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My grandfather used to tell me that, to be old and wise, you first have to be young and stupid. I feel like I’m now past that young and stupid phase. But here’s something even better: How about being young – or young at heart – and smart?
How? By increasing your retirement savings while giving to your favourite charities at the same time. Today, I want to share an example of how to do this.
Before I get to the example, I think it’s important to recognize that many charities in Canada are experiencing a significant reduction in donations this year – some by up to 50 per cent less than in a typical year. The postal strike is making matters worse. Please take the time to give – and give electronically or by dropping off your donation in person if you can. Now, consider William’s example.
The plan
William wants to help charities but doesn’t want to sacrifice the path he’s on to save for retirement. He has a TFSA with $10,000 invested and has an RRSP as well. He’s been thinking of donating $5,000 to support both his community foundation and a local charity called Oasis Youth Care, which provides housing and life coaching to young people who need assistance. He’s going to take four steps to accomplish his goals:
Step 1: William is going to withdraw $5,000 from his TFSA that he’ll use to donate to the charities. The withdrawal is tax-free, and he’ll be entitled to recontribute the $5,000 in just three weeks on Jan. 1, 2025. The reason? When you make a withdrawal from your TFSA, you can recontribute the funds starting the year after your withdrawal. If William waited until January to make the withdrawal, he wouldn’t be able to recontribute the funds until 2026.
Step 2: William is going to donate the $5,000 withdrawn from his TFSA to the two registered charities on or before Dec. 31 of this year. This will save him $2,100 in taxes when he files his 2024 tax return in the spring. His marginal tax rate is about 42 per cent (this rate varies a little by province and income level; William is in Ontario and earns about $120,000 annually).
Step 3: He’s then going to visit his bank in January to borrow $10,000 to contribute to his RRSP on or before March 3, 2025 – the deadline for RRSP contributions that can be deducted on your 2024 tax return. This $10,000 RRSP contribution will provide William with tax savings of $4,200 for 2024 at his marginal tax rate.
Step 4: Finally, William will use his total tax savings of $6,300 ($2,100 from the donation plus $4,200 from his RRSP contribution), which he expects to receive as a tax refund in the spring, to do two things: (1) he’s going to recontribute the $5,000 to his TFSA, and (2) he’s going to use $1,300 to pay down his $10,000 RRSP loan at the bank, leaving just $8,700 owing.
The results
In the end, William will have total investments of $20,000 ($10,000 in his TFSA plus $10,000 in his RRSP), which is $10,000 more than he had before doing any of this. He’ll also have a loan owing to his bank from the RRSP contribution. If he borrows at prime rate (which is 5.45 per cent as of yesterday’s Bank of Canada announcement) – a common rate for RRSP loans – then defers his first loan payment for 90 days until his tax refund arrives, and applies $1,300 of that tax refund to pay down his loan, he’ll be able to pay off that loan in four years and four months at a monthly payment of $202. His total interest cost (which is not deductible) will be $1,178 over the term of the loan.
The $10,000 of new money in his RRSP will grow to be $42,920 over 25 years if he earns 6 per cent annually in his RRSP. Check out RBC’s online calculator to do all this math for your situation. Just do an online search for “RBC RRSP loan calculator.”
The nuances
You might wonder why William doesn’t simply borrow to donate to charity. Or he could forget about the RRSP and borrow to recontribute to his TFSA after making a donation. The problem with these ideas is that neither one results in more retirement savings for William.
Further, it’s straightforward to borrow from your bank at preferred rates and terms for an RRSP contribution. But try telling your bank you want to borrow to donate to charity, or to contribute to your TFSA; the terms may not be as flexible. In addition, you won’t be able to both maintain your TFSA value and pay down the loan with any tax savings with these other ideas.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at tim@ourfamilyoffice.ca.
