RRSPs: try some advanced and alternative strategies
Last week, we talked about some facts regarding RRSP. As a gentle, but firm reminder, the deadline for the 2017 RRSP contribution is coming up on March 1st. Now that we are all a bit more familiar with the RRSP (If you’re not, you can check out last week’s article) we can move on to some more advanced, and even alternative strategies. When you commit to setting money aside, we believe that the more information you have on hand, the better. When all the options are laid out in front of you, you’ll be able to choose the best one for your situation. With that being said, here are 2 other savings strategies which can help you as you decide to put your money away.
1. The RRSP loan strategy. This is an advanced RRSP strategy which can be useful if you want to make a larger RRSP contribution, but don’t have enough cash on hand. The idea here is that you borrow some money in order to make a larger RRSP investment, and after you receive the tax refund, immediately use the refund to pay off the loan amount. There is a simple formula for calculating the loan amount:
Let’s use an actual example. Billy has $10,000 he would like to put into an RRSP, and he has a marginal tax rate of 40%. Plugging in the numbers, we end up getting the following:
So, Billy would borrow $6,666, making his total contribution $16,666, which would mean his return is $16,666*40% = $6,666. Hey! That’s the perfect amount to pay off his loan! And the cost? Billy only needs to borrow the $6,666 for the time that it takes from him to receive the refund. Let’s say it was 60 days. Using a typical interest rate of 4%, that means Billy only has to pay about $45 in interest. However, he just increased his RRSP contribution from $10,000 to $16,666. If you have the RRSP contribution room, this could be you!
2. The borrow to invest strategy. An even more advanced strategy is the borrow to invest, or investment loan strategy. If you wanted to contribute $5000 into your RRSP, you might consider using it towards an investment loan. Let’s say you took out a loan at $100,000, and the $5,000 was used towards the interest payments on the $100,000 over one year. You would have several advantages using the investment loan strategy, over the RRSP strategy. First, the $5,000 is STILL tax deductible. In essence, you get the same $5,000 tax deduction using either strategy. Second, you’ll have $100,000 working for you, rather than just $5,000. Third, the investment loan income is only taxed at HALF the rate of the RRSP investment. And fourth, this doesn’t use up any of your RRSP contribution room, so if you wanted to, you could still make an RRSP contribution!
We hope that these 2 strategies will help you come to a better decision on what else your money can do for you. Remember, you should always be looking for the most efficient and valuable methods of utilizing your money. We’re happy to help you do just that. Take action sooner rather than later, and let us guide you through the different strategies and help you choose the perfect one for you.