribute to your RRSP in May, it’s just as eligible for a tax refund as it is if you contribute in February?
See? Fun fact.
With all of the talk about “RRSP season”, and the RRSP contribution deadline, you’d be forgiven for thinking that we’re only allowed to contribute to an RRSP for two months out of the year.
But it turns out, that’s not the case.
In fact, you can contribute to your RRSP all year round, and those contributions are just as eligible for those sweet, sweet tax refunds.
Wait, what is this madness?
For my friends who maybe don’t pay quite as much attention to articles about tax planning, or haven’t been bombarded with advertisements about the RRSP deadline and RRSP loans (I’ve been pre-approved for two) here’s what’s happening.
The deadline to have your RRSP contribution count towards your 2015 tax return is February 29th, 2016. That’s soon, and everyone is maybe losing their minds about it a little.
RRSP contributions can be a great thing for your tax refund, since they’re made in pre-tax dollars. Essentially, if you put in $1000, you’ll get back the amount of tax you originally paid on that $1000. If your marginal tax rate is 40%, that’s a cool $400 added to your tax return.
So what’s the issue?
Even though you can make these contributions all year round – I make mine twice a month like clockwork – it seems like everyone loses their mind a bit around “RRSP Season.” (Yes the quotation marks are sarcastic. No I don’t think it’s a real thing.)
“I have to contribute rightnow to get money back on my taxes!”
“I should borrow to top up my contribution and get a big refund!”
“I’m already approved for a loan at a great rate!”
I’ve done some research. (Not a lot, but some.)
Some people make a really great case for borrowing to top up your RRSP contributions. There are legitimate circumstances in which it can be a good move for your finances. I’ve seen some very convincing charts.
But if you can’t say, in total honesty, that you are a rock-solid tax planner, or you employ one who has only your best interests – not profit – at heart? On top of that, if you can’t absolutely guarantee you’ll pay it back in full right away?
Do not borrow money to “top up” your RRSP.
Here’s what you should do instead.
- Do some research.
- Figure out what combination of an RRSP and a TFSA is the best savings plan for you.
- If an RRSP is part of your plan, set an amount you want to contribute over the course of a year.
- A good starting point might be the amount you think you would borrow right now to “maximize your tax refund.”
- Divide that by 12.
- Contribute that amount to your RRSP every month.
If you had taken out a loan, you’d need to pay it back anyways, and this way, the only interest involved in the situation is the interest your monthly contributions are racking up in whatever investments or accounts you have in your RRSP.
Because seriously, even though I’ve read a fair bit about borrowing to top up your RRSP, the only real thing I retained was that the borrowing they were talking about? Yeah, it wasn’t a last-minute decision to get a sweet tax refund. It was a highly strategic, carefully thought out decision for specific people who knew oh-so-much about taxes.
So let’s just take a deep breath.
February 29th is not the last day anyone will ever be allowed to contribute to an RRSP.
Your contributions will count just as much on March 1st, they’ll just count in a different tax year.
Unless you have a solid tax-planning strategy in place, now is not the time to take anyone up on an offer to borrow money.
And next year, you can avoid all of this by contributing to your RRSP monthly instead of all at once during “RRSP Season.”
Which is not a real thing.
Have you done some serious tax planning and found out that an RRSP loan does make the most sense for your situation? Or have you noticed the madness that is “RRSP season” in Canada? (Are you American and have literally no idea what I’m talking about, but want to share similar stories of tax season silliness?) I’d love to hear about it in the comments!
I have also been pre-approved for a couple of these “magical loans” that solve all of my retirement problems. Haha but no, thanks for sharing your research. I knew it wasn’t a good decision (because anything that has the word loan in it never is for me), but it’s nice to know why. I haven’t started getting ready for my taxes yet, but I’m thinking it will be good enough regardless of whether I top off my RRSP.
Me too! The beauty of regular contributions, haha – I know I’ll be fine and will be getting a refund thanks to the money I’ve already put into my RRSP.
Also, truer words have never been spoken: “because anything that has the word loan in it never is for me.” Literally soul sisters on this one – it’s such a knee-jerk reaction for me! I’ve accepted that sometimes, in certain cases, it might be a good choice for other people, but if I can avoid loans, I do!
So freaking true! I basically have been meaning to write this exact same post for a few weeks. “RRSP Season” is dumb, and taking out a loan to top up your RRSP is even dumber.
That said, I have been loading up my RRSP these past few months to offset my higher than expected freelance income last year, but I’ll be using the money I’m contributing as a home down-payment through the Home Buyer’s Plan in a few years, so it’ll all work out in the end.
That’s awesome Jordann – and yay unexpectedly high freelance income! What an awesome problem to have! I actually think I should be looking more closely at the HBP, given the amount that I’m saving for a house downpayment, and the huge amount of room I still have in my RRSP, even despite my best efforts to maximize it. Thank you for the kick in the pants to actually do a better job of tax planning with regards to my saving next year! (Because yeah, as much as I don’t believe in raiding your retirement to buy a house, I might as well make use of the ample room I do have in my RRSP.) (This is literally me having a lightbulb moment. Seriously, thank you!)
