Another Financial Question thread

[JiriHrdina]

This question was posed in the Real Estate thread but is worthy of its own attention since people I talk with have varying opinions on it.

Should one borrorow against one's LOC in order to max out the RRSP contribution?

[burn_baby_burn]

Since this is the "Financial Question Thread". What is a LOC?

[looooob]

This question was posed in the Real Estate thread but is worthy of its own attention since people I talk with have varying opinions on it.

Should one borrorow against one's LOC in order to max out the RRSP contribution?
I know very little about this. might depend on your current tax bracket and if you see that changing in near future?

I'm pretty conservative but I would likely do it and then at least apply the tax savings back to your LOC , but apparently others here would keep buying

[Looger]

buy gold. lots of gold.

[ken0042]

Since this is the "Financial Question Thread". What is a LOC?

Line Of Credit

[return to the red]

I've only maxed out my RRSP's once so far, reason being I would rather make sure all my outstanding debt (car loan, visa, etc. )is cleared up.

I guess it really depends on the state of life you are in. Being only 27 and having 2 fairly new vehicles '03 & '05 (one completely paid off and the other nearly paid off), Student loans paid off, and only about 50k left to pay off on my mortgage, I look at it that if I can pay all this stuff off then I have that much more to contribute to RRSP's when I'm in my late thirty's and forty's. I would also like to have as little debt as possible when it comes time to start a family

[Claeren]

buy gold. lots of gold.

Or Swiss Francs....




Claeren.

[Looger]

swiss francs would be good, but if you think of a safe currency as an investment based on the future resource / energy riches of a country, i personally would buy rubles.

putin has declared war on the '13 oligarchs' gangsters that had been running most of russia's banking and energy affairs (to install his own gangsters no doubt!!!), many people think that russia is set to do well economically as they are paying off the debt they incurred during the 90s.

after gold i'd buy rubles.

[Resolute 14]

I've only maxed out my RRSP's once so far, reason being I would rather make sure all my outstanding debt (car loan, visa, etc. )is cleared up.

I guess it really depends on the state of life you are in. Being only 27 and having 2 fairly new vehicles '03 & '05 (one completely paid off and the other nearly paid off), Student loans paid off, and only about 50k left to pay off on my mortgage, I look at it that if I can pay all this stuff off then I have that much more to contribute to RRSP's when I'm in my late thirty's and forty's. I would also like to have as little debt as possible when it comes time to start a family

The major gains in RRSPs come from interest rather than principal. The longer your money is in the RRSP, the more interest it earns, the faster it grows.

If you can afford to put a little extra into your RRSP now, it will do a lot more work for you over the next 15 years that it can't do if you wait until your late 30s/early 40s.

[Prototype]

The major gains in RRSPs come from interest rather than principal. The longer your money is in the RRSP, the more interest it earns, the faster it grows.

If you can afford to put a little extra into your RRSP now, it will do a lot more work for you over the next 15 years that it can't do if you wait until your late 30s/early 40s.

Plus, it's a tax break. Which is why there's a push right now for RRSPs.

[Slava]

This is a tough question to just fire out an answer. But, in short that answer is most likely yes, you should max your RRSP's, althought the borrowing may or may not be a line of credit. Part of why I say this is because it depends on the interest rate of the LOC. Another reason to consider an RRSP loan is because you might want to defer payment of this loan until your tax return comes back. (This is assuming that you want to put the return against the loan).

It also depends on which tax bracket you're in. Maxing your RRSP whan you make $20k/year is not as much of a tax break as when you earn $70k/year. While it is true that you will earn compound interest so you are better to invest early, you still earn compound interest in other investments that are not RRSP's.

Lastly, I better make a quick point on the tax-sheltered aspect of the RRSP; you don't pay tax on the growth. This is a big advantage if you are receiving interest income in particular. However if you are willing to pay some tax, but still want to invest early you could consider a Corporate Class Fund. This is a fund that will pay you Capital Gains no matter how the income was derived. Also, you will pay this when you take the money out, not on an annual basis.

