# Calculating RRSP refund options... I'm now really confused



## k66 (Feb 11, 2012)

Here is my basic problem: My company usually pays an annual bonus and this year I would like to direct it entirely into my RRSP. The problem comes in that it is only paid in the first week of March - thereby missing the 2011 contribution deadline by mere days - and I will only be able to apply it as a 2012 contribution.

The bonus amount could be somewhat substantial (5-figures) so I really want to find a way to get the full amount into this year's contribution so I can further contribute the associated refund to the RRSP (rather than waiting until next year).

Seems simple enough - take a short-term loan near the end of February for the full Bonus amount, let's say $10k, and plunk it into the RRSP. Take the actual Bonus in cash (less 36% marginal rate), or approx $6,400, and make a lump sum payment to the $10k loan by early March. Then file my return (as soon as I get my Contribution receipts) and await my tax refund - maybe by May(?). The refund (attributable to the $10k contribution) should be approximately my marginal rate (36%) x $10k = $3,600 right? This would then payout the remainder of the loan principal. Depending on the terms of my loan, I would also have (hopefully) only a small service cost to pay out of pocket - say $50 to $100. This would seem to be a good way (and/or reasonable price) to get my $3600 refund working one year sooner... or is it?

At the end of this exercise, I only managed to contribute $10,000 after the refund has been received; not the $13,600 I could have hypothetically stashed away for 2011 ($10k Bonus + $3,600 refund) if I had received the Bonus one week earlier in February (rather than after the deadline in March).

I also ran my preliminary numbers through TurboTax and get essentially the same results.

So what gives? Can I not borrow the $10k, pay it back, and still make a total contribution of $13,600 to my RRSP this year (meaning $10k before March 1 and $3,600 later this spring)?

Any help in seeing around this conundrum is greatly appreciated.

-KLF


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## Cal (Jun 17, 2009)

'At the end of this exercise, I only managed to contribute $10,000 after the refund has been received; not the $13,600 I could have hypothetically stashed away for 2011 ($10k Bonus + $3,600 refund) if I had received the Bonus one week earlier in February (rather than after the deadline in March).'

Unless I am misunderstanding here, you would not have been able to hypothetically stash away $13,600 for 2011, as the $3,600 would come after you get your return. Also as you stated above, the $10K bonus after taxes would only be $6400.

Basically you have it though. But you can always save the money prior to the deadline right.


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## k66 (Feb 11, 2012)

I should clarify... In my "Bonus in February" example, I am saying I can end up contributing $13,600 in calendar year 2012 (which is composed of $10k in tax year 2011 and $3,600 in tax year 2012).

The result being that I can not only apparently invest $3600 more now (or in the near future) but the fact that I am able to receive an extra $3600 period. In the "Bonus in March" example, I seem to never get the extra $3,600... which is at the heart of my confusion!

What is the difference between the two scenarios that leads one to generate $3600 more than the other?


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## OhGreatGuru (May 24, 2009)

How much RRSP room do you actually have?

What did you do with last year's bonus?


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## k66 (Feb 11, 2012)

It gets even more curious, as the person who makes his original contribution by *without* the aid of borrowing not only gets a refund boost this year, but in many years following ad infinitum it seems. For example, the year after he gets the $3600 refund (and he puts it into an RSP), he gets another for 36% of $3600 in return*, or $1,296 which he can further apply (year 2013). In 2014, that generates another spin-off refund 36% x $1296 = $467, and in 2015 it is another $168 followed by $60 in 2016. On it goes, ad infinitum.

We recognise the infinite series set up here and know that the sum of said series, excluding the original contribution, is:

S = 1 - (m / m-1), where m is our marginal tax rate expressed in fractional form (e.g. 36% becomes 1/2.777...)

So, the total value of all successive contributions resulting tax refunds in the ensuing years originating from the initial $10k becomes:

$10k x (1 - 2.777/1.777) = $5,625 as in $3600+$1296+$467+$168+60+...

The fellow who borrows to make an "early" contribution seemingly misses out on a very substantial sum of money to be had - even if it occurs over a period of many years.

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> How much RRSP room do you actually have?
> 
> What did you do with last year's bonus?


Apart from being completely tangential to the question at hand; My room is sufficient and last year's bonus went to booze and hookers... a different kind of stimulus spending I suppose.

