Personal Finance

RRSP Loan: does it make sense for me?

  • Last Updated:
  • Feb 17th, 2017 8:19 pm
[OP]
Deal Addict
Apr 21, 2014
2263 posts
1018 upvotes
Alberta

RRSP Loan: does it make sense for me?

I'm pretty much done preparing my taxes and I was playing around with the RRSP amount, and noticed that if I contribute 5k to my RRSP I will increase my refund by $2,050 (41%). I do have the contribution room, BUT based on the curent value of my portfolio, my yearly contributions to my DCPP RPP I should be set for retirement. I do not have the extra 5K at the moment, would it make sense for me to get an RRSP loan at prime + 0.5% (3.20% currently) and must be paid back within 2 years, for someone in my situation?

I was thinking that it would because I am in a high tax bracket now (higher than i would be upon retirement). and basically getting a 38% return on the loan now + the compounding. I also have a bit of dilemma on the refund aspect, should i use the additional refund and pay down credit card debt (19.9%) or put it against the RRSP loan?

Any thoughts would be helpful, also can I get a better rate than prime + 0.5% on an RRSP loan?
6 replies
Member
Oct 27, 2009
371 posts
2682 upvotes
Montreal
It is possible to get Prime+0 but amortization will have to be 12 months.
I am curious as to how your cashflow could be lacking considering your high (?) income. Could you handle the monthly payments of a 5000 loan?
If you can manage it, you will be better served by paying off the credit card before the RRSP loan.

Here are two ways to see it:
1) Positive : cost is 5000-2050+interest but you get to have 5000+compounding interest for your retirement.
2) Negative : ''free'' 2050-interest paid on the loan, but you ''lost'' 5000 until retirement.
Financial and Debt Advisor
[OP]
Deal Addict
Apr 21, 2014
2263 posts
1018 upvotes
Alberta
MTLGuru wrote: It is possible to get Prime+0 but amortization will have to be 12 months.
I am curious as to how your cashflow could be lacking considering your high (?) income. Could you handle the monthly payments of a 5000 loan?
If you can manage it, you will be better served by paying off the credit card before the RRSP loan.

Here are two ways to see it:
1) Positive : cost is 5000-2050+interest but you get to have 5000+compounding interest for your retirement.
2) Negative : ''free'' 2050-interest paid on the loan, but you ''lost'' 5000 until retirement.
I can easily handle the payments on a 5k loan. I have money tied up in other investments that and we had some very large unplanned expenses we incurred in December. So don't have the liquid cash for 5k right now.

Also want to contribute this to spousal rrsp because wife makes significantly less than I do. The last point is what is bothering me as approx 17k a year already goes into my retirement account monthly so I won't really "need" this money for retirement (nice to have though).
Deal Expert
User avatar
Jan 27, 2004
45474 posts
8471 upvotes
T.O. Lotto Captain
abc123yyz wrote: I'm pretty much done preparing my taxes and I was playing around with the RRSP amount, and noticed that if I contribute 5k to my RRSP I will increase my refund by $2,050 (41%). I do have the contribution room, BUT based on the curent value of my portfolio, my yearly contributions to my DCPP RPP I should be set for retirement. I do not have the extra 5K at the moment, would it make sense for me to get an RRSP loan at prime + 0.5% (3.20% currently) and must be paid back within 2 years, for someone in my situation?

I was thinking that it would because I am in a high tax bracket now (higher than i would be upon retirement). and basically getting a 38% return on the loan now + the compounding. I also have a bit of dilemma on the refund aspect, should i use the additional refund and pay down credit card debt (19.9%) or put it against the RRSP loan?

Any thoughts would be helpful, also can I get a better rate than prime + 0.5% on an RRSP loan?
Use it to pay the 19.9% credit card debt... RSP loans are usually of a very low interest rate (they're enticing you to invest with them!). The interest you pay on the RSP loan isn't that bad... b/c with a long term strategy, it is highly realistic to expect a return that'll beat the interest you're paying on the RSP loan. Typically RSP loans are prime+1 for the big 5 banks. Give or take...

But yes you have the strategy down correctly. Deferring taxes during your highest earning income years. But you have to be careful not to contribute too much. Because if you have a decent pension, it could screw you later down the road... Unless you can afford to retire early, start draining your RSP's into your TFSA, then collect your pension afterwards!!
Member
Oct 27, 2009
371 posts
2682 upvotes
Montreal
Excellent. Your strategy is good now AND later as you'll still benefit from the tax refund now and you wife will have to pay a small amount of taxes at retirement. I learned that to sustain a similar lifestyle, you will need 70% of your gross income (RRSPs+OAS+pension etc). I do the same for my wife as she is a stay-at-home mom.
Financial and Debt Advisor
[OP]
Deal Addict
Apr 21, 2014
2263 posts
1018 upvotes
Alberta
UrbanPoet wrote: Use it to pay the 19.9% credit card debt... RSP loans are usually of a very low interest rate (they're enticing you to invest with them!). The interest you pay on the RSP loan isn't that bad... b/c with a long term strategy, it is highly realistic to expect a return that'll beat the interest you're paying on the RSP loan. Typically RSP loans are prime+1 for the big 5 banks. Give or take...

But yes you have the strategy down correctly. Deferring taxes during your highest earning income years. But you have to be careful not to contribute too much. Because if you have a decent pension, it could screw you later down the road... Unless you can afford to retire early, start draining your RSP's into your TFSA, then collect your pension afterwards!!
Thanks for your input. I don't have a defined benefit plan everything is defined contribution. But based on my current portfolio, contributions, and using a modest 5% return rate the calculators show I will have hit my target for retirement.
[OP]
Deal Addict
Apr 21, 2014
2263 posts
1018 upvotes
Alberta
MTLGuru wrote: Excellent. Your strategy is good now AND later as you'll still benefit from the tax refund now and you wife will have to pay a small amount of taxes at retirement. I learned that to sustain a similar lifestyle, you will need 70% of your gross income (RRSPs+OAS+pension etc). I do the same for my wife as she is a stay-at-home mom.
Thanks! May increase it to 10k and pay it off with my bonus in sept! I never really contributed to spousal rrsp as RRIF's can be income split anyway. But it's good to have in case we want to retire before 65.

Top