{"id":12616,"date":"2020-02-13T08:00:00","date_gmt":"2020-02-13T13:00:00","guid":{"rendered":"https:\/\/www.zolo.ca\/news\/?p=12616"},"modified":"2022-07-29T22:51:39","modified_gmt":"2022-07-30T02:51:39","slug":"ask-rk-rrsp-contribution","status":"publish","type":"post","link":"https:\/\/www.zolo.ca\/blog\/ask-rk-rrsp-contribution","title":{"rendered":"ASK RK: Should I Borrow Money for an RRSP Contribution?\u00a0"},"content":{"rendered":"\n<p><span style=\"font-weight: 400;\">As the RRSP deadline quickly approaches, many Canadians are scrambling to find the money to make a contribution to this tax-deferred account. Some of those Canadians are wondering whether or not to borrow money for that RRSP contribution, while others if they should forego the loan, and the hassle, and skip this year\u2019s contribution altogether?&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Unfortunately, the answer isn\u2019t a one-size-fits-all solution when it comes to borrowing money for RRSP contributions.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Fortunately, there are some general guidelines and principles that can help you make the right decision for your situation.&nbsp;<\/span><\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p style=\"padding-left: 80px;\"><strong><span style=\"color: #ff0000;\">QUICK FACTS:&nbsp;<\/span><\/strong><\/p><\/blockquote>\n\n\n\n<ul class=\"wp-block-list\"><li style=\"list-style-type: none;\">\n<ul>\n<li style=\"font-weight: 400;\">\n<blockquote><p><span style=\"color: #ff0000;\"><span style=\"font-weight: 400;\">Deadline for contributions for 2019 tax year is <\/span><b>March 2, 2020<\/b><\/span><\/p><\/blockquote>\n<\/li>\n<li style=\"font-weight: 400;\">\n<blockquote><p><span style=\"color: #ff0000;\"><span style=\"font-weight: 400;\">If you contribute money into your RRSP within the <strong>first 60 days of 2020 <\/strong><\/span><b>you must report<\/b><span style=\"font-weight: 400;\"> it on your 2019 taxes, even if you don\u2019t plan on carrying that contribution amount into next year\u2019s tax return.<\/span><\/span><\/p><\/blockquote>\n<\/li>\n<li style=\"font-weight: 400;\">\n<blockquote><p><span style=\"color: #ff0000;\"><b>All retirement funds count towards your RRSP contribution limit<\/b><span style=\"font-weight: 400;\"> \u2014 this includes employer pooled pension funds, share purchase plans and contributions to spousal RRSPs.&nbsp;<\/span><\/span><\/p><\/blockquote>\n<\/li>\n<li style=\"font-weight: 400;\">\n<blockquote><p><span style=\"color: #ff0000;\"><span style=\"font-weight: 400;\"><strong>Deadline to submit<\/strong> your 2019 tax return, and taxes owed, is <\/span><b>midnight April 30, 2020<\/b><span style=\"font-weight: 400;\">.&nbsp;<\/span><\/span><\/p><\/blockquote>\n<\/li>\n<li style=\"font-weight: 400;\">\n<blockquote><p><span style=\"color: #ff0000;\"><b>Self-employed<\/b><span style=\"font-weight: 400;\"> people and their spouses have until <\/span><b>June 15, 2020<\/b><span style=\"font-weight: 400;\"> to file their return, but the <strong>clock starts at <\/strong><\/span><b>12:01 am May 1, 2020<\/b><span style=\"font-weight: 400;\"> for penalties and interest on taxes owed for 2019.&nbsp;<\/span><\/span><\/p><\/blockquote>\n<\/li>\n<\/ul>\n<\/li><\/ul>\n\n\n\n<p><span style=\"font-weight: 400;\">The answer boils down to whether or not your contribution to a Registered Retirement Savings Plan (RRSP) will benefit you now <\/span><i><span style=\"font-weight: 400;\">and<\/span><\/i><span style=\"font-weight: 400;\"> in the future.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">If it does, then the quick answer to this question is: yes.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">But to make a smart decision, it\u2019s best to dive into the weeds a bit.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">(If you already know you need to borrow in order to contribute to your <a href=\"https:\/\/www.zolo.ca\/blog\/reduce-capital-gains-tax\">RRSP<\/a>, then jump to our<\/span>&nbsp;<b><a href=\"#how much\">quick calculation method to find out how much to borrow<\/a>).