Line of Credit to contribute to RRSP: Worth it?

[mogmatt]

This will be my second year contributing into my RRSP, and it seems that I will be unable to save enough money to contribute the maximum amount (as defined by my 2008 RRSP Deduction Limit Statement) into my RRSP by the deadline.

Would it be worthwhile to take a line of credit to contribute the max amount allowable into my RRSP? According to my calculations if I follow through with this plan, I think I will be able to repay the line of credit in about 6 months.

Any other suggestions?

[gman]

This will be my second year contributing into my RRSP, and it seems that I will be unable to save enough money to contribute the maximum amount (as defined by my 2008 RRSP Deduction Limit Statement) into my RRSP by the deadline.

Would it be worthwhile to take a line of credit to contribute the max amount allowable into my RRSP? According to my calculations if I follow through with this plan, I think I will be able to repay the line of credit in about 6 months.

Any other suggestions?

If you can repay the whole thing within 6 months, I would say it worth it. Of course, it also depends on what the interest rate your LOC would be.

[Islington]

Would it be worthwhile to take a line of credit to contribute the max amount allowable into my RRSP? According to my calculations if I follow through with this plan, I think I will be able to repay the line of credit in about 6 months.

You may be able to get a lower rate -- than your unsecured line of credit -- if you use a RRSP-specific loan from your bank or credit union; especially if the RRSP investment is held by your bank, and pledged as security for the loan.

This also doesn't tie-up your line of credit, in case you need it for another purpose.

For example, see "RRSP Loans at Prime" at this link (http://www.firstontariocu.com/loansmortgages/loans/personal.asp).

[alanbrenton]

This will be my second year contributing into my RRSP, and it seems that I will be unable to save enough money to contribute the maximum amount (as defined by my 2008 RRSP Deduction Limit Statement) into my RRSP by the deadline.

Would it be worthwhile to take a line of credit to contribute the max amount allowable into my RRSP? According to my calculations if I follow through with this plan, I think I will be able to repay the line of credit in about 6 months.

Any other suggestions?

Depends what your marginal tax bracket is. If you are at the 2nd tax bracket (36% tax up to $75k income), only contribute enough so you deplete your income to the point that you don't get to the 26% taxation level. Maxing out RRSP is good if you have a good investment strategy (higher risk investments like equities) but I'd hold off contributing the max amount if you will only be putting it into cash / money market.

[Mayoo]

Depends what your marginal tax bracket is. If you are at the 2nd tax bracket (36% tax up to $75k income), only contribute enough so you deplete your income to the point that you don't get to the 26% taxation level. Maxing out RRSP is good if you have a good investment strategy (higher risk investments like equities) but I'd hold off contributing the max amount if you will only be putting it into cash / money market.

sorry for thread hacking but where can i find the tax bracket information ?

[alanbrenton]

sorry for thread hacking but where can i find the tax bracket information ?

Here you go: http://www.taxtips.ca/marginaltaxrates.htm#ON

[iluvmikeharris]

You may be able to get a lower rate -- than your unsecured line of credit -- if you use a RRSP-specific loan from your bank or credit union; especially if the RRSP investment is held by your bank, and pledged as security for the loan.

This also doesn't tie-up your line of credit, in case you need it for another purpose.

For example, see "RRSP Loans at Prime" at this link (http://www.firstontariocu.com/loansmortgages/loans/personal.asp).

They may offer a better borrowing rate since you're taking their product on both sides of the transaction, but RRSP assets cannot be used as collateral.

RRSPs cannot be used as collateral for a loan. If you should find anyone who would do it and the Canada Revenue Agency found out, the plan would be considered to have been terminated and the entire amount would be taxed in your hands as income. Source: buildingwealth.ca

[brunes]

You may be able to get a lower rate -- than your unsecured line of credit -- if you use a RRSP-specific loan from your bank or credit union; especially if the RRSP investment is held by your bank, and pledged as security for the loan.

This also doesn't tie-up your line of credit, in case you need it for another purpose.

For example, see "RRSP Loans at Prime" at this link (http://www.firstontariocu.com/loansmortgages/loans/personal.asp).

