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With the new year slightly behind us, I consider January a planning month for RRSP and Tax Planning. To optimize your RRSP, you will need to have an idea of your taxes. Last month I discussed how you can offset capital gains with capital loss and now it’s time to make sure you make use of your RRSP account effectively if you do make use of it.
Personally, I do all three accounts in the following order:
RRSP Optimization
To optimize your RRSP, you want to understand how big your tax refund is and then you calculate how much more RRSP contribution you could add in the short term by borrowing and then you use the tax refund to pay back the loan.
For example, if you are getting $1,000 in a tax refund and decide to borrow another $1,500 to contribute, you would get another $500 on top of the original $1,000 in tax refund. The total tax refund would be $1,500 which covers the loan of $1,500. All you need to pay is the interest for a couple of months.
- 2012 Tax Refund $1,000 – before RRSP optimization
- Borrow $1,500 (for a couple of months)
- Extra RRSP Contribution $1,500
- Extra RRSP Tax Refund $500
- Total 2012 Tax Refund $1,500
This technique really allow you to maximize your RRSP for maximum growth.
When it comes to RRSP loans, simply use your line of credit if you have one. Don’t bother with the RRSP loans the banks try to offer you. If you have a home equity LOC, chances are you have a better rate – if you don’t start negotiating for a better rate 
Make sure you check out my RRSP section for many posts on the topic.
Worthy Readings
Some weekend reading to share …
Dividend Guy has a new eBook reviewing 30 US and Canadian companies, check it out – many companies you would be interested in buying are reviewing and he likes to compare his picks against the index at the end of the year.
- Boomer & Echo with ‘Net Worth Update And Year-End Review‘
- Dividend Growth Investor with ‘Best Dividend Stocks for 2013, and beyond‘
- Dividend Ninja with ‘Do You Have a Plan?‘
- Dividend Monk with ‘Kinder Morgan Energy Partners: Still Poised for Good Returns‘
- Freedome 35 with ‘How the National Debt Works‘
- Canadian Couch Potato with ‘Ask the Spud: Do I Have Enough for a DRIP?‘
- My Own Advisor with ‘2012 Blog Year In Review‘
- Retire Happy Blog with ’Ways to Simplify your personal finances‘
- Retire by 40 with ‘Review your finances for a new beginning‘
Carnivals
Here are the carnivals I was present in the last two weeks.
- Yakezie Carnival at Your Personal Finance Pro
- Carnival of Financial Planning at CultOfMoney
- Carnival of MoneyPros at Good Financial Cents
- Yakezie Carnival at Making Sense Of Cents
- Carn. of Financial Camaraderie at The Savvy Scot
- Carnival of MoneyPros at Debt Black Hole
- Carnival of Financial Planning at Thriftability
Happy New Year.. Thank you for the mention PIE!
Cheers
@Ninja
Always a pleasure and Happy New Year to yourself and everyone else
[...] Passive Income Earner, also had a weekly roundup, and laid out his RRSP optimization plan for 2013. Although I prefer to contribute to the TFSA [...]
[...] back on eating out Mo money mo houses has some tips for when you’re making plans to travel The passive income earner explains how to optimize your RRSP for maximum growth. Tax season is just around the corner My own [...]
Thanks for the mention PIE!
When it comes to RRSP loans, I haven’t done any yet and prefer to avoid them, but they can be a very handy tool for many folks attempting to catch-up on contributions. It must be done wisely.
Have a great weekend, always appreciate the blog support my friend.
Mark
My Own Advisor recently posted..Weekend Reading – Out with the old, in with the new across the blogosphere
@My Own Advisor
I am not advising an RRSP loan, a quick loan from a LOC does the trick and it should really be for 1 or 2 months top if you do the math right. Turbo Tax can do it for you with the optimize RRSP tool.
I took out an RRSP loan once to avoid owing taxes at filing time. It was for about $7k and the monthly payments nearly crippled our budget. I would have been better off just paying the taxes owing which was less than $2k.
Thanks for the mention!
Echo recently posted..Why Budgeting Is Not A Waste Of Time
@Echo
Was your loan not matching the return? Did you not make use of it only for a month or two?
What I am suggesting is actually what Turbo Tax will help anyone do and you only need to borrow for 1 or two months until you get your tax refund. Obviously, if you do it too early before you submit your taxes, you pay more interest.
Thanks for the mention. Nice tip for getting the most out of RRSPs.
Liquid recently posted..Weekend Business and Blog Roundup – Jan 5th
I’ll likely have to go in and put a nice chunk down on my RRSP’s as my income went up quite a bit in 2012 and I’m far behind on my RRSP’s. Mrs.CBB took out a loan once for $5k and paid it back no problem so they can be good for last minute as long as you can pay the loan off asap.
Canadian Budget Binder recently posted..Finances In The New Year + New Budget = Success Formula
Hi PIE! I like your RRSP optimization technique. As an engineer, I always like optimization. It’s explained in a short yet clear manner. Not enough people are taken full advantage of RRSP. Keep spreading the message! TDE
[...] your refund with a small RRSP Loan. The Passive Income Earner recently discussed this strategy in, Weekly blog round: RRSP Planning (although he called it optimizing). Again you’ll want to download some tax software so you can [...]