&nbsp;<\/b><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"<b&gt;what-you\u2019ll-learn:-<\/b&gt;\"><b>What You\u2019ll Learn:\u00a0<\/b><\/h2>\n\n\n\n<ul class=\"wp-block-list\"><li><span style=\"font-weight: 400;\"><a href=\"#Benefits of RRSP\">Benefits of RRSP<\/a><\/span><\/li><li><span style=\"font-weight: 400;\"><a href=\"#How an RRSP works\">How an RRSP works (and how marginal tax brackets work)<\/a><\/span><\/li><li><span style=\"font-weight: 400;\"><a href=\"#How much you can contribute to your RRSP each year\">How much you can contribute to your RRSP each year<\/a><\/span><\/li><li><span style=\"font-weight: 400;\"><a href=\"#How does a pension impact RRSP contributions\">How does a pension impact RRSP contributions<\/a><\/span><\/li><li><span style=\"font-weight: 400;\"><a href=\"#How you handle over-contributions to your RRSP\">How you handle over-contributions to your RRSP<\/a><\/span><\/li><li><span style=\"font-weight: 400;\"><a href=\"#When should you contribute to an RRSP?\">When should you contribute to an RRSP?<\/a><\/span><\/li><li><span style=\"font-weight: 400;\"><a href=\"#When should you not contribute to an RRSP?\">When should you not contribute to an RRSP?<\/a><\/span><\/li><li><span style=\"font-weight: 400;\"><a href=\"#Should you borrow money for an RRSP contribution?\">Should I borrow money for an RRSP contribution (and how much)?<\/a><\/span><\/li><li><span style=\"font-weight: 400;\"><a href=\"#What types of investments can I hold in my RRSP?\">What types of investments can I hold in my RRSP?<\/a><\/span><\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"benefits-of-rrsp\">Benefits of RRSP<\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">The RRSP is a powerful tool for a few reasons:&nbsp;<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">It defers the tax you pay on earned income until a future year, allowing you to withdraw and pay tax on that money, during retirement, when you are theoretically earning less putting you in a lower tax bracket.<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">You get credit from the taxman on money contributed to an RRSP. The credit, known as a tax refund, is based on the assumption that you\u2019ve paid tax on that money, but you are now electing to defer your tax payment to some future time, so you are owed that already paid tax money.&nbsp;<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Working with time and the power of compounding interest, the money you invest can grow quite substantially.&nbsp;&nbsp;<\/span><\/li><\/ul>\n\n\n\n<p><span style=\"font-weight: 400;\">In sum, <strong>any RRSP contributions you make are tax-deductible<\/strong>. That means you can claim these contributions as a tax deduction when you file your income tax return. This lowers the tax you pay, as it lowers your income (and, if you\u2019re fortunate, could bump you down to a lower marginal tax bracket, further reducing the tax you pay).<\/span><\/p>\n\n\n\n<figure class=\"wp-block-table widefat\"><table><tbody><tr><td><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"how-does-an-rrsp-work?\">How Does an RRSP Work?<\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">When you contribute to your RRSP, the CRA deducts this amount from your income and, as a result, lowers the annual personal income tax you owe. <strong>The higher your income, the bigger the savings because your tax rate is higher<\/strong>.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">How Do Marginal Tax Brackets Work?<\/h3>\n\n\n\n<p><span style=\"font-weight: 400;\">But that doesn\u2019t mean that every dollar you earn is taxed at that higher rate.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">It means that <strong>each dollar earned in a tax bracket is charged this tax<\/strong>. The more you make, the further you go up the income tax ladder until you get to the top tier.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">To illustrate, let\u2019s assume you earn $98,000. This salary puts you in the 26% federal tax bracket (there are also provincial taxes). This doesn\u2019t mean you\u2019d pay $25,480 in taxes ($98,000 x 26%). Instead, each earning bracket is taxed, based on those rates. In other words, your tax would be calculated like this:&nbsp;<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Pay 15% on the first $48,535 of taxable income ($7,280.25), and<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">20.5% on the taxable income over $48,535 and up to $97,069 ($9,949.68), and<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">26% on the taxable income over $97,069 ($242.06)<\/span><\/li><\/ul>\n\n\n\n<p><span style=\"font-weight: 400;\"><strong>Total tax<\/strong> <strong>bill using marginal tax brackets<\/strong> = $17,471.99<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\"><span style=\"text-decoration: underline;\"><strong>To sum it up:<\/strong><\/span> The marginal tax rate is the amount of tax paid on any dollar earned until you pass the minimum amount for the next tax bracket.