My income is approx. 75K am in my mid-30’s, and have been working in Canada for about 6 years. I’m single with no dependants but I’m now at a stage where I’m thinking of buying my first home, however, I have basically no savings. The first 3 years I lived here I had put away some savings and RRSPs but I went to college for a year whilst still working and had to pay my way through the course, so I used up all the savings and have not quite recovered since.

A financial advisor that I know thinks that if I take out an RRSP loan for approx. 20K (I have about 25k room for contribution) and use that borrowed RRSP contribution as a down payment on a house then that would be a good investment of the loan. We’ve also determined that by borrowing that amount my tax return would be approx. 7K, the majority of which I could use to make an initial repayment of the RRSP loan.

I am clueless when it comes to finances so any comments would be appreciated.

Your problem is unfortunate, but your solution is right on. I agree with FT that you should not work with that advisor any longer. He clearly did not have your best interest at heart. IF there was a reason for the loan, he should have explained it to you.

To put some perspective on your situation, the benefits of RRSPs are that you can defer tax on income of investments in the RRSP and that you may be in a lower tax bracket when you withdraw than you are when you contribute.

Therefore, RRSPs are worth contributing to if you expect to be in the same or lower tax bracket when you withdraw them (probably after you retire).

With your income at $34K, you are in the lowest tax bracket at about 20%. When you retire, you might be in the same tax bracket or a higher one. If you will still be in the lowest bracket at that time, then it is worth it for you to contribute because you can benefit from deferring tax on your investment income. But if you will be in a higher tax bracket after you retire, then you are probably better off NOT investing in RRSPs.

Many seniors are effectively in higher tax brackets because of all the clawbacks on government income programs, so the odds are that you will likely be in a higher tax bracket when you retire.

In short, for people under age 65 earning under $11,000, RRSPs are not worth it at all because they are not paying tax. For people like you in the lowest tax bracket, it is probably still not worth it for you to contribute.

Once your income is over $41,000, you are into the middle tax bracket at about 31%. Here it is quite likely that RRSPs will benefit you, since you have a reasonable chance of being in a lower tax bracket after your retire.

This is why contributing so much while you are in a low tax bracket probably makes no sense. Whenever advice from an advisor makes no sense, you have to wonder if the advisor really had your best interests at heart.

Your advisor was also wrong when he said you would get $10K back on a $30K contribution. That would only apply if your income was $71K or higher.

So, what should you do?

Option 1: Unfortunately, it will be difficult for you to just cancel. You would have to file a formal complaint and fight for a settlement. Your advisor could possibly issue a Letter of Indemnity to have the entire transaction reversed, but that would cost him quite a bit.It you be up to you to prove that the transaction was inappropriate and that you did not understand the recommendation.

Option 2: Your advisor could issue a Letter of Indemnity to have the investment changed so that the investments are not RRSP. In that case, you cannot deduct the RRSP contribution, but you can deduct the interest on the loan every year. This may well work for you as a long term strategy, since you would be borrowing to invest and the investments should be able to make more than the investment loan over time. This would also probably cost your advisor nothing to do (although he may hesitate to do it because he may be unfamiliar with how to do it).

Option 3: This is your strategy. Carry the entire deduction forward until you can claim it at a higher tax bracket. If your income is $52K in 2010, then you can claim $11K at the 31% tax bracket. If your income stays at that level, you can deduct the entire $30K over 3 years, in which you would get $10K in refunds over 3 years. Do you expect your income to stay comfortably above $41K for the next few years?

Which is best for you? Probably either option 2 or 3, but which is best is more complex. It depends on your income in the next few years, your tax bracket after you retire, and your risk tolerance.

Option 2 may well be best in your case, but borrowing to invest is considered a more aggressive strategy that may or may not be suitable for you. The advantage is that the the RRSP deduction is a deferral (you will repay it when you eventually withdraw the RRSP), while the interest deduction is deductible every year.

Option 3 is the simplest and gets you the largest refund over the next 3 years, but may or may not be the biggest benefit for you long term.

I hope that is helpful, Ally.

Ed

IF I contribute $30K in 2010 tax year, the marginal tax rate will be 20.05% (30k*20%) as opposed to 31.15% (30K*31.15%). Correct?

If so, would you recommend to claim about 11K of the contribution, enough to keep stay the 31.15% marginal tax rate? then. carry Forward the unuse contribution forward to later years?

I did not get your point when you mentioned ” IMO, claim enough to drop you to the lowest tax bracket for your province, then move the remainder to be claimed another year. Use any tax refunds that you receive, and pay down that RRSP loan.” I thought dropping to the lowest bracket has no point since the whole RRSP thingy is to take advantage of the getting more tax back while income is high, and pay lower tax while income is low (during retirement).

OR, should I be better off to contact my advisor, (yes, it doesn’t seem to make sense the more I think about it) to see if I can cancel this whole loan? — I think the loan contract is still new (one mth old), I might have a chance to cancel since the 1st payment hasn’t been drawn yet.
Sigh… not feeling so smart about myself. But I really appreciate your comment. Thank you.

To answer your question, if you were to claim your $30k contribution on $52k income, you would basically report a net earnings for that year of $22k. IMO, claim enough to drop you to the lowest tax bracket for your province, then move the remainder to be claimed another year. Use any tax refunds that you receive, and pay down that RRSP loan.

