Bidding adieu to credit card debt using an RRSP strategy

We are just about 3 weeks away from the RRSP deadline of Feb 29, 2012 for the 2011 tax year, and we wish to outline an RRSP strategy for our readers that they can use to rid oneself of credit card debt.

 

Let us suppose that you are an average person in Canada earning a salary in the 31.15% tax bracket and have an average perennial credit card debt of say $10,000 which, no matter how hard you try, you are unable to get rid of. Some months it may jack up to $12,000 and other months it may be at $8,000, but on the average it is always around $10,000.The minimum payment on this debt is usually about 3% of the total or $300.What follows is an outline of the strategy to bid adieu to this ‘bad’ debt and to build your assets by taking on a ‘good’ debt. A ‘good’ debt is used in the sense that the debt helps in squirreling money away for the future.

 

 

If you have been in the workforce for several years and have a lot of RRSP contribution room, as is the case with most people in Canada, you can avail of what is known as a ‘catch –up’ loan (to catch up on all your available RRSP contribution room) that is payable in 10 years. This loan is available at an interest rate of prime + 2.5% or 5.5% currently (the prime rate is at 3%). Should you shop around, you may find loans at cheaper rates, but I am here using a rate that many institutions offer. If you take an RRSP loan of $28,000 at 5.5%, the monthly payment is $303 (more or less the minimum payment of $300 on your credit cards).

 

For simplicity, once the loan is approved, the investment breakdown should be as follows:

 

1.     $5,000 in an investment product that gives you extra tax credits of 25% such as the Growthworks Commercialization fund. An investment in this vehicle gives you a tax break of 31.15% +25% = 56.15% of $5,000 or $2,807.50.

2.     $23,000 in regular investment products that will give you a tax refund of  31.15% or $7,164.50

Using the 2 step method above also helps in diversifying your portfolio

When you file your tax returns in April, you will get a refund of $2,807.50 + $7,164.50 = $9,972 or just $28 shy to retire your credit card debt of $10,000.

 

Also if you invest in Growthworks Commercialization Fund you will get extra dividends of 25% spread over 3 years or $1,250 as a bonus.

 

You also at the same time will have a nest egg of $28,000 which if invested properly will grow over the years.

 

So speaking idiomatically you ‘kill two birds with one stone’- you get rid of your bad credit debt and get an RRSP of $28,000 at virtually the same monthly cost.

 

For more detailed information and to customize investments to your needs and risk profile please contact Lachman Balani at lbalani2000@yahoo.ca or 416-902-3580.

 

Have a happy investing season!

 

Congratulations to Gurpreet Sodhi for correctly responding to last week’s question and winning a folder cum binder complete with calculator, writing pad and pen.

Last week’s question: What is the current prime rate in Canada?

Answer: 3%.

 

This week’s question: What is the RRSP deadline this year?

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