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RRSP Facts you should know
Feb 03, 2016
The Myths of RRSP's
Many people contribute to their RRSP seeing the refund as a windfall. Many also think borrowing for the contribution especially with low interest rates is a good idea.Sometimes borrowing works but overall it is not a good thing. RRSP’s were the first big incentive to encourage retirement savings. By getting a tax refund it appears Ottawa is giving you something for nothing- money saved, plus the money back.
Myth 1. 1+1=3 An RRSP contribution plus the refund is not worth more than the contribution.
i.e. If you live in Ontario, make $75,000 per annum and are taxed at 33.3% and contribute $1000 to your RRSP your refund will be $330.00
You seemingly have $1330.00 but the refund represents tax that you will pay later. If you withdrew $1000.00 from your RRSP on the day you
received your refund you would pay $330 in tax, leaving $670 plus the $330 refund. The only way to come out ahead is to have a lower tax
bracket when you retire.
The smart thing to do is put the refund back into your RRSP to take advantage of the compounding power of interest working for you.
Myth 2. Borrowing for an RRSP is always a good idea.
In some cases a loan works and certainly your bank will be encouraging it.
Other things to consider are do you need a loan because you don’t have cash? If so, that may mean you have other debts. It would be better to
Pay off the debt first. If you have the cash but not the discipline are you likely to pay the loan off or will it be added to your credit line?
Today’s interest rates are low but you still have to earn that rate from your investment.
The easiest way is to implement monthly payroll deductions, reinvesting the refund and let time and compounding interest work in your favour.
Article adapted from Adam Mayers, Toronto Star