– Hello, may I speak with M. TFB please.
– Yeah that’s me!
– Hello sir, my name is Evil Banker and I would like to book an appointment with you for your RRSP contribution.
– Nah… I don’t have money left for retirement this year (I just bought a brand new TV instead 😉 ).
– Well sir, we still have a solution for you. How about getting your RRSP contribution done and a retirement plan (i.e. excel spreadsheet with a graph) at the same time? We can arrange everything for a small amount per month and you would get a huge tax return in May. How does that sound?
How does that sound? That sounds like the regular banker sales pitch during a RRSP campaign 😉 I’m making fun of my colleague here but we need a bit of laughter in this strange world, don’t we?
Seriously, several Canadians contract a RRSP loan every year in order to catch up with their unused RRSP contribution. Is it a good idea? Should we use this leverage strategy? (yes, it is a leverage strategy as the Smith Manoeuvre).
The RRSP loan is a great investing strategy under the following guidelines:
– It must be at a very low rate of interest (prime rate or near prime rate)
– It must be reimbursed within a maximum of 24 months (2 years).
– It must fit in your budget 😉
– The tax return should be used to pay off a part of the RRSP loan and not to finance the next trip to Disney Land with your kids.
– Once paid off, you should keep your payment into a saving habit by setting up a systematic contribution into your RRSP account.
– Use the RRSP loan while participating to a HBP (Home Buyer Plan)
A RRSP loan is not a great investing strategy under if the following happens:
– You take a huge amount and you can’t pay it off within 24 months. In this situation, you rather simply use the payment as a systematic contribution into your RRSP account and you will save the interest (which is not tax deductible).
– You can barely make your payments and the RRSP loan jeopardize your financial situation.
– You have no intention to use your tax return in a financial planning strategy (you are then missing the whole point of taking a RRSP loan).
So if you are not 100% convinced that you should take a RRSP loan or not, ask your financial adviser questions in order to understand if there is a strategy behind the loan or simply your banker’s commission 😉
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