Most people who contribute to their registered retirement savings plans before the March first deadline spend the refund when it comes in the spring. Why not? They deserve a reward for putting their future ahead of their present.
But if you’re willing to sacrifice your refund, there’s a way to supercharge your contribution through the power of compounding. It involves contributing the refunds over and over. In other words, you invest the refund on the refund, and the refund on that refund, and so on. If you do it over several years you also have the advantage of having those compounded contributions further compound through investments in your RRSP.
You can supercharge your RRSP at any level of taxable income, but the benefits are minimal on income below $40,000. The higher the tax bracket, the bigger the benefits.
To see how it works let’s use an example of a contribution of taxable income over $40,000. Results vary from province to province but the differences are small.
Find an online RRSP refund calculator. There are several, but I use the one on the Ernst and Young website to avoid getting bogged down by sales pitches.
Enter your taxable income from 2016, home province, and the amount you have saved for a contribution plus forty per cent. The resulting refund should be very close to the extra forty per cent.
Supercharging your RRSP involves borrowing the forty per cent and paying interest for a couple months while your refund comes. That’s where a low-interest secured line of credit comes in handy.
Regardless, interest for a couple months won’t make a big impact – provided you have the discipline to pay off the loan when the refund comes in.