Tax Time and RRSP Loans

Tax Time and RRSP Loans

Recently, I joined Momentum, an organization which helps low income, youth entering the workforce, and disadvantaged people save money.  Basically, the way the helped me was during the six months I was with them I was to save $50/month up to $300 for the entire six month workshop. One of the classes dealt with Taxes at all levels hosted at Momentum and taught by an accountant who has experience with personal accounting, corporate accounting, and was moving up in the world to international accounting.

One of this accountants pet peeves was the idea of getting a RRSP LOAN, something he said never made any sense for people to have. By the time you pay the loan off, the RRSP could be environmentally worthless since people now know that jobs, especially over the past couple of generations, have become less and less secure, therefore rendering a loan of any kind for personal finances useless. If you get fired, let go, downturn, company goes under, than you are left paying a loan at the same rate as a student loan.  Plus the interest made on the RRSP and TAX FREE SAVINGS ACCOUNTS are so low, that you would not make any money off it for retirement which is the goal of RRSP's to begin with. I.E a loan would probably be 10% and the interest made is something like 2.5%/year. Plus you would have to pay back the Government Taxes from the first year you started contributing to RRSP. For example, if you put $100 away in 2015 at the lowest tax bracket which is 15%, you will get $15 in tax refund in 2016, instead of spending it put aside $115 for your 2016 taxes, than something like $130 away for 2017 RRSP, so on and so forth. Basically take the 15% RRSP tax credit each year and reinvest it. When you retire, the $15 credit from the first initial $100 RRSP contribution you made in 2015 will will go back to the government. By that time you would have made 2.5% a year on the $15 for as many years as you are working. So the RRSP loan itself is something you should consider avoiding all together.

When married or with a common law, this gets a bit more interesting. It is best to put the RRSP into the higher wage earners account since that person is likely to be in the higher tax bracket. I.E I have worked in the lowest tax bracket since 2000.  And if I was married and my spouse was in the 25%, it would have been best to put all our money in the RRSP of the person paying 25% since instead of receiving only $15 off of $100, we will be getting $25 from the $100 instead.

Give it a try.  This non RRSP Loan is a plenty easier route to go even if you cant max out your RRSP room the first year.  You will notice in approximately five years time it will not matter since this method only takes five years to max your RRSP room, when you do you can simply keep your RRSP's topped up the rest of your life and still have extra money from your tax return to spend on whatever it is you either need, want, or any debts you wish to pay down.

Sincerely

Kevin Miller