"I'm tapped out," it cries. "I've got mortgage payments to cover. The kids' braces. Property taxes are due. And the holiday bills are just coming in!"
Fortunately, there are a few ways to stuff an RRSP without hitting the "overdrawn" alarm.
1. Borrowing the money
It comes as no surprise that financial institutions are only too eager to lend you the money to make an RRSP contribution. First, they make money on the loan. Second, they'll have a crack at persuading you to invest that money in mutual funds or other RRSP products they sell.
So, should you take them up on their kind offer? Borrowing rates are certainly low these days.
Many financial companies offer instant one-year RRSP loans that are close to the prime lending rate — currently in the 2 to 3 per cent range. The first monthly payment can often be deferred for three or four months while you wait for your refund.
But many financial advisers note that if you can't make your monthly payments without that refund, you probably shouldn't be taking out such a loan.
"If you don't have the capacity to save in those first few months, you have to ask yourself if you can repay the loan in the other months," says Adrian Mastracci, president of KCM Wealth Management in Vancouver.
Applying the refund directly to the loan makes it that much easier to pay off the remaining loan amount in the following eight or nine months. A general rule suggests that the tax-free growth of the loaned money in your RRSP should offset the amount of the loan interest to make borrowing worthwhile.
When interest rates are as low as they are now, that's not difficult.
For example, a $2,000 RRSP contribution would generate $800 in tax savings for someone with a marginal tax rate of 40 per cent. If the loan was at 2.25 per cent and that $800 refund was applied to the loan, your total interest cost in one year would be $24.46, according to one calculator we tried. As long as the borrowed money earned at least 1.25 per cent in the RRSP ($25), you'd be ahead of the game.
For those with a lot of unused contribution room, most financial companies also offer "catch-up" RRSP loans or lines of credit. These allow people to borrow as much as $50,000 and repay that over as long as 10 or 15 years. Should you consider doing that?
Many advisers warn against borrowing for longer than one year. But if you do opt for a big loan, it's best to apply the refund to the loan, to pay it down as quickly as possible.
There's no shortage of RRSP loan calculators that will demonstrate how your RRSP could benefit from a longer-term catch-up loan. What they won't tell you is whether you could comfortably make future RRSP contributions while you're still making payments on your catch-up loan.
Also, it's worth noting that unless you're in the very top tax bracket (above $125,000 in income), that big deduction thanks to that big RRSP contribution might not be quite as big as you think. For instance, if you have a taxable income of $50,000, you would be in a tax bracket that has a marginal tax rate of about 31 per cent (depending on the province). So a $2,000 RRSP contribution would realize about $620 in tax savings.
But if you've taken out one of those catch-up loans for $20,000, your tax savings may be only 26 per cent ($5,200). That's because that huge contribution has effectively pushed you into a lower tax bracket. Some of the contribution will indeed result in a 31 per cent refund. The rest will result in a tax refund of only 21 per cent.
Ernst & Young has a good calculator that shows the tax savings your RRSP contribution generates in each province and territory.
Borrowing can also be a relatively painless way to "top up" one's RRSP. Let's say you can come up with $3,000 but have $5,000 in contribution room. Borrowing the other $2,000 would allow you to maximize your contribution. Assuming a 40 per cent marginal tax rate, the $5,000 contribution would generate a refund of $2,000 — enough to pay off the entire loan.
This is another way to put something into your RRSP without making a dent in your chequing account. The idea of a contribution-in-kind is to take an existing investment you have outside your RRSP and transfer it inside your RRSP.
Let's assume you have no available cash and you don't want to borrow. But you do hold an investment outside your RRSP — say a stock, mutual fund, or GIC.
Contribution-in-kind transfers within one institution can usually be done very quickly. But transfers from one institution to another can sometimes take weeks.
You can always sell it and contribute the cash. But you may want to hang on to the investment. Selling a mutual fund could also trigger a deferred sales charge. In cases like this, you could transfer the investment to your self-directed RRSP and get a tax deduction for its value on the date of the transfer. Some institutions may charge a small fee (around $25) to do this.
There's an important catch to all this: If on the day of transfer, the investment has increased in value from when you bought it, you must report a capital gain on your tax return. But if it has gone down in value, you can't claim a capital loss.
There is one way around that restriction, but it does involve a bit of risk. You could sell the investment on the open market and contribute the cash proceeds to your RRSP. Then, at least 31 days later, buy the same investment inside your RRSP.
"This strategy will permit you to trigger the capital loss on the shares, which you can apply to other capital gains, while effectively transferring ownership of the shares to your RRSP so that any future growth will be tax-sheltered," advises KPMG in Tax Planning For You and Your Family 2010.
But if you don't want to borrow and don't have any investments to transfer, don't fret too much. "You can always carry forward unused contribution room," KCM's Mastracci points out. "Don't upset the entire apple cart if you can't afford it. You can always do it next year."
3. Consider a swap
You can also swap investments held outside your RRSP with investments held inside. The value of the assets being swapped must be identical. This can be a useful rebalancing tool.
For instance, you could swap interest-bearing assets held outside your RRSP (where the interest income is fully taxed) for tax-advantaged assets held inside (like stocks and bonds).