Have you ever thought about borrowing money to contribute to your RRSP? For many, this idea may seem absurd, especially since you should pay the interest and repay the debt directly from your pockets but will not see the colour of your money until retirement.
Although everyone’s situation is different, the idea is still worth considering. Here are 3 good reasons that will make the most skeptical reconsider.
1. Compound return vs depreciation
As with most investments, the return on your RRSP will increase exponentially. As for your debt, it will be amortized with an interest to pay smaller and smaller over time. Let’s take an example to better illustrate the situation.
Thomas borrowed $10 000 to invest in RRSPs for 5 years. His loan is at 4% interest for 5 years. And expects his RRSP to pay him very theoretically 4% / year (same rate). Following some quick calculations, here are the results:
- His RRSP will be worth $10 400 for the first year, $10 816 for the second and $12 166 for the fifth. If Thomas is patient, $32 434 in 30 years.
- On the other hand, he will pay $ 366 in interest in the first year, $291 in the second and $1 050 in total.
After 5 years, Thomas will have made a profit of $ 2116. And another $ 20,000 25 years later. The magic formula is time.
2. Tax Refund and METR
The major advantage of an RRSP is to allow you to have a tax return immediately. This tax refund can be used to pay part of your debt or reinvest it. Of course, if you have the means, we will always advise reinvesting this amount for the same reasons as in the 1st point.
In addition, with good planning and an optimal RRSP amount, your RRSP contribution can entitle you to a multitude of amounts other than tax. This deduction may increase your GST/HST and solidarity credit, child allowance receivables or even other various tax credits. This gives you access to tax savings that can exceed 90% in some cases. It’s like a 2 for 1 tax.
Bien souvent, ces bonbons sont déclenchés en cotisant des sommes intéressantes, ce qui requiert souvent un prêt. Lisez notre article sur le sujet
Among the most common concerns expressed by our clients is the imposition of the RRSP on withdrawal. In all cases, the tax will have to be paid, we are often told. Yes and no. today’s dollar is not equivalent to the dollar of tomorrow.
Let’s go back to Thomas, who borrowed $10 000. He received a tax refund of $4 000 (40%). And expects to pay the same $4 000 upon retirement in 30 years upon retirement. However, knowing that inflation has stabilized at 3% on average, this $4 000 in 20 years will have a value of $1 648 today.
Once again, time is a magic formula.
Borrowing to invest in a common tip in the world of financial planning. Before making any decisions, make sure the amount you borrow will not hurt your financial quality of life. Regarding the tax, we can advise you on the ideal RRSP amount to contribute with the Express95 advisory service “RRSP“.
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