By Mike Howe
With more and more Canadians building up unused RRSP contribution room, one strategy that can be used to eliminate this contribution room is an RRSP Loan. RazorPlan’s RRSP Loan calculator lets advisors compare borrowing to invest a lump-sum into an RRSP today versus making regular monthly contributions to an RRSP.
To see the power of this calculator, take a 38-year-old client that has $50,000 of unused RRSP contribution room available. The calculator assumes that the tax refund created by the $50,000 deposit is used to reduce the RRSP loan. If this client has a marginal tax rate of 32% then the net loan is $34,000. If that loan has interest of 4.25% and a 5-year term, then the client would have to pay $630.01 monthly. Assuming the RRSP is earning a 6% rate of return, the client will have $241,117 by retirement at age 65.
In comparison, if that payment is grossed up by the 32% tax rate it becomes a $926.49 deposit to an RRSP which at the same 6% grows to $231,988 by age 65. The RRSP loan strategy creates a larger RRSP account balance at retirement. This client will always have a larger RRSP account balance by using the RRSP loan strategy as long as the rate on the loan is less than 5.84%.
The RRSP Loan calculator is an effective tool for demonstrating the benefits of borrowing to catch up on unused RRSP contribution room.
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