TORONTO, ONTARIO--(Marketwire - Nov. 25, 2011) - To mark Financial Literacy Month, which was launched by Finance Minister Jim Flaherty, BMO is releasing a series of financial tips throughout November. As part of Making Money Make Sense and BMO SmartSteps, BMO's tips are designed to help individuals and families save and manage their day to day finances more effectively.
BMO's Tip of the Day: Consider taking out a loan to maximize your contribution to your Registered Retirement Savings Plan (RRSP) and take advantage of the tax benefits
- When borrowing to maximize your RRSP contribution, while the interest accumulated on the loan is not tax-deductible, the tax refund you get by making a larger contribution is often enough to pay off the principal of the loan.
- For instance, 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 $2000, you will get a tax refund of $500. You can then take the refund and immediately pay off the loan.
Borrowing money allows you to increase your RRSP contribution for the year. Many financial institutions, including BMO Bank of Montreal, offer a variety of low interest loan options specifically for this purpose.
"Taking out an RRSP loan can make 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 the recently released 52 Ways to Wreck Your Retirement… and How to Rescue It. "However, a general rule of thumb is to only borrow if you're confident you are able to repay the loan within one year."
Ms Di Vito advises that, in order to avoid borrowing on an annual basis, a simple strategy worth considering is to pay off your loan within six months, and then redirect those payments to your RRSP instead. That way, when the deadline comes, you have already made your annual contribution and have saved money in interest payments.
BMO Financial Literacy Month Tips
November 1: Pay more than the minimum payment on a credit card balance.
November 2: Choose a shorter amortization for your mortgage.
November 3: Contribute to a child's Registered Education Savings Plan (RESP) as early as possible.
November 4: Invest in a Tax-Free Savings Account (TFSA) to maximize your savings.
November 7: Switch to weekly mortgage payments to save interest and become debt-free faster.
November 8: Take advantage of credit card travel insurance to lower costs.
November 9: Start early and contribute often to your investment account, rather than waiting to invest.
November 10: Use a line of credit to consolidate high-interest debt and save on interest costs.
November 14: Canadians can give the gift of securities and benefit at tax time.
November 15: Students, pay off your credit card balances and take advantage of student discounts to save money.
November 16: Pay an extra five per cent on your mortgage every year to reduce interest costs.
November 17: Secure your retirement by starting to save early and taking advantage of compounding growth.
November 18: Students can save money by ensuring they are in a no-fee student banking plan.
November 21: The Registered Disability Savings Plan (RDSP) is a powerful investment option that can offer long-term financial security for persons living with a disability.
November 22: Maximize your Old Age Security (OAS) benefits by adopting the right tax strategies.
November 23: Stress-test your mortgage to ensure your housing costs are affordable.
November 24: Take advantage of Canada's numerous online personal finance resources.
For more on financial literacy, BMO encourages Canadians to visit http://www.financialliteracymonth.ca/ and http://www.bmo.com/home/about/banking/corporate-responsibility/customers/financial-literacy.