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It’s RRSP season and everyone is buzzing about the Feb. 29 deadline for topping up RRSP contributions. But what if you don’t have the cash? Don’t worry, there’s a solution that might work: the RRSP gross-up strategy. 

What’s the RRSP gross-up strategy?

At RRSP season, many banks will offer short-term RRSP loans with the option of deferring the first payments by three or six months. This allows sufficient time to receive your tax refund and pay off your loan. For this to work, you’ll need to meet the following criteria:

  • A portion of your RRSP contribution must not be borrowed
  • The expected tax refund should be at least as much as what you borrow
  • The tax refund must be used immediately to pay off the RRSP loan
  • There must not be any outstanding personal tax liability
  • The Home Buyers’ Plan and Lifelong Learning Plan must be considered separately, as they will not generate a refund

How much should you borrow?

There’s a calculation for this:

(RRSP contribution x marginal tax rate) / (1 – marginal tax Rate) = RRSP loan value

Let’s assume that, for the year, you contribute $5,000 into your RRSP and would like to gross up your plan. You’re currently in the 40 per cent marginal tax bracket.

In that case, here’s how the calculation looks:

($5,000 x 0.40) / (1 – 0.40) = $3333.33

So, you can borrow $3,333.33, invest it in your RRSP (before the deadline) and your total contribution for year should trigger a refund of $3,333.33. You can then use your refund to pay off your loan before incurring interest payments.

Why use the RRSP gross-up strategy?

If you don’t have the cash on hand to top up your RRSP contribution, a disciplined approach to this strategy can help play an important role in your long-term retirement plan. It’s important to consider how you’re going to generate streams of retirement income. RRSPs are a great way to save for your retirement – you can invest today and defer the taxes to a later date.

A financial security advisor can help educate you on the different investment vehicles available and what might be the best fit for your situation.

While borrowing to invest can be a powerful means to build wealth, the risks involved make it a strategy that is not suitable for everyone. Leveraging magnifies gains or losses.

Until next time.