I transitioned this year from the panicked “move money around in February!” mode to contributing every month, which has helped a lot. I think the “RRSP Season” is bunk as well and an opportunity for banks to sell stuff but it also offers a chance to be like “hey if I put a little bit more in how does this affect my taxes” because you’ve got that information at your fingertips.
(I had never heard of loans for RRSPs, so I learnt something! Thanks!)
Also reinvest your tax refund! was the best advice I ever got. Money I wasn’t expecting because I wasn’t doing the math (so free Money right?? haha) = tax refund (or paying off your HBP right at the start of the new tax year) = retirement savings.
Yesssss yes yes! I love the feeling of throwing an extra few hundred (or thousand, back in the days of my sweet tuition tax credits!) towards a goal or an investment.
Yay contributing every month! And honestly, I feel you on the “how does this change my taxes” angle, because I am right there with you. I use Simple Tax, and have for years, but I assume most programs and software will give you a similar update for every change you make – like if you add $1000 in RRSP contributions, it’ll show you exactly how much more you’ll get back. That’s always a fun game (said the nerdiest human being, lol. Wooo tax season!)
I actually just wrote an article on Rate Hub about this: http://www.ratehub.ca/blog/2016/02/what-to-consider-before-getting-an-rrsp-loan/
There are lots of things to consider and as a tax specialist I would say that the RRSP loan doesn’t make a ton of sense unless you are in a high tax bracket (biggest refund).
This is an awesome article Janine, thank you so much for sharing it! And I agree – it’s a pretty niche combo of high-tax-bracket, plus immediate ability to repay the loan (and the discipline to do so!) that makes the most sense. In that case, and with a tax plan in place, it has my blessing, lol.
Really enjoyed this article. I’m not a fan of ever using leveraging or loans, and we use the techniques you mentioned so we never have to recommend that clients borrow.
That’s awesome Scott – thank you! And I felt the same way – since I have my RRSP invested, all I could hear when I heard “RRSP loan” was “leveraged investment,” haha!
I’ve never taken an RRSP loan and I agree with everything you outlined. The one possible benefit is that it forces people to save. If they have a loan payment they *have* to make then at least they end up saving something.
RRSPs are a tax deferal not tax avoidance system. You get to contribute with Pre-Tax dollars (you get the income tax back on the money you put in) but you pay income tax on every $ you take out — including any investment returns you make. Don’t get me wrong, they are a great tool, but you will end up paying the tax in the end at some point!
Hahaha that’s true – and the market is probably going to have better returns than a house, and people justify that as forced savings all. the. time. So from that angle it might be the best call for some people!
And since we’ll both be plenty frugal in retirement, tax deferral is a great call while we’re in high earning years, right? 😉
Unless we save enough that our minimum RIF withdrawals are higher that our working incomes (wouldn’t that be a nice surprise). Then RRSPS were a bad idea. I guess I figure that if I manage to get into that situation I have nothing to complain about……
My wife took out an RRSP loan before I married her and paid it back with-in a few months. It was that time of year where everyone panics like you mention so she went to the bank and opened an account for this RRSP loan. The bank continues to send us mail about the account trying to motivate her to take out a loan again if she needs. At the time it made sense to her financially to do but today she knows that budgeting helps so the money is saved in the budget. She did not budget back then.
Budgeting and planning really do make a world of difference! And I’ve definitely been on a few of those marketing lists myself – on behalf of marketers I apologize, lol!
If the bank is offering you a loan, they are going to make profit on it, guaranteed. Better to just adjust your budget and drop a good amount into your RRSP. Also update your TD1 every year to account for what you’re investing to lower your pay deductions. It may mean you get a smaller refund in spring, but getting a refund is like loaning the government money with 0% return. I’d rather invest that money and get something out of it.
Hahaha Dennis, I couldn’t agree more! It’s not like they’re offering you free money out of the goodness of their heart. They are literally running their business and making their money on this.
Free money is charity, not banking, lol.
Oh, here’s an idea I use. First of all, I track all of my spending and do my budget in YNAB (youneedabudget.com to learn more), and I buy all of my groceries, gas, and prescriptions on a cash back visa ( which I pay off every month). So When Christmas comes around, I use my cash back that I get in November for it and keep on trucking. Works pretty slick as long as you keep within the limits you set for yourself.
That’s an awesome idea Dennis – I’ve really recently switched to a cashback credit card with Tangerine and I have the cash transferred directly into savings. That would be a great goal to save for!
Ola. Do you know how early you can file your tax details?
Actually, I have no idea, I’m sorry! For me personally, I’m waiting for the tax software I use to come out with their 2016 version / filing options.