BMO's Financial Tip of the Week: Consider Borrowing to Maximize Your 2011 RRSP Contribution
TORONTO, ONTARIO--(Marketwire - Feb. 8, 2012) - As part of BMO Financial Group's ongoing commitment to financial literacy and 'Making Money Make Sense' for Canadians, BMO is releasing a financial tip every week in 2012. In addition, BMO will be providing daily retirement tips during the month of February.
BMO's Financial Tip of the Week: Consider taking out a loan to maximize your contribution to your Registered Retirement Savings Plan (RRSP) before the February 29th deadline.
Borrowing money to contribute to your RRSP can increase your RRSP contribution for 2011, which may entitle you a larger tax refund. In some cases, the tax refund you get will be enough to pay off a significant part of the principal of the loan.
- For example: Assume your tax rate is 25 per cent, and you have $1,500 to contribute to an RRSP. If you borrow an additional $500 for a total RRSP contribution of $2,000, you may be eligible to receive a tax refund of $500. You can then take the refund and immediately pay off the loan, significantly reducing the amount of interest you pay on the principal.
"Borrowing to contribute to an RRSP makes sense if you have accumulated a significant amount of unused RRSP room because it allows you to maximize your contribution," said Tina Di Vito, Head of the BMO Retirement Institute and author of 52 Ways to Wreck Your Retirement… and How to Rescue It. "However, a general rule of thumb is to only borrow only if you're confident you're able to repay the loan within one year."
Ms. Di Vito advised that, in order to avoid borrowing on an annual basis, a strategy worth considering is to budget for double the loan amount and interest payments, which will allow you to pay off your loan within six months, and then allocate the remaining payments to your RRSP. That way, when the deadline comes, you have already made your annual contribution and have saved money in interest payments.
BMO's Financial Tips of the Week:
Week of January 1st: Consider investing in a Registered Retirement Savings Plan (RRSP) and take advantage of tax incentives when saving for retirement.
Week of January 8th: Secure your retirement by opening a Registered Retirement Savings Plan (RRSP) as early as possible and contribute to it on a regular basis (regardless of the amount).
Week of January 15th: On a $400,000 Mortgage, Have a Mortgage Burning Party 5 Years Earlier and Save $70,000 by Choosing a 25 Year Amortization
Week of January 23rd: Once you retire, consider converting your Registered Retirement Savings Plan (RRSP) into a Registered Retirement Income Fund (RRIF) to manage your retirement income effectively.
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