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"how-much-you-can-contribute-to-your-rrsp-each-year?\">How Much You Can Contribute to Your RRSP Each Year?<\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">There are limits on how much you can contribute each year to your own RRSPs and, if you\u2019re married or in a common-law relationship, to your partner\u2019s RRSPs.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Your <strong>maximum contribution each year<\/strong> is calculated based on a percentage of the earned income from the previous year, or the maximum contribution amount for that tax year minus any contributions to your pension.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Put another way, your maximum RRSP contribution, for any given year, is the lower of:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">18% of your earned income from the previous year;<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The maximum annual contribution limit for that taxation year (this is posted by the CRA and can be found <\/span><a href=\"https:\/\/www.canada.ca\/en\/revenue-agency\/services\/tax\/registered-plans-administrators\/pspa\/mp-rrsp-dpsp-tfsa-limits-ympe.html\"><span style=\"font-weight: 400;\">online<\/span><\/a><span style=\"font-weight: 400;\">);<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The remaining limit after any company-sponsored pension plan contribution or group RRSP contribution.<\/span><\/li><\/ul>\n\n\n\n<p><span style=\"font-weight: 400;\">(Keep in mind your RRSP deduction limit is capped at 18% of your income or CRA\u2019s capped maximum sum, but your RRSP contribution limit also includes any unused RRSP rooms from previous years.)<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">If you want to be precise about your maximum RRSP contribution for this tax year, go online to <a href=\"https:\/\/www.canada.ca\/en\/revenue-agency\/services\/e-services\/e-services-individuals\/account-individuals.html\">\u2018My Account\u2019 on the Canada Revenue Agency\u2019s site<\/a>.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"how-does-a-pension-impact-rrsp-contributions?\">How Does a Pension Impact RRSP Contributions?<\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">If you are fortunate enough to work with an employer that offers a pension, you need to take into consideration how yearly pension contributions will adjust your annual RRSP contribution limit.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Since pension contributions work like registered retirement contributions \u2014 put into a fund that you do not access until retirement and if you do, there are withholding fees \u2014 <\/span><span style=\"font-weight: 400;\">you have to <strong>subtract your &#8220;pension adjustment&#8221; (PA) from your total RRSP deduction limit for the year<\/strong>.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Thankfully, the CRA will include this information on your notice of assessment. Check the NOA you received from the CRA after filing last year\u2019s tax return. It lists your deduction limit for the current tax year, as well as information about your PA. You can also find this information on your CRA My Account page.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"how-do-i-handle-an-over-contribution-to-my-rrsp?\">How Do I Handle an Over-Contribution to My RRSP?<\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">Disciplined savers, those looking to aggressively take advantage of legitimate tax strategies, and both seasoned and naive investors may find themselves in a position where they contributed more than they are allowed to into their RRSP in a given year.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Not to worry. <strong>Every Canadian is allowed to over-contribute $2,000 and not be penalized<\/strong> \u2014 but this \u2018pass\u2019 is only offered once in your lifetime.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">The contributions you make to all your registered retirement accounts will count towards your annual contribution limit, including employer or personally held pooled registered pension plans (PRPP), RRSP, share purchase plans (SPP) or your spouse or common-law\u2019s RRSP or SPP.