It is often said that the best use of Reward Points is in travel. However, if you play your cards right, an RRSP contribution can easily beat travel reward redemptions.
RRSP: Registered Retirement Savings Plan
First of all, the RRSP is defined as a savings vehicle for retirement or to finance the purchase of a first property.
The main advantages are
- returns grow tax-free
- RRSP contributions can reduce taxable income (therefore generating a tax refund, family allowances, various credits, etc.)
When we talk about a tax refund, we are talking about a tax savings. In fact, when RRSP contribution deductions are used, the tax payable is recalculated at a lower rate since the income is lower.
Since the tax deducted from each paycheck does not take these deductions into account, we get a tax return (refund).
Using Reward Points to Maximize Tax Returns
Getting a tax refund with credit card points
Let’s take the example of the National Bank of Canada rate to calculate the real return when we use our points to contribute to the RRSP and invest.
You can redeem 60,000 NBC Rewards points for a $500 contribution to an RRSP account.
|Marginal tax rate||27,53 %|
So with 60,000 points, you can get $637.65, which is a better value than 60,000 points for $600 in travel credit!
The higher your income, the higher your marginal tax rate and the higher your return.
Then, by putting the $137.65 tax savings into a child’s RESP (Registered Education Savings Plan), you can take advantage of an additional 30% grant or $41.30.
That means your 60,000 Reward Points can equal $678.95 in value if you contribute to an RESP!
Get a return with points
Your new $500 RRSP contribution will start to grow depending on the product you choose.
For example, I bought $500 worth of Air Canada shares on February 9, 2021, and have had a 15.30% gain since purchase. My RRSP account shows $576.50 on February 9, 2022.
So, with 60,000 NBC Rewards points, I was able to get $714.15 ($500 contribution + $137.65 tax return + $76.50 return) on top of the grants in the RESP.
Get more disposable income with points
Another magical aspect of RRSP deductions is using them for tax optimization purposes.
Many tax credits and government assistance are determined by taxable income. So, if you take RRSPs to reduce your taxable income, you will be “poorer” in the eyes of the government (even though you have increased your savings), and the financial aid will be increased!
There are different tax optimization strategies or sweetspots, depending on the situation.
Contribute to an RRSP on low taxed income
We often hear that you should not contribute to an RRSP if you have a low income. This is not entirely true. While it’s best to maximize the TFSA before adding to the RRSP in these situations, it may be worthwhile to turn to the RRSPwhen purchasing a home.
Also, it is possible to defer the deduction of the RRSP contribution. You won’t get the tax refund right away, but you can earn tax-sheltered returns right away.
For example, an 18-year-old student has saved $7,500 with his summer jobs since 15. Depending on his contribution room, he can maximize his TFSA to $6,000 and use the excess to contribute to his RRSPs. Then he can wait until he returns to work to maximize his tax refund.
How can I easily get points for investing in my RRSP?
The various institutions listed at the beginning of this article offer reward points as a welcome bonus. So, it is possible to get points for an RRSP contribution almost for free with these credit cards!
To follow up on the examples in this article, let’s look at what National Bank is currently offering as a welcome bonus.
With National Bank’s three flagship products, you earn 35,000 NBC Rewards points. That’s $291.67 in RRSPcontributions!
These cards also give you 1 to 2 points per dollar on all your purchases, even at Costco! That can add up to 2% back to your next RRSP contribution.
In addition, the offer is identical on all three cards. Students or low-income individuals can earn these points with the National Bank Platinum Mastercard.