Q – I’d like to make a contribution to my RRSP to get a tax deduction for 2013, but I haven’t got a lump sum of ready cash to contribute right now. I’ve heard that you can transfer in investments from non-registered accounts. But I’ve also seen ads saying I can borrow to contribute to an RRSP. Which is the better bet? – S. Yee, Toronto, Ontario
A – Before I get to your question, I want to point out that the reason most often given for not contributing to an RRSP is: “I don’t have the money!” But the fact is there are always ways and means to make RRSP contributions…without digging around under sofa cushions for loose change before the March 3 contribution deadline. Here are a few ideas.
Automatic deposits. This is the easiest way to ensure you make RRSP contributions through the year. Arrange with your bank or your employer (if they’ve set up a group RRSP) to automatically deposit funds to your RRSP with every paycheque. You set the amount. The rest happens “invisibly,” just like any other withholding amount from your pay. Except in this case, the “withholding” remains in your hands as an RRSP contribution. And contributing through the year gets your money invested and compounding that much sooner.
Severance payments. If you received a severance payment in 2013 (and you haven’t already blown it on something), use it to make an RRSP contribution. That way, you’ll shelter some or all of the severance amount from income tax.
Inheritances. You may have received a bequest during the year. If it’s a substantial sum, use at least some of it as an RRSP contribution. Bequests themselves are generally not taxable as income, but any investment income from that bequest is. So put some of it into an RRSP, where investment growth is tax-sheltered until your RRSP matures.
Contributions in kind. If you have qualifying investments outside an RRSP in a non-registered account, consider transferring some of them to an RRSP. Their current value will be deemed to be the contribution amount for tax purposes. Any RRSP-eligible investment will do, including stocks traded on listed exchanges, GICs, Canada Savings Bonds, government bonds, mutual funds, ETFs, and so on. If you make this type of contribution, keep in mind that there will be what’s called a “deemed sale” of the asset, and 50% of any capital gain may be taxed. However, the upside is that you’ll get a tax deduction on 100% of your contribution. To make contributions in kind, you’ll need a brokerage account or have a self-directed RRSP that lets you pick and choose your own investments.
To borrow or not borrow? That is the question
Borrowing to make an RRSP contribution can sound very attractive. After all, you’ll get a tax deduction on the contribution, you’ll be able to pay down the loan with your refund, and your investment could well earn more than the interest on the loan. This might seem an easy answer to the contribution conundrum, but there are a few “cons” to go with the “pros.”
The biggest downside to borrowing your RRSP contribution is that you are levering your investment. It makes no sense to put borrowed money into an safe, interest-bearing investment like a GIC, because it earns less than the cost of your loan. But if you invest in equity investments, either directly or through a mutual fund or ETF, you run the risk of magnifying any losses that may occur. In other words, the value of your investment may end up being less than the value of your loan – never a good situation!
Another minus is that an “RRSP loan” is still a loan – a debt with interest payable. And you must pay the lender (usually your friendly neighborhood bank) the money when it’s due, regardless of what happens to your RRSP investment or anything else. People who jump into RRSP loans without thinking about the effect on their cash flow are usually in for a rude awakening.
Whether contributions in kind or borrowing makes most sense for you really depends on your personal financial situation and your ability take on and manage debt. In general, I’d advise being very careful with additional debt for RRSP investment purposes, even at current low rates. Before you do so, speak with your financial advisor or qualified planner. – Robyn
Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at email@example.com for a confidential planning consultation.
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