Should I Take an RRSP Loan?

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.

the-more-you-know

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.

That’s great.

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!”

Listen.

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!

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