RRSP Loan

So what is it – RRSP Loan? If someone would like to begin contributing into an RRSP but does not have enough money, it is possible to get a loan to begin contributing into a pension plan. This would be an RRSP loan. Interest on these loans is usually lower than on an ordinary loan and depends on Prime Rate. The formula for calculating interest on an RRSP loan is Prime Rate + 0.5%. You can always find the current Prime Rate at our homepage.

But before getting into this loan and investing money into an RRSP there is a commonly asked question.

What is good about this loan, its just another debt?

The answer to this question is: if a person would like to lower his or her taxable income but for whatever reason has no funds available to contribute into an RRSP, he can borrow the money as a RRSP loan and invest this amount into the pension plan RRSP. Using this way you can lower your taxes. The income tax return you receive from contributing to RRSP can be used to cover part of the loan and the rest can be paid through the year. There are options to forward your first payment for 90, 120 or even 180 days, which allows you to get your tax return, repay part of the RRSP loan and then make monthly payments towards the remaining amount.

Example:

Mister Smith has a job and makes between 43 and 87 thousand per year. It so happens that he was not able to save money through the year to contribute to an RRSP. A new year came around and with it came the desire to invest $10,000 into an RRSP and lower the taxes but… there was no money. He can loan $10,000 and pay it off through the next year. On interest (let’s consider an interest of 3.5%) Mr. Smith loses $190 through the whole year, but right away he gets tax return of $3,100 (31% of the $10,000 invested – this is the regulation on income between 43 and 87 thousand). If the $3,100 is put toward covering part of the loan, the annual interest (cost of borrowing) will become lower than $190. Also, don’t forget that the $10,000 invested into an RRSP also brings additional income. For example: the interest at the beginning of 2014 is 2% on the regular savings account. If this rate continue through whole year you will earn $200, which is even more then the interest for that year. The information above is based on a typical scenario on an individual contribution to an RRSP plan.

The RRSP loan is an open loan and allows for prepayment at any time. Taking larger loans as well as for longer periods of time (2, 3, or even 10 year) is also possible. There is one thing to keep in mind though – be realistic on your capabilities. One-year loan (or longer period, if you chose) has to be paid off.

RRSP can also be used as a saving tool for the purchase of real estate. The program is called HBP (Home Buyers Plan). With this program you have the opportunity to save one third more than otherwise possible. However, it is really important to analyze family’s current financial state. As a financial consultant, I am ready to offer you this service. Very often, regular banks will not provide you with such financial analysis since, to a certain degree, bank service is impersonal. By the time you arrive the second time you are probably will be talking to a different advisor.

My goal is to work with my clients for a long period of time (20-30 years). I have all the necessary licenses to analyze any family’s financial situation.