Why Wait for your RRSP Refund?

We’ve seen that if you plan on saving for retirement by using an RRSP, you can really knock multiple years off your working life if you do something productive with the tax refund. That can be anything from paying down the mortgage, to saving to a non-registered investment account, plowing it right back to the RRSP (if you don’t maximize your contributions), etc.

BreakingPiggyBank.JPGNo matter the case, if you have a tax refund that is owing to you IT DOESN’T EARN INTEREST while it’s sitting with the government waiting for you to fill out your tax return. To counter that "problem", you could always fill out a form that tells the payroll department to withhold less income tax from each pay cheque. Now, your take-pay will be slightly higher per pay cheque and if you do your math right you will have neither a refund nor a balance owing once you file your taxes.

EXAMPLE

John lives in Ontario and earns $50,000 per year and contributes $500/month to his RRSP. His normal take-home pay is based on his $50,000 salary which means that he pays roughly $9,915 in taxes per year (2007), and his bi-weekly pay cheque will average $1,514.73 after taxes. If he waits until filing his tax return to get his annual refund from contributing to his RRSP he will get a cheque for $1,869 perhaps sometime in May.

If John instead requests that less tax be deducted from his pay cheque based on him continuing to contribute $500/month then his average take home pay will increase by $71.88 from $1,514.73 to $1,586.61. He won’t have to wait until filing his return to take advantage of the income deductibility of his RRSP contributions – he’s getting the tax back NOW.

Of course, if you normally put your tax refund right back into your RRSP,  then you would want to now increase your regular RRSP contributions by $71.88 per pay cheque (if paid bi-weekly). This way not only are you getting your tax refund immediately, it is also being put to good use immediately.

HOW TO DO IT

If you are starting a new job and you know how much you will be regularly contributing to your RRSP, you can enter the appropriate information on the TD1 form that your new employer will give you. This is a Personal Tax Credits Return that you fill out and remit TO YOUR EMPLOYER. If you want to reduce the amount of withholding tax that is already being deducted at source from your current employer, then you have to fill out a T1213 and submit it to your local tax service office. 

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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