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">If you over-contribute more than $2,000 or you over-contribute more than once in your lifetime,&nbsp; you&#8217;ll be charged a penalty of <\/span><strong><a href=\"https:\/\/www.canada.ca\/en\/revenue-agency\/services\/tax\/individuals\/topics\/rrsps-related-plans\/contributing-a-rrsp-prpp\/what-happens-you-over-your-rrsp-prpp-deduction-limit.html\">1% on the over-contribution amount <i>per month<\/i><\/a><\/strong><i><span style=\"font-weight: 400;\">.&nbsp;<\/span><\/i><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">If you realize you\u2019ve made an overcontribution, immediately do the following:<\/span><\/p>\n\n\n\n<ol class=\"wp-block-list\"><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Pay the penalty.<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Withdraw the excess amount.<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Contribute to a qualifying group plan.&nbsp;<\/span><\/li><\/ol>\n\n\n\n<p><span style=\"font-weight: 400;\">For this last step, you\u2019ll need to prove to the CRA that you either had RRSP contribution room that was unused in prior years \u2014 thus bumping up your contribution limit \u2014 or your income increased, thereby increasing your contribution room.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">At 1% per month, the penalty doesn\u2019t sound like much until you realize that the amount is charged starting day one, even though you don\u2019t learn about the overage until you receive your Notice of Assessment (NOA) \u2014 about two weeks after filing your taxes, if you did it electronically, or as long as two months if you filed a paper return.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Now, if you made an honest mistake or you can show quick action to rectify the problem, ie: withdrawing the excess contribution, then you <strong>may be able to appeal the penalty<\/strong>. To do this, write a letter to the CRA. In the letter:&nbsp;<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Ask to cancel or waive the penalty charged for over-contribution on your RRSP.<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Include copies of your RRSP, PRPP, SPP, or registered retirement income fund (RRIF).&nbsp;<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Show documentation as to when you withdrew the excess contributions.&nbsp;<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Any supporting paperwork that shows how your over-contribution was due to an error.&nbsp;<\/span><\/li><\/ul>\n\n\n\n<p><span style=\"font-weight: 400;\">But, wait. There\u2019s more.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Whether it was a mistake or not, the over-contribution will need to be removed. To do this, you need to fill out and file a <\/span><a href=\"https:\/\/www.canada.ca\/content\/dam\/cra-arc\/formspubs\/pbg\/t3012a\/t3012a-fill-18e.pdf\"><span style=\"font-weight: 400;\">T3012A<\/span><\/a><span style=\"font-weight: 400;\">. The CRA will confirm and certify the total over-contribution amount. Once certified, you can withdraw the excess money without paying the 30% withholding tax, that\u2019s typically applied to all early RRSP withdrawals. Work fast, however, as the over-contribution penalty keeps growing until you withdraw the funds.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"when-should-you-contribute-to-an-rrsp??\">When Should You Contribute to an RRSP??<\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">Anyone with a social insurance number and who has earned income and filed a tax return can contribute to an RRSP up until December 31 of the year they turn 71. After this age, if you continue to have earned income, you can contribute to a Spousal RRSP up until December 31 of the year your spouse turns 71.<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">The tax refund you get back is based on your marginal tax rate. For example, if you make $50,000 per year and live and work in B.C, you are in a 28.2% marginal tax rate (<\/span><a href=\"https:\/\/www.taxtips.ca\/marginaltaxrates.htm\"><span style=\"font-weight: 400;\">provincial plus federal rate<\/span><\/a><span style=\"font-weight: 400;\">). If you choose to contribute $1,000 to your RRSP, you will save $282 or 28.2%.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\"><strong>The higher the tax bracket, the bigger the tax savings<\/strong>. <strong>The lower the tax bracket, the lower the tax savings.&nbsp;<\/strong><\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">For that reason, you should contribute to an RRSP when you are in a high marginal tax rate (38% for example) and take it out when you are in a low marginal tax rate (22% for example).