Yup. There I was - in the hustle and bustle of RRSP season - trying to make my last minute contribution. Well, ok. Not exactly. Actually, I was sitting in front of my computer and made my contribution online. But I digress.
This year, I had not planned on buying any RRSPs. My wife and I decided that we would make a concerted effort to pay off our mortgage as quickly as possible. That means saving all the money that we normally put towards RRSPs and taxable investment accounts. Our goal (cross my fingers!) is to have our home paid for by July 2009. It is a very aggressive goal and any little bumps along the road could push it out further, but at least it gives us a target to shoot for!
Anyways, getting back to my last minute RRSP contribution. My wife did our initial trial run of our tax returns about a month ago or so - using our last paystubs of 2005 as a good approximation. Things were looking good for me. Normally, my employer takes off exactly the right amount of tax owed so I normally wouldn’t have to make a payment.
However, I just started dripping this year. I probably own around 15 different DRiPs. The T5s started to trickle in - one by one for each of these dividend paying stocks and income trusts. My low-fee index funds also produced a T5. And lastly, ING Direct sent me the interest I had earned in my chequing/savings accounts. After all was said and done, I owed tax! Not a lot, but I owed!
To make a long story short, I decided to contribute just enough to my RRSP so that I don’t have to pay any taxes. I placed my contribution into a high interest savings account until I can determine where best to use the funds to rebalance my asset allocation model.
7 users commented in " Last Minute RRSP Buyers? I am Guilty. "
Follow-up comment rss or Leave a TrackbackDid you use tax software to do your taxes? If you did there are a few of them that will let you play around with RRSP contributions to try out different scenarios. The software that I use will even tell you exactly how much you can contribute so that you get the exact same amount back in your refund.
Doing this would both allow you to contribute to your RRSP and pay down your mortgage with no net change in the amount of cash you have to come up with. You still have time to contribute if you want to check that out.
Hmmm. My wife uses QuickTax to do our tax returns.
I am not sure I understand your statement “how much you can contribute so that you get the exact same amount back in your refund.”
Are you saying that there is a certain amount, let’s say $1,000, that if I put that amount in, I get that whole amount back out?
My understanding is that for every $1,000 I put into my RRSP, I basically get my marginal tax rate back. So if I was in a 36% tax bracket, I would get $360 back as a refund.
You are correct, you just get back your marginal tax rate (I looked into this a little more this morning because I didn’t quite get it either). However, you could have over-paid your taxes over the year or made donations or whatever and a package like QuickTax (through the RRSP Wizard) will tell you exactly how much you can contribute to your RSP so that your total return (not just the part from contributing to the RSP) will cover exactly your contribution.
Hey! I commend you on trying to pay down your mortgage as fast as possible. This however, is not always the most effective use of your money. Check out my post for something to think about.
Mortgage Or RRSP Contribution
Hi John,
I have heard the argument before about using your tax refund to pay down your mortgage. And it is valid.
Here are my points:
1. I personally think there is too much propoganda from the financial industry to get people saving for their retirements. For the financial industry, it is a win-win. Not only do they earn commissions and fees from my investments, they also earn interest from my mortgage! My theory is: pay down your debt first. If you can be debt free by 40, you have plenty of time to save for your retirement. Check out my article “To RSP or Not RSP.”
2. The rate of return you earn in your RRSP is an unknown. You can assume an 8% return, but that is it. However, I know what my mortgage rate is and I have to pay my mortgage with after tax dollars. So depending on your tax bracket, this is probably a pretty healthy return. And it is a guaranteed return.
Going forward, I have heard many economists and gurus predict that equity markets will be earning 6-8% per year.
I believe that either way is effective. It comes down to personal choice.
Hi Joe:
I agree. It comes down to personal choice and what rate of return you earn inside your RRSP. I have been doing better than 8% lately so it has made sense for me.
I read your post to RSP or not RSP. Excellant work. I very much agree with you that RRSP salespeople use scare tactics to generate sales. It is my opinion that you need to be very leary of their advice!
Leave A Reply