They may offer a better borrowing rate since you're taking their product on both sides of the transaction, but RRSP assets cannot be used as collateral.

RRSPs cannot be used as collateral for a loan. If you should find anyone who would do it and the Canada Revenue Agency found out, the plan would be considered to have been terminated and the entire amount would be taxed in your hands as income. Source: buildingwealth.ca

The reason RRSP loans have lower rates is not because the RRSP is being used as collateral, it is because the implied tax refund is basically being used as collateral.

As in, if I take out a LOC of $5000 for my RRSP, the bank is basically assured that I will be getting back around $2000 on my taxes in April with can be earmarked for the RRSP, so this lowers their default risk, therefore lower interest rate.

[MoreMiles]

The reason RRSP loans have lower rates is not because the RRSP is being used as collateral, it is because the implied tax refund is basically being used as collateral.

As in, if I take out a LOC of $5000 for my RRSP, the bank is basically assured that I will be getting back around $2000 on my taxes in April with can be earmarked for the RRSP, so this lowers their default risk, therefore lower interest rate.

I believe RRSP is shielded from bankruptcy seizure so it cannot be used as a collateral.

RRSP loan is usually done at prime rate. The interest is NOT tax deductible. Would you make enough investment from a nondeductible interest, which means 6.5%? It's hard to find any investment giving 6.5% these days.

[alanbrenton]

I believe RRSP is shielded from bankruptcy seizure so it cannot be used as a collateral.

RRSP loan is usually done at prime rate. The interest is NOT tax deductible. Would you make enough investment from a nondeductible interest, which means 6.5%? It's hard to find any investment giving 6.5% these days.

There is some advantage to borrowing from the way I see it since you have been able to invest more into your RRSP than you would have been able to otherwise. I made a few lump sum contributions in October and November and got CRA to reduce taxes withheld for the remaining pay periods to zero. In effect, I was able to make a lumpsum of say $10,000 for $6,400 ($3,600 I'm getting back by not getting taxed anymore in 2008).

When are these RRSP loans available? And do the banks require for one to make the contributions specifically through them and not through other financial institutions?

[engmsf]

I believe RRSP is shielded from bankruptcy seizure so it cannot be used as a collateral.

RRSP loan is usually done at prime rate. The interest is NOT tax deductible. Would you make enough investment from a nondeductible interest, which means 6.5%? It's hard to find any investment giving 6.5% these days.

I believe the idea is to get an RRSP loan at bank prime 4.00%. I already have a regular LOC that is 6.75% so I would rather have a RRSP loan at 4.00% if I/you can get one.

[gman]

I believe RRSP is shielded from bankruptcy seizure so it cannot be used as a collateral.

RRSP loan is usually done at prime rate. The interest is NOT tax deductible. Would you make enough investment from a nondeductible interest, which means 6.5%? It's hard to find any investment giving 6.5% these days.

Borrowing to buy RRSP is not about the investment in that short period of time would outperform the borrowing rate. It is about getting the tax refund within 1 or 2 months. Hence, the shorter the borrowing period the better. The longer you borrow, the weaker the deal.

[MoreMiles]

I believe the idea is to get an RRSP loan at bank prime 4.00%. I already have a regular LOC that is 6.75% so I would rather have a RRSP loan at 4.00% if I/you can get one.

4% is an after-tax rate. If you want to make 4% investment after tax, you need to make about 6 to 7% before tax. So if you borrow $20000, that money is costing more. It is only worthwhile if you can make it even. Unlike an investment loan, RRSP loan's interest is NOT tax-deductible.

Also, RRSP does not eliminate taxes. It simply defers them until your retirement. If you still have high incomes, then RRSP is useless.

[Bullseye]

Also, RRSP does not eliminate taxes. It simply defers them until your retirement. If you still have high incomes, then RRSP is useless.

Well, not useless, as you still benefit from tax deferred growth over that period. Same tax rate in and out would make it as useful as the TFSA, but both would still be better than investing outside either one.

Further to what you posted, though, an RRSP is also less effective if your tax rate at contribution is low.