&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">To calculate how much you\u2019ll need to contribute to your RRSP in order to meet your retirement needs, consider using <\/span><span style=\"font-weight: 400;\">an <\/span><a href=\"https:\/\/www.getsmarteraboutmoney.ca\/calculators\/rrsp-savings-calculator\/\"><span style=\"font-weight: 400;\">online calculator<\/span><\/a><span style=\"font-weight: 400;\">. Just remember, however, that junk in is junk out. If you don\u2019t have accurate information you won\u2019t get an accurate contribution limit from the calculator.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"when-should-you-<strong&gt;not<\/strong&gt;-contribute-to-an-rrsp?\">When Should You <strong>Not<\/strong> Contribute to an RRSP?<\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">It also means that it might not be a good idea to contribute money to your RRSP, for instance when you are in a low marginal tax rate (25%) or if you believe you\u2019ll end up earning more in retirement (putting you in a higher tax bracket).&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Of course, this general principle gets complicated when you start to add in other factors. To help, here are four guidelines on when should you <\/span><b>not<\/b><span style=\"font-weight: 400;\"> contribute to an RRSP:<\/span><\/p>\n\n\n\n<ol class=\"wp-block-list\"><li style=\"font-weight: 400;\"><span style=\"text-decoration: underline;\"><strong>If your annual income is too low.<\/strong><\/span>\n<ol>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">An RRSP contribution works as a tax deduction against your income. If your income is too low, you will not benefit from that tax deduction.<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Rule of thumb:<\/b><span style=\"font-weight: 400;\"> If your income is below $50,000 (or the upper threshold of the second marginal tax bracket, putting it around $48,500) then you won\u2019t see any significant tax benefits from an RRSP contribution.&nbsp;<\/span><\/li>\n<\/ol>\n<\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\"><span style=\"text-decoration: underline;\"><strong>If you anticipate an annual income in retirement that is higher than your current annual income<\/strong><\/span> then you will not benefit from an RRSP contribution.<\/span>\n<ol>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Entrepreneurs and <a href=\"https:\/\/www.zolo.ca\/blog\/year-end-tax-strategies\">business owners<\/a> often fall into this category, as their annual earnings can be significantly lowered through current annual taxable deductions.&nbsp;<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Rule of thumb:<\/b><span style=\"font-weight: 400;\"> It\u2019s best to calculate whether or not you anticipate higher earnings in retirement \u2014 say from the <a href=\"https:\/\/www.zolo.ca\/blog\/how-to-avoid-capital-gains-tax\">sale of your business<\/a>, or from future sales commissions \u2014 making an RRSP contribution now, a poor choice.&nbsp;<\/span><\/li>\n<\/ol>\n<\/li><li style=\"font-weight: 400;\"><span style=\"text-decoration: underline;\"><strong>If you have too much money in your RRSPs.&nbsp;<\/strong><\/span>\n<ol>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">For those fortunate enough to save well or sell stock at the right time, your RRSP savings could grow significantly and it may force you to withdraw a larger sum each year in retirement, bumping you into higher tax brackets. If this looks like the case, investing more in an RRSP is not wise.&nbsp;&nbsp;<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Rule of thumb: <\/b><span style=\"font-weight: 400;\">Do the math. Consider your marginal tax rate in retirement, as well as your annual withdrawal rate \u2014 a percentage of your savings that you\u2019ll need to withdraw each year in order to live. Then calculate how much you\u2019d need to withdraw to smooth out your tax rate in retirement.&nbsp;<\/span><\/li>\n<\/ol>\n<\/li><li style=\"font-weight: 400;\"><span style=\"text-decoration: underline;\"><strong>If you expect your salary to grow in the near future.&nbsp;<\/strong><\/span>\n<ol>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">This typically applies to newly graduated post-secondary workers, as well as apprentices in trade work fields. Remember, the deduction you earn from an RRSP contribution is equal to your marginal tax rate, so the higher your marginal tax rate, the higher your tax refund.