RRSP Loan?

[rubecube]

So I was just talking to my bank (I just lost my wallet in Vegas so that's about my level of financial acumen) and they offered me an RRSP loan at prime. Is this a decent way to invest? I'm going to be finishing school in two months and figure I can have my student loans paid off in 4-5 years (if I don't do grad school), but I don't really understand the point of taking on more debt in the same timeframe. The dude on the phone said something about being able to use it as a deduction on my taxes, but I think I maybe made $25k after taxes this year, so I'm not really sure if that's even that great of a deal. The job I have also comes with a pension.

I get that the guy was probably just trying to make a sale, but I can't see any positives in taking on this loan. Am I completely out to lunch here?

[Slava]

Well I can't give you exact advice, being that this is an internet forum and I don't know you. So generally speaking it doesn't sound like it makes sense at this point. You don't have a huge income, and probably have a lot of things (tuition, books, school in general) that you can't write off as non-refundable credits? That along with the basic personal exemption and you're probably not looking at a tax bill, or so I would assume.

An RRSP loan can be a good strategy for people to make a lump sum contribution though, and then pay it off using the tax return and then monthly payments until next February (occasionally people pay longer for larger amounts and for longer than a one year contribution in general). The benefit is that you invest the full amount today, and make that contribution to go against last years income, so you can save money on taxes. A lot of places defer the first payment for 90 days, so you can file and get back some money on your taxes, which you then apply to the loan. The lump sum gets invested now and you gain on it (theoretically!) all year while you make those monthly payments. So that is one way to use them, and it can be a good idea for the right person in the right situation.

Another way is a scenario where you were going to pay say $10k into your RRSP this month. You would borrow say $5000 and now invest $15,000 instead. You file your taxes and at 39% (highest bracket in Alberta) get back a tax return now of $5850, and pay off the loan. There are a number of strategies you can use, but as with anything involving borrowing in particular you should seek out individual advice.

[rubecube]

Okay that makes a bit more sense, and you're right about the other credits. I also have credits from previous years that I can carry forward, and I'm likely going to get a refund in the $2k range, which I would rather put towards paying off my student loans than taking on more debt. The RRSP loan seems like a better idea to do next year when I'm making more money.

[pseudoreality]

Sounds like one of the big bank financial advisors is trying to sell you a product that isn't appropriate. Quelle suprise.

[rubecube]

To be fair to the rep, the conversation came about because he saw that I had been preapproved, but he didn't know anything about my school/work situation.

[Calgary14]

With RRSP loans isn't it usually the case that the big banks will lend at a reasonable rate (ie. prime) but you have to use the money to buy one of their products? At least that's what they offered me - an RRSP loan at good terms but I had to buy one of their mutual funds with the money. I declined.

[Slava]

^ I don't know how it goes with the big banks, but there are "un-tethered" options out there.

[GGG]

Okay that makes a bit more sense, and you're right about the other credits. I also have credits from previous years that I can carry forward, and I'm likely going to get a refund in the $2k range, which I would rather put towards paying off my student loans than taking on more debt. The RRSP loan seems like a better idea to do next year when I'm making more money.

In your early years of earnings a TFSA might make more sense then an RRSP. If you are in a lower bracket of income then you think you would be in when you retire or you plan on using the money for a downpayment on a house you are better of paying the tax now and waiting until you are in a higher bracket to use your RRSP contribution room.

If you pull money out of your RRSP to buy a house you pay it back with after tax dollars of your 30-40 income instead of paying with after tax dollars of your 20-30 income.

Also you would have to run the numbers but I'm not sure perpetually taking RRSP loans and paying them off over the next 12 months is better or worse than skipping 1 year of contributions and just putting in money over the next 12 months. I think the banks make money with both hands here on the interest and on the fund sales.

[Slava]

In your early years of earnings a TFSA might make more sense then an RRSP. If you are in a lower bracket of income then you think you would be in when you retire or you plan on using the money for a downpayment on a house you are better of paying the tax now and waiting until you are in a higher bracket to use your RRSP contribution room.

If you pull money out of your RRSP to buy a house you pay it back with after tax dollars of your 30-40 income instead of paying with after tax dollars of your 20-30 income.

Also you would have to run the numbers but I'm not sure perpetually taking RRSP loans and paying them off over the next 12 months is better or worse than skipping 1 year of contributions and just putting in money over the next 12 months. I think the banks make money with both hands here on the interest and on the fund sales.

There is no question that is the case, but there are options aside from the bank funds. You can get RRSP loans that aren't tied to the specific funds or a fund company and use the funds to invest in whatever you like in terms of securities.

As for the rest of your post, what it comes down to is that you have to do the math and see what makes the most sense. For some people that is purely the TFSA, whereas for others a combination or straight RRSP maximization is beneficial. There are a number of moving parts though.

[rubecube]

Yeah, I don't know. I just think with $25k in student loans to pay off, the money would be better spent paying those off.