So what is it - RRSP Loan? If somebody wants to invest into an RRSP but does not have money, it is possible to get a loan to invest into a pension plan. This loan would be an RRSP Loan. Interest on this kind of loan is usually lower than on usual one and ordinary equals the value of Prime Rate. Today (December 2007) Prime Rate is 6%. These offers are good and widely used conditions. There are also other options, in which it is possible to get a loan with rate even lower than Prime Rate. For example, in the season of 2007-2008 the interest on RRSP Loan is equal to Prime minus 1%. Usually you can get a special rate only during RRSP season (December, January, February).

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

What’s good about this loan in this particular situation, it is just a new debt?

The answer to this question is: if a person wants to lower his or her taxes but for whatever reason has no funds to invest into an RRSP, it is better to take the loan and invest it into the pension plan. This way your taxes become lower. Take your returns, use that to cover part of your loan and pay out the rest through the year. There is an option to forward your first payment for 90 or 120 days, which allows you to get your return, cover part of your loan and then make monthly payments towards that loan.

Example:

Mister Smith has a job and makes between 36 and 72 thousands per year. It happened that there was no chance to put money away throughout the year to contribute to an RRSP. New year came and together with it came the desire to invest $10,000 into an RRSP and lower taxes but ... there was no money. He can loan $10,000 and pay it off through the next year. On interest (let’s consider that the rate is 6%) Mr. Smith loses $327 in a whole year, but right away he gets tax return of $3,100 (31% of invested $10,000 - this is the regulation on income between 36 and 72 thousands). If those $3,100 is put towards covering the loan, annual interest (cost of the loan) will become lower than $327. Also don’t forget that the $10,000 you invest into an RRSP also brings the additional income. Even if the investment rate is 3.75% it works out to $375, which is more than $327 interest from your loan for the using it the entire year - win-win situation (assume that he doesn’t withdraw his money from RRSP and doesn’t pay withholding taxes). The information above is based on a typical scenario on an individual contribution to a RRSP plan.

The interest on the loan may be fixed or variable with the interest = prime rate - 1%, but it’s an open loan and you are allowed to repay it at any time. Taking loan on larger amounts is possible, as well as for longer periods of time (2, 3 or even 5 years). There is one thing to keep in mind though - be realistic about your capabilities. One-year loan (or a longer period, if you choose) has to be paid off.

RRSP can also be used as a saving tool for the purchase of real estate. This program is called HBP (Home Buyers Plan). In the program you have an opportunity to save one third more than you expected. But it is always necessary to analyze current financial state of the family. I, as financial consultant, is ready for you to grant this kind of service. Most frequently, in the bank nobody gives this financial analysis to you since any bank service is impersonal to a certain degree, i.e., tomorrow you will arrive and you will possibly talk with another person.

My goal is to work with everybody for a long period of time (20-30 years). For this, having all the necessary licenses, I always analyze the financial situation of every particular family.

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