Borrowing to invest can be an effective strategy to help put your money to work. When it comes to an RRSP loan, Nicole Ewing, Director, Tax and Estate Planning at TD Wealth, says there are unique factors to consider when deciding if it’s right for your financial situation.
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[MUSIC PLAYING] The deadline to contribute to your registered retirement savings plan for the 2023 tax year just around the corner. Joining us now to discuss what you may want to be keeping in mind is Nicole Ewing, director of tax and estate planning at TD Wealth. Nicole, great to have you back on the show. Great to be here. So this is the last day of January, if I know how to read a calendar. Soon, we're going to be in February. It's a short month, and of course, at the end of that month, we have a deadline to keep in mind, the RRSP. Walk us through what we need to be thinking about. We do. So at the end of February, February 29, we have the deadline for contributing money to our RRSP that can be used against income in 2023. So even though we're contributing it now, we have that first couple of months of the year where we are able essentially to use our contributions against income from last year or this year. So it does provide us with some good flexibility. Of course, we have to be within our contribution limit, making sure that we are not over-contributing but making sure that we also have looked at what the opportunities are more broadly for contributing to our RRSPs versus other registered plans and really making sure that we are really optimizing the opportunity. Because contributions to an RRSP, of course, can be claimed as a deduction against your income for the year and reduce tax significantly. It can grow in this tax-deferred environment, allowing you to have the growth over a number of years. You will be taxed on this, though, when the funds come out. So this is where the math comes in looking at your own personal circumstances, when are you expecting to retire, what is your timeline, what is your age now, and what is your tax bracket? So If your tax bracket right now, if you are in one of those higher-earning brackets, but you're expecting that your retirement you will see you in a lower tax bracket, then an RRSP is a really beneficial tool. If it's not the case, though, if we're perhaps in a lower tax bracket now, that doesn't mean that we wouldn't also want to maybe make those contributions if it allows us for that tax-free growth. So it's a little bit of math and a little bit of really weighing the opportunities and costs. But we don't have that same opportunity if we don't make those contributions by the deadline. You're talking about a little bit of math there. When you talked about your contribution room and being careful of not exceeding that, there's a little bit of math there. I don't know the formula exactly. It's 18% of something, something, something. There's an easier way to get that number, right? Just to make sure you're within your boundaries. You can check in with the CRA, and you can look on your account online to see what your contribution limits are. Now, I would caution, though, that these are not necessarily real time numbers that you're seeing. So we have seen situations where maybe people are over-contributing to their TFSA because they hadn't-- the numbers or the contributions that they had made in the current year weren't reflected on that tool. So just make sure that you are aware of what that contribution limit is at the as at date because you may have made some additional contributions, and it can be a little bit surprising for people. So for example, if you have a contribution match, that's going to-- that's going to be counted against your contribution limit. If you are in other sorts of pensions and contributing towards those, that will count against your contribution for your RRSPs as well. So we can't think about it in a vacuum. We need to make sure that we're aware of which of our contributions to various types of plans will be caught under the umbrella of your RRSP contribution limit. All right, so important things to keep in mind there. Sometimes this time of year, you hear people talking about a strategy to contribute to that RRSP before the deadline for the previous tax year. And they talk about borrowing money to invest in an RRSP. Now what would be the condition? When would a situation like this make sense for someone? Well-- and this is great. We are thinking about putting our money to work for us in the most tax efficient way. And so sometimes borrowing to invest is going to be a great strategy. What we want to be thinking about, though, is how quickly we are going to be able to repay that loan, what are the terms of the loan. Sometimes we can see a short-term three-month time frame. Maybe we have a line of credit that we can borrow against. But we have to ensure that we have a plan to pay those funds back so that we are not paying more in interest on a loan than we are earning in the account that's allowing us to grow tax free. So again, this comes down to the math. Will you have the opportunity to be able to repay that? Is your interest rate going to be one that is digestible and allow you to invest the money within your RRSP and outperform what the interest that you need to pay against that loan would be? And your age as well, so the compounding growth and the opportunity that the RRSP provides is really quite significant the longer those funds are in. So being able to maximize your contributions and have that tax-deferred growth over a prolonged period of time can really be a significant benefit that does outweigh, perhaps, a short-term loan in order to allow you to put those funds in. Generally speaking, a lot of people think about this when they are intending to be repaying that loan with the refund that they will be receiving as a result of using the contribution towards the deduction to reduce their income. So they're going to get the refund and immediately pay back that loan. That's a great strategy. But we do have to keep in mind whether or not we can hold ourselves to that because ultimately, we could end up spending a little bit more on interest than we might realize if we just treat that loan as a longer-term strategy. Need a little fiscal discipline to consider on that strategy. So once we get to the end of February, the deadline for contributing for the 2023 tax year is over, it'll probably be a mistake to sit back and say, well, I'm done now. I don't have to worry about anything else because then we enter tax season, don't we? What should we be thinking [? about ?] this year? Well, that's it, and it comes before we know it. And so there might be the temptation to file really early because we want to get that refund. Be aware, though, that we do-- if you file and do not report some of the income that you may have earned, maybe there's a slip that came out a little bit later, there are penalties. Ask me how I know. And if you don't do the-- if you do this repeated years, those penalties can be quite high. So now is a great time to be looking at your previous year's return, looking at the income sources that you received, the tax slips that you received, so that you have an understanding of really what to expect, and was this year any different? We would also use this time to be gathering receipts, so for example, if you're able to use medical expenses, employment expenses. Maybe you've made some donations to charity. This is the time to be gathering all of that information so that you're in a position to know what your obligations are going to be. Now, there has been some things that are different this year than last year. And so having these on the radar nice and early would be important, one of those being this underused housing tax that has created a lot of confusion for a number of people in that it applies in ways that were not necessarily anticipated. There was a deadline that has been extended and extended again. So the 2022 year's obligation to report and file and pay the underused housing tax has been extended to April 30 of 2024, but that's only for the 2022 tax year. Whether or not you have a 2023 filing, you'll also want to be doing some looking into that to determine whether or not, for example, a joint account that you are joint names on a property, this might have created an a requirement for you to file. We also have new T3 requirements for many trusts that previously didn't need to file. So if you have a trust that the calendar-- that the year end is on or after December 31, 2023, you will then also have a trust filing obligation. So now is really the time to be thinking about what new circumstances might I have found myself in this year, what research do I need to know about these new rules to know whether they apply to me, and to get your-- frankly, to get your tax advisors working with you now because come tax filing time, they are not going to have the bandwidth to be able to help you work through these more complex issues.
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