So one of the tricks financial planners like to pull out of their hats (in Canada at least), if you are going to receive a refund, you use a short-term LOAN to buy more RRSPs and thus MAX out your RRSP.
If I was going to get a refund of $1200, if I took out a loan for $1560.00 I could max out my RRSPs. This assumes I am taxed at a rate of 30%, and that I pay off the loan right away (and I have $1560.00 in RRSP room as well). You don’t understand still? Let’s do the math:
- I would be getting $1200, so I could simply get a loan for $1200 and buy RRSPs with that, BUT I would then get a $1560 refund, because of the extra RRSPs that I bought
- Remember if you buy $1200 worth of RRSPs, your marginal rate is 30%, you would get $360 back for buying the RRSPs.
- So, I should take a loan for $1560 or so, and I will get more than $1560 in refund back (not much more, but a little), which I can then pay off the loan (this is REALLY important guys, don’t leave the loan hanging around). This means you now have more money in your RRSPs! Cool eh?
The important things to remember is, if you were planning on using your refund to pay down your mortgage or some other debt, that is good too. Don’t get convinced that the only good idea is to get a loan to max out your RRSPs! Pay off the darn loan if you get it as well!
DON’T BORROW THE MONEY FROM YOUR CREDIT CARD (can I be more exact, don’t do it). Don’t borrow at all if possible.
It’s an idea, but not the ONLY good idea at RRSP time