Anyway, I know that this is both rambling and probably generates more questions than it answers, but those are my thoughts.

[Sylvanfan]

Lastly, I better make a quick point on the tax-sheltered aspect of the RRSP; you don't pay tax on the growth. This is a big advantage if you are receiving interest income in particular. However if you are willing to pay some tax, but still want to invest early you could consider a Corporate Class Fund. This is a fund that will pay you Capital Gains no matter how the income was derived. Also, you will pay this when you take the money out, not on an annual basis.


You're talking about an investment outside of an RRSP with that correct?

The way I understand investing is that if you're going to invest more money annually than your RRSP maximum try to keep stuff thats going to be your lowest percentage capital gain on the outside and stuff anything else inside the RRSP. If you're in a higher income bracket you'll pay full income tax on an income type investment. So for example a you'll basically pay 40% on a bond fund gaining say 7% so your net gain is only like 4%. Whereas on a capital gain that averages 12% growth a year you only pay tax on 50% of the gain, so you'd only pay tax on 6% of that. Is that correct.

[Slava]

Yes, that is correct. But in the case of a Corporate Class fund (which is a type of fund series) you can have a bond fund which earns interest. At the end of the day though, you take out the money and receive capital gains instead. In other words you can have the "security" or risk of a bond fund, with the tax implications of a capital gain. There is a brand new series available through one particular company where you can actually select how you would like to receive your money; interest, capital gains or dividend income.....very slick, totally legit and very, very tax efficient if it is done correctly.

[mykalberta]

I've only maxed out my RRSP's once so far, reason being I would rather make sure all my outstanding debt (car loan, visa, etc. )is cleared up.

I guess it really depends on the state of life you are in. Being only 27 and having 2 fairly new vehicles '03 & '05 (one completely paid off and the other nearly paid off), Student loans paid off, and only about 50k left to pay off on my mortgage, I look at it that if I can pay all this stuff off then I have that much more to contribute to RRSP's when I'm in my late thirty's and forty's. I would also like to have as little debt as possible when it comes time to start a family

Similar boat here, just more left on mortgage -195K.

It was my understanding that you can use your excess cash say in 2010 to put down to get money back on taxes up to 2005 (5 years). If that is the case (I did it for the first few years of work with respect to student loans).

I guess it depends what your LOC interst is, if its anything higher than prime+1 I wouldnt. I would wait for a windfall a few years down the road then do it then. Make sure CC and loans are paid off first (mortgage exception).

MYK

[Slava]

MYK, you can carry-forward your RRSP contribution room, and it all applies in the year in which you use it. Basically if you have the room and make a $50k contribution now, it all applies to last years income. It carries forward basically forever.

[TurnedTheCorner]

There's no shortgae of interesting hybrid investments out there, but the Corporate Class Fund is a new one to me. Thanks for sharing! Interest is 100% income, dividens are 75%, and capital gains are 50% if I recall correctly - are those rates still right?

I'm planning on a loan of some kind to contribute more to my RRSPs this year so that our household is tax neutral. I'm meeting with the bank tomorrow to discuss the T&Cs of an RRSP loan. if the rate is OK and the loan is flexible, I may go with that instead of drawing on my LOC. I'm concerned about flexibility because my annual bonus should arrive shortly after the contribution deadline, and I may be able to pay the loan in one shot. LOC should have no problem with this, but if the RRSP loan penalizes for this, there's no point to it for my situation that I can see.

[Claeren]

swiss francs would be good, but if you think of a safe currency as an investment based on the future resource / energy riches of a country, i personally would buy rubles.

putin has declared war on the '13 oligarchs' gangsters that had been running most of russia's banking and energy affairs (to install his own gangsters no doubt!!!), many people think that russia is set to do well economically as they are paying off the debt they incurred during the 90s.

after gold i'd buy rubles.


I was actually kind of kidding.

The CHF is a good yet underappreciated long term bet for reserve funds though.... it was until very recently backed directly by 40% gold - too bad it is not anymore...




