Tuesday, 20 September 2011

Why borrow for your RRSP?

Originally published on xyeg.com on January 14, 2008

Looking to add to your RSP's? Consider this: Invest $10,000 cash to an RSP and the government could give you $3,000+ in the form of a tax deduction depending on your tax rate. That deduction filters right to the bottom line of your tax return. Not bad considering you’ll still have your $10,000 RSP.

Don't have $10,000 cash sitting around? Consider an RSP loan. First, borrow $10,000 to dump into your RSP. Then take the $3000+ tax deduction you just created and pay off nearly a third of the loan. With less than $7000 to pay back, your monthly payment at 6% would be $600/month for one year or $310/month for two years.

Keep in mind that we aren’t gambling away borrowed money here. We’re investing what we plan on paying back in the short term. The interest is a small price (a total of $230 for a 1 year term and $450 for a 2 year term) to pay considering the government just gave you $3000+ back. After a year or two, you’ve paid the loan and you have your RSP valued at $10,000 plus growth.

With the market depressed, logic says it’s a good time to buy. Alternately, consider investing in land or debt for double digit returns that don’t bow to market fluctuations.

For more info on RSP loans or details on the math discussed, please contact us.

Loan Details
This illustration is hypothetical and is based on the following information: An assumed tax rate of 30% will generate an additional tax return value of $3,000; The additional return is used to pay down a portion of the principle; The final loan principle will be $7,000 borrowed at 6% interest; Growth of $10,000 at 10% would yield $11,000 after 1 year and $12,100 after 2 years.

Actual numbers will vary.
1Year Term - The amortized loan would be paid out in 12monthly payments of $602.47 (principle of $7000 andinterest of $229.58). The net effect would yield a positive gain of $4870.42 if the RSP was invested at 10% per year for 2 years.

2 Year Term - The amortized loan would be paid out in 24 monthly payments of $310.24 (principle of $7000 andinterest of $445.86). The net effect would yield a positive gain of $4654.14 if the RSP was invested at 10% per year for 2 years.

For more information on land based investments and their potential double digit returns, please contact us.

Specific tax advice should be obtained by a qualified tax professional.

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