Tax season is just around the corner and it is that time of the year where people start contributing to their RRSP!
Personally, I think it’s best to contribute to the RRSP at the start of the year for investment growth but this can prove quite difficult for those who do not have the excess funds (myself including).
Anyhow, I had just contributed $7,000 into my RRSP today leaving $6,000 of contribution left. I am in the process of considering the possibility of taking out a bank loan to contribute the rest. Unfortunately, I am unsure whether that would be the right move. Let’s do some quick math here and hopefully at the end of the post, I would have my answer.
What I Should Have Done?
Before I get down to the math, I would just like to mention what I should have done.
Seeing how I had a sizeable amount in my TFSA, I should have taken out the $6000 from my TFSA to reallocate it to my RRSP prior to the end of 2015. By doing this, I could have contributed my TFSA back in the new year and only losing minimal growth.
Unfortunately, I am aversive to doing that now since the year had just started and I could be potentially losing out on 10 months of potential growth.
The next possible options would be to take out a bank loan or to leave it as is without making any further contributions.
Taking Out a Bank Loan
I am currently at quite a high tax bracket and according to my quick calculations, my current contribution of $7000 would result in me owing the government $300 after completion of my taxes.
Taking into account that I don’t have enough contribution in my RRSP to lower my income to the previous bracket, my only option would be to minimalize my taxes as possible. This means that I would have to max my RRSP.
Currently, I have $6,000 worth of contribution room in my RRSP and maxing it out to $13,000 would mean that I would get a refund of $1500.
At a rate of 5.5% from my line of credit, taking out a $6,000 loan would amount to $330 of interest annually. However, I do not believe that it would take that long to repay it and plus, I am not confident enough in my investment skills to generate that percentage to null the interest just yet.
At the very least it would take at most 3 months to repay that loan. In either case, borrowing from the bank would mean that I would have a surplus of $1200 or more after tax completion.
To determine whether this will be worthwhile, I will need to consider my end game for my RRSP.
My Endgame for My RRSP
I had never been a fan of having my money in my RRSP held for ransom.
Unless, I am using it to purchase a new home, the price tag for withdrawal can be incredibly hefty.
Hypothetically speaking, say I want to withdraw the $13,000 that I had invested this year, I will have to pay a tax rate of 20% which is $2,600. This does not even include the taxes I will have to pay when I report the $13,000 as additional income when the tax season comes around.
With my plan to retire early, I anticipate that there will be years where I can arrange to have no income and be able to withdraw $10,000 per year. Even though, it will be subjected to a with-holding tax, I should get that back when I file for my taxes if I have no other income.
Not only is this very troublesome but the very thought of this gives me a sour taste when it comes to my RRSP. However, the upside to this is that my investments in my RRSP will be able to grow tax free keeping in mind that once withdrawals are made the contribution room is lost forever.
Anyhow, I digress. Assuming that I follow this plan of withdrawing $10,000 per year in my years of early retirement with no other income, I should be able to withdraw from my RRSP with no taxes.
If this is the case, the only penalty I would accrue would be the interest rate from the loan. The rest of the tax refund should be additional income (even though technically it is not because it is already deducted from my pay).
This leaves me with the conclusion that in my particular situation, it would be in the best interest to take out that loan. Thoughts?
By the way. I just remembered that I forgot to update my net-worth for January. I will do a combined 2-month update for January and February.
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