My question is, how’s the marginal tax rate/tax bracket determined?
Obviously I can’t file this year, or I’ll be charged 1% on the overcontribution. If I wait and file the 30K contribution next year, will I be in the 52K income tax bracket (thus getting more tax savings) OR will I be in the 20K (50K less 30Kcontribution) tax bracket.
I just knew this advisor a few months ago, he was telling me that I’ll get about 10K back with the 30K investment while I get the loan, that I can use that 10K to paydown my line of credit. But now, it doesn’t seem to be the case.
I felt a rushed when getting the RRSP loan, approaching the March 1st deadline, now i found out that I have to wait, and i doubt i could even get 10k if i file next year.
I really hope that i’m not making mistake here. IF i am, I am hoping someone can give me your opinion on this? thank you.

I have about $20K RRSP contribution room. Is there a smart move I can make with this bonus check and the combination of an RRSP loan that will put me ahead (and not have me owing a lot of tax in 2010)?

Would appreciate your thoughts. Thanks…

The biggest factor in determining whether an RRSP loan is beneficial is what you do with the tax refund. If you invest it, or use it to pay down the loan the strategy is generally sound (keep in mind that an RRSP loan is a leveraging strategy like any other and is dependant upon market performance). Where the strategy really holds up is when you use the tax refund to pay down really high rate credit card debt. Most financial institutions will give you a low interest rate RRSP loan because they will hold the investment against the debt. You will find that they will not be as generous providing you a low interest fixed rate loan to pay off your 22% credit card in most cases unless you secure it against an asset. Thus the extent to which the strategy is successful is really dependant upon the alternatives available.

In my experience the approach is successful with young couples who have been undisciplined with their money and have accumulated some debt. You ultimately can reduce some of their anxiety, reduce the interest costs on their debt, and begin a forced savings plan all at once. BUT, and I’ll say this again BUT…. they have to understand that all they have done is reposition their debt…… they will dig a much bigger hole if they ring up the credit cards again.

[...] Personally, there are very few scenarios where I see RRSP loans beneficial.  The one case where I do like RRSP loans is where the loan "tops up" your RRSP contribution and the tax refund pays back the loan entirely.  [...]

There are a lot of variables involved that make it difficult to give you specific advice – your age, assets, debts, and other obligations. Does your employer have a pension plan? If so, an RRSP might not be necessary. How much do you expect to pay for child care now that you have two children – I’ve got two kids, and my daycare expenses for 2008 will be nearly $20k! With potential large expenses coming up, going $36,000 into debt to fund an RRSP might not be the best strategy. Bear in mind that when you have a house, you’ll have significantly higher expenses than in a condo – you won’t have condo fees, but you’re responsible for all of your own maintenance and repairs, and property taxes will be significantly higher.

As a rule, RRSP loans only make sense if they’ll be paid off within a year. Also, RRSP loans are regularly offered at prime, so prime+1.5% doesn’t sound like a great deal to me. It’s odd that they’re recommending an “RRSP Loan” that’s really going to be used to provide a down payment for a house purchase.

I’d suggest getting a second opinion from a fee-only financial planner. Investor’s Group has a conflict of interest, since they make money from you if you take out an RRSP loan and invest with them – it’s in their best interest for you to invest as much as possible, whereas it might not be in YOUR best interest.

Also, you’re not likely to get good advice from random people on the Internet – we don’t know all of the details of your situation, and you have no reason to trust any advice you receive here. Hire an advisor that you trust, pay them an hourly rate for their services (instead of a commission on sales), and have them review your situation and give you advice.

Here’s my situation:

• I make about $92,000 / annually and my wife take home is around $72,000/ annually.

• Got our first RSP last September 2007 and contributed about $8,000 to date. Our last tax return indicated that we have $16k and $20k contribution room for our RSP.
• Roughly 5k in savings (it’s really small, though I am supporting two of my sibling educational requirement)
• Tendered to purchase a house for $420,000 with a closing date of June 30, 2008. (We are expecting our second child this year and we really need to move out of our one bedroom condo.

Our financial planner (Investor’s Group) suggested that we take out the max RSP loan (@ prime +1.5% spread over 10 years) to be used as down payment and use the refund either to cover the closing cost or invest it in a 4% preferred savings account.

Being fairly new to the country and having without a semblance of a family support, I am not confident that I am making the right financial choices. Thus, I would greatly appreciate any help/ you’d be able to provide.

I can get 5.5% on the money for 90 days (3.74 after that) and my HELOC is 5.75% so I don’t think the actual cost will be anywhere near $500, but I do still need to confirm this account is registrable though. I also want to find out how much of it I can borrow from the Home Buyers Plan when I buy back in to Real Estate, I’m thinking a year or two from now, maybe longer.

One thing to note: you don’t have to use the RRSP deduction in the same year that you make the contribution – you can “save” the deduction and use it in a future year. If your tax bracket will be lower in 2008, this might not be a good idea (you want to use the deduction, as much as possible, when you’re in a higher tax bracket to maximize the tax savings).

-selling the house taking 100k profit
-putting 50k in rrsp (maxing out)
-but using HELOC to do so till completion on house sale april 1st

good, bad? there’s also the possibility of a lower tax bracket in 2008 due to a career change.