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Borrowing to Save... Does it Make Sense?

Weighing RRSP and TFSA

RRSP Lines of Credit

Whether your retirement is five years away or 40 years down the road, contributions to your RRSP can be some of the most important investments you’ll make. That’s because contributions are tax deductible in the year they’re made, and deposits grow tax-sheltered until you begin making withdrawals in retirement.

Cambrian offers RRSP Lines of Credit (RLOCs) to help those who find themselves at the end of the tax year without any funds left to contribute, or those who just want to top-up their retirement plan. Borrowing money for RRSPs can pay off for certain individuals, while it may not be the best option in other situations. The farther away you are from retirement, the more the benefits of compounding interest earned over the years until you retire along with the tax deduction you receive could outweigh the interest you pay borrowing the funds. This example demonstrates the potential benefit of borrowing for your RRSP:

 

Borrow $1000 and contribute it to your RSP

$1,000

Return on RSP investment at 4.0%  

for 1 year:
for 10 years:
for 40 years:

$1,040
$1,480
$4,801

Repay loan over 12 months - total of payments

$1033

Loan interest paid over the 12 months

$33

(The example above assumes that your RSP earns 4.0% interest compounded annually, the loan interest rate is 6% compounded monthly, and the loan is repaid in 12 equal monthly installments of approximately $86. Rates are for illustrative purposes only. They are not intended to be representative of current rates.) Source: www.tdcanadatrust.com 

RLOCs generally need to be paid back within 12 months of issue, but can be used year over year for RRSP contributions. Making a payment to an RLOC with funds received from a tax refund can help pay off the borrowed funds even more quickly. Keep in mind that Cambrian issues RLOCs for the purpose of making investments through Cambrian only, whether an RRSP variable, term deposit, or other investment.