&nbsp;<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Rule of thumb: <\/b><span style=\"font-weight: 400;\">Consider your current annual earnings and then realistically consider future earnings. If you anticipate a bump up in pay in the near future, consider not contributing to your RRSP this year, carrying that contribution room forward, and making a contribution when your earnings are higher.&nbsp;<\/span><\/li>\n<\/ol>\n<\/li><\/ol>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"don\u2019t-want-a-loan-and-don\u2019t-have-enough-money-to-contribute-to-your-rrsp,-no-problem\">Don\u2019t Want a Loan and Don\u2019t Have Enough Money to Contribute to Your RRSP, No Problem<\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">Not everyone likes to use leverage, even if it can help them build their savings.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">For those that prefer not to take on debt, don\u2019t worry if you don\u2019t have the money to contribute to your RRSP this year.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">The <strong>CRA allows you to carry forward your contribution room indefinitely to future years<\/strong>. This <\/span><span style=\"font-weight: 400;\">works in your benefit if you anticipate your earnings to rise in the future.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">To illustrate how the carry-forward works, let\u2019s assume your contribution room was $15,000 in 2018, <\/span><span style=\"font-weight: 400;\">but your earnings were low and you decided not to make a contribution to your RRSPs. Then, in 2019, your earnings jumped and you can now contribute the maximum amount to your RRSPs, which is $25,600. At this point, you can make a total RRSP contribution of $41,500 ($15,000 + $26,500).<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">To find out precisely how much unused-contribution room you have, read your most recent most Notice of Assessment, or log into the CRA\u2019s My Account and look for your RRSP Deduction Limit Statement.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"should-i-borrow-money-for-an-rrsp-contribution?-and-how-much?\">Should I Borrow Money For an RRSP Contribution? And How Much?<\/h2>\n\n\n\n<p><b id=\"how much\">It can make a lot of sense to borrow money <\/b>in order to increase your annual RRSP contribution. The key is to minimize the costs and to plan how and when you\u2019ll pay off this debt.<\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">The <span style=\"text-decoration: underline;\"><strong>best strategy<\/strong><\/span> is to only borrow an amount that is matched by the refund you\u2019ll receive. That way you are paying little or no interest on the loan and you get the advantage of compounding interest on those savings.<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Thankfully there is a fairly easy and quick formula for figuring out how much to borrow (based on your expected tax refund). <strong>Here are the steps to take<\/strong>:&nbsp;<\/span><\/p>\n\n\n\n<ol class=\"wp-block-list\"><li><span style=\"font-weight: 400;\">Calculate your marginal tax rate. <\/span><span style=\"font-weight: 400;\"><br>\n<\/span> <span style=\"font-weight: 400;\">I use <\/span><a href=\"https:\/\/www.taxtips.ca\/marginaltaxrates.htm\"><span style=\"font-weight: 400;\">TaxTips.ca<\/span><\/a><span style=\"font-weight: 400;\">, and click on my province of residence.<br>\n<\/span>(In this example, let\u2019s assume your marginal tax rate is 33%)<\/li><\/ol>\n\n\n\n<ol class=\"wp-block-list\" start=\"2\"><li><span style=\"font-weight: 400;\"> Divide 1 by your marginal tax rate (1 \/ 0.33 = x)<br>\n<\/span><\/li><li><span style=\"font-weight: 400;\"><span style=\"font-weight: 400;\"> Then subtract 1 from that answer (x \u2013 1 = y)<\/span><\/span><\/li><li><span style=\"font-weight: 400;\"> Take the final answer (y) and divide it into the amount of money you will contribute to your RRSP <\/span>before the investment loan<span style=\"font-weight: 400;\"> ($ \/ y = the amount you should borrow to invest in your RRSP)<\/span><\/li><\/ol>\n\n\n\n<p><span style=\"font-weight: 400;\">For example, let\u2019s say Pat has $5,000 to invest in her RRSP and Pat is in the 33% marginal tax bracket:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">1 \/ 0.33 = 3.03<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">3.03-1=2.03<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">$5,000 \/ 2.03 = $2,463<\/span><\/li><\/ul>\n\n\n\n<p><span style=\"font-weight: 400;\">Based on these calculations, Pat should borrow $2,500 and invest this sum, along with the $5,000 he saved, into her RRSP. This $7,500 RRSP contribution will provide a tax refund of $2,463, which she then uses to pay off the investment loan.