RRSP loans

This week we will examine the option of using RRSP loans for a normal yearly RRSP contribution.

 

According to data from Statistics Canada, the average yearly RRSP contribution is around $5000. Also only about 30% of eligible tax payers make a contribution. The contributions made only used up 6% of total available RRSP room. The data suggests that the majority of Canadians have accumulated vast amounts of RRSP contribution room. Only a small fraction of Canadians have used up all their contribution room and many would benefit by being able to boost their RRSP contributions.

 

There are several reasons why many Canadians do not make use of their RRSP contributions even though they would love to do so. One of the reasons that some Canadians do not contribute to their RRSP is that they are busy paying down debts accumulated during the heady spending sprees of the holiday season of December and the New Year and so when the deadline of Feb 29 arrives, they find themselves short in money to contribute towards their retirement. Enter the RRSP loan option.

 

Though it is more financially sound to set up a voluntary monthly contribution of say $200- $300 a month towards your RRSP, there is also the choice of using the ‘forced’ monthly contribution using the good debt option of RRSP loans for your yearly contribution. I use the word good debt as this loan helps build up your net worth. These loans are available at rates as low as prime (as this article goes to print). The prime interest rate is currently at 3%. These loans also have the option of deferring payment up to 180 days, i.e if you avail of the loan today, your first payment does not come out until 180 days later, giving you enough time to arrange finances so as to make sure you have  the requisite funds to pay down the loan. Most people use the 60-90 day deferral plan. That is, the first payment to pay down the loan is done 60 or 90 days after the loan date.

 

Loan terms are available from 1 year to 10 years, but most people use the 2 year term which offers good affordability. As the loan term increases, the interest rate on the loan increases. Following is an illustration for a $5,000 (average contribution), 2 year loan.

 

RRSP loan amount = $5,000

 

Rate                              Monthly payment                                Term

 

Prime (3%)                               $215                                        2 years

 

Prime +0.5%                            $216                                        2 years

 

I have given 2 interest rate scenarios depending upon your choice of investment; segregated funds, mutual funds or other.

 

Loans are also available for longer terms; 3 -5 years, and 6-10 years at higher rates. These longer terms make sense if you are trying to catch up on your contributions and wish to make  higher contributions in the range of $15,000 plus.

 

For more information and to customize your investment and loan needs please contact Lachman Balani of IDC financial at 416-902-3580 or lbalani2000@yahoo.ca.

 

Question of the week for Ontario residents only: In the article above,according to Statistics Canada what is the average yearly contribution to RRSP?

 

 

Winner will be chosen from all people who send in the right answer. Draw will be done at noon, Jan 23 and the winner will be announced in next week’s newsletter.

 

Last week’s question: What is the maximum RRSP contribution room for this year? Answer:  $22,450

 

Winner to last week’s contest is Tony Aducayen.

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