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* assuming all income, income tax paid, marginal rate, etc remain constant over the full period of the analysis.


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## the-royal-mail (Dec 11, 2009)

Why can't you add this to 2012's contribution? Why the rush for an immediate tax refund?


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## k66 (Feb 11, 2012)

Yes - of course I could simply wait until March to make the contribution and push all of the following returns ahead by one year, however it means losing one year's worth of investment gains (or losses, as the case may be).

It would be nice to know that the simple exercise of making a short bridge loan completely evaporates the possibility of the future refund chain for certain.


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## stephenheath (Apr 3, 2009)

k66, the only difference is that you are purposely pocketing the 3600 of the bonus in your scenario by borrowing 10k, repaying only 6400 from the bonus and 3600 from the 3600 you get back... wheras the person you're comparing to is putting in both.

For you to be comparable, you need to borrow the 10k and put it in the RRSP, pay off all 10k with your bonus, and then put the 3600 you get back into the RRSP. 

You're basically saying why does someone who puts in 10k + all subsequent refunds get more than me who is putting in 6400 + all subsequent refunds.

As for timing of the year, if you really want that first 3600 in 2011, just borrow 13,600 and contribute it all, then use your 10k bonus to pay off 10k of it and the tax refund of 4896 to pay off the last 3600 of the loan, and put the extra 1296 in for next year's RRSP refund, and boom, you're on the same infinite cycle as the others, but one year earlier.


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## OhGreatGuru (May 24, 2009)

If you are getting a 5-figure bonus in March 2012, I should think you would want to deduct it against 2012 income, not 2011. Why complicate your life with shell games?


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## thebomb (Feb 3, 2012)

Hey guys- dont mean to jack the thread, but you have me a little concerned. I am getting an 19k bonus and was planning on cashing out 9 and 10 to rrsp. I assumed that I would get money back on the contribution but you mentioned in one of the messages that if it is not taxed before it is deposited that I wont get a refund. Am I missing something here....?? They do not deduct fed tax when depositing, just ei and cpp.


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## k66 (Feb 11, 2012)

Bomb: Any money that you put directly into the RRSP will not be taxed and will lower your Taxable Income. Assuming that your taxing owing/refund is roughly balanced, then the RSP contribution will generate a refund using your marginal rate (e.g. tax rate on last dollar earned) - in my case, the marginal is the 36% figure quoted.

The remainder that you cash out is likely going to get nailed at "full" rate (here in Alberta, it would be 29% + 10% = 39%) unless you can convince payroll to use a different value. Any amount you overpay in taxes on the cashout should come back as a net refund next year.

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Stephen: I see what you are getting at. If using the "February Contribution" example, I would only put the cashed-out value of the bonus ($6400) against the $10k bridge loan and then apply the refund ($3,600) back into the RRSP. That leaves me having to pay off the remainder of the loan over X-number of months/years. Whether the extra $13,600 now in the RRSP can then out generate the payment stream required to retire the $3,600 loan over the course of the loan's life determines if it is worthwhile or not.

My guess is that the loan payments would far exceed the potential RRSP returns.

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Oh Great Guru: My income figures (incl. bonus) would generally be expected to be the same next year as well. I might as well deduct as soon as possible and get the money working "today" rather than a year from "today". As discussed above, the cost of the loan will likely negate any TMV opportunity in the RRSP... so I shall skip the loan and wait patiently.


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## stephenheath (Apr 3, 2009)

k66 said:


> Stephen: I see what you are getting at. If using the "February Contribution" example, I would only put the cashed-out value of the bonus ($6400) against the $10k bridge loan and then apply the refund ($3,600) back into the RRSP. That leaves me having to pay off the remainder of the loan over X-number of months/years. Whether the extra $13,600 now in the RRSP can then out generate the payment stream required to retire the $3,600 loan over the course of the loan's life determines if it is worthwhile or not.
> 
> My guess is that the loan payments would far exceed the potential RRSP returns.


But that was just if you wanted to get the same returns as someone who puts 10k in without borrowing... now that you've figured out you were comparing apples to oranges, and you could see how you could get an apple, just decide if you want an apple or an orange. Personally if I were in your shoes I would go with your intial plan... borrow the 10k, pay off the 6400 and the refund against it, and then not worry about it. Sure, you won't make as much money in the long run as someone who put in the 10k AND all the refunds, but you'll make more money than not doing it.


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