<\/span><\/p>\n\n\n\n<p><strong>Remember, <span style=\"text-decoration: underline;\">unlike loans for non-registered investment<\/span>s, interest on investment loans used for registered plans, such as RRSP or Tax-Free-Savings-Accounts, are not tax-deductible.<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"what-types-of-investments-can-i-hold-in-my-rrsp?\">What Types of Investments Can I Hold in My RRSP?<\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">If you\u2019re pushing up against that February 29 deadline or you just don\u2019t know what to invest in, the easiest thing to do is to open and add cash to an RRSP high-interest savings account or just contribute money into your RRSP account (without actually buying or investing in anything).&nbsp;<\/span><\/p>\n\n\n\n<p><strong>Once the pressure is off, you can see what type of investments would work best in your RRSP, based on your financial plan.&nbsp;<\/strong><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">If you don\u2019t have a financial plan and you don\u2019t want to keep the money in a high-interest account, you can opt to hold the following types of investments:&nbsp;<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Guaranteed Investment Certificates (GICs)<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Exchange-Traded Funds (ETFs)<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Mutual funds<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Real estate investment trusts (REITs)<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Bonds (both corporate and government-issued)<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Stocks (securities) that are listed on a designated exchange, such as the TSX or the NYSE<\/span><\/li><li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Self-directed mortgage (this is a more complex strategy, and best down after seeking advice).&nbsp;<\/span><\/li><\/ul>\n\n\n\n<p><span style=\"font-weight: 400;\">Finally, if you want to get an idea of how different contribution amounts to your RRSP will impact your refund, use this <\/span><a href=\"https:\/\/www.eytaxcalculators.com\/en\/2019-rrsp-savings-calculator.html\"><span style=\"font-weight: 400;\">simple tax calculator<\/span><\/a><span style=\"font-weight: 400;\"> from EY.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">For a rundown on the basics of the RRSP, read this <\/span><a href=\"https:\/\/www.moneysense.ca\/columns\/ask-moneysense\/how-to-maximize-benefit-of-rrsp-contribution\/\"><span style=\"font-weight: 400;\">MoneySense article<\/span><\/a><span style=\"font-weight: 400;\">. If you\u2019re in the market to open an RRSP account, check out the ranking of the <\/span><a href=\"https:\/\/www.moneysense.ca\/save\/banking\/best-savings-accounts\/\"><span style=\"font-weight: 400;\">best savings accounts in Canada<\/span><\/a><span style=\"font-weight: 400;\">.&nbsp;<\/span><\/p>\n\n\n\n<figure class=\"wp-block-table widefat\"><table><tbody><tr><td><\/td><\/tr><\/tbody><\/table><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>Borrow money to make money. It\u2019s an old strategy and a good strategy, as long as it\u2019s employed wisely. Here\u2019s what you need to know about leverage and your RRSP contributions<\/p>\n","protected":false},"author":3,"featured_media":12663,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[46],"tags":[],"guide":[],"class_list":["post-12616","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance"],"acf":[],"zolo_excerpt":"","_links":{"self":[{"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/posts\/12616","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/comments?post=12616"}],"version-history":[{"count":19,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/posts\/12616\/revisions"}],"predecessor-version":[{"id":21857,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/posts\/12616\/revisions\/21857"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/media\/12663"}],"wp:attachment":[{"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/media?parent=12616"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/categories?post=12616"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/tags?post=12616"},{"taxonomy":"guide","embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/guide?post=12616"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}