RRSP savers all wait for it. That nice refund cheque from the government after filing your taxes. Some turn around and put this money into their RRSP or TFSA. Another great strategy is to diligently put this refund each year against your mortgage principal: dramatically reducing the scheduled amortization. Others simply enjoy the fruits of their labour, and go on a well-deserved vacation. Either way, it feels good to get money back from the government!
The downside is that your refund is essentially an interest-free loan to the government. They get to use your money during the year for free, until you file your taxes. Applying to reduce the amount your workplace withholds from your paycheque is a way to receive a portion of your tax refund each pay period, instead of waiting for a lump sum at the end of the year. This has 2 benefits:
- Increased cash flow. By applying to have your withholding tax reduced, more money will hit your bank account each pay period. This increases your cash flow and gives you flexibility to be able to pay down debt, increase monthly savings or join that new gym that opened up on the corner.
- Dollar-Cost-Average. Instead of waiting for a large refund at the end of the year, and timing the market as to when/how this amount gets invested, you can set up an automatic savings plan for the increased monthly amount. This way your money is being put to work and invested each month, instead of missing out on any potential return during the course of the year for the privilege of helping the government out (and not being paid for it).
Of course, some people just like the feeling of receiving that cheque in the mail-and that’s fine. For those interested in this strategy, however, below is an approximate calculation for someone contributing the maximum RRSP amount in 2015. This results in an, approximate, $900 per month increase in cash flow that can be directed to debt, savings…or that vacation. Contact us if you’d like to discuss if this strategy is appropriate for you.
*This tax calculation excludes any other potential income inclusions or deductions and credits that may apply to your situation.
The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances. Before acting on any of the above, please seek individual financial advice based on your personal circumstances.