Claeren.

[Slava]

There's no shortgae of interesting hybrid investments out there, but the Corporate Class Fund is a new one to me. Thanks for sharing! Interest is 100% income, dividens are 75%, and capital gains are 50% if I recall correctly - are those rates still right?

I'm planning on a loan of some kind to contribute more to my RRSPs this year so that our household is tax neutral. I'm meeting with the bank tomorrow to discuss the T&Cs of an RRSP loan. if the rate is OK and the loan is flexible, I may go with that instead of drawing on my LOC. I'm concerned about flexibility because my annual bonus should arrive shortly after the contribution deadline, and I may be able to pay the loan in one shot. LOC should have no problem with this, but if the RRSP loan penalizes for this, there's no point to it for my situation that I can see.

The rates for the dividend are actually a lot less than that. FYI, to my knowledge banks cannot do the Corporate Class funds.

It sounds like you want a loan with a deferral arrangement so that you can pay the whole thing off; the banks should offer this for you but if they do not, there are plenty of other sources that will.

[return to the red]

The major gains in RRSPs come from interest rather than principal. The longer your money is in the RRSP, the more interest it earns, the faster it grows.

If you can afford to put a little extra into your RRSP now, it will do a lot more work for you over the next 15 years that it can't do if you wait until your late 30s/early 40s.

Not saying that I don't contribute to my RRSP's rather that I'm not maxing them out on a yearly basis. Usually I contribute about 3,000 per year and find that the 200-250 per month is just about the right amount that let's me contribute while still saving to pay down my debts. It also helps I get a significant bonus every year;)

[YziesGirl]

This is a tough question to just fire out an answer. But, in short that answer is most likely yes, you should max your RRSP's, althought the borrowing may or may not be a line of credit. Part of why I say this is because it depends on the interest rate of the LOC. Another reason to consider an RRSP loan is because you might want to defer payment of this loan until your tax return comes back. (This is assuming that you want to put the return against the loan).

It also depends on which tax bracket you're in. Maxing your RRSP whan you make $20k/year is not as much of a tax break as when you earn $70k/year. While it is true that you will earn compound interest so you are better to invest early, you still earn compound interest in other investments that are not RRSP's.

Lastly, I better make a quick point on the tax-sheltered aspect of the RRSP; you don't pay tax on the growth. This is a big advantage if you are receiving interest income in particular. However if you are willing to pay some tax, but still want to invest early you could consider a Corporate Class Fund. This is a fund that will pay you Capital Gains no matter how the income was derived. Also, you will pay this when you take the money out, not on an annual basis.

Anyway, I know that this is both rambling and probably generates more questions than it answers, but those are my thoughts.

Well said!!! ~nods in COMPLETE agreement~

[Bobblehead]

buy gold. lots of gold.

Million Dollar Coin (http://www.cbc.ca/canada/saskatchewan/story/2007/02/07/coin.html?ref=rss)

[Looger]

Million Dollar Coin (http://www.cbc.ca/canada/saskatchewan/story/2007/02/07/coin.html?ref=rss)
i'm saving up for it as i speak.

ha - no seriously it's british soveriegns, american eagles, and the most pure - canadian maple leafs.

[Resolute 14]

Not saying that I don't contribute to my RRSP's rather that I'm not maxing them out on a yearly basis. Usually I contribute about 3,000 per year and find that the 200-250 per month is just about the right amount that let's me contribute while still saving to pay down my debts. It also helps I get a significant bonus every year;)

Ahh, k. Sounds like you are in a very similar spot to me, except that $250 a month on the RRSP is about as high as I can reasonably go. I would love to put more, but that will have to wait until the end of the summer when I do get my debts eliminated.

[MoneyGuy]

There is no easy answer to this question, and you certainly won't get it here, although there have been some intelligent answers posted. The original poster's question is very complex. It depends on your marginal tax bracket, your debts and other cash-flow issues plus other considerations. If you want to PM me some details, I could offer an opinion. But generally, if you don't have high-interest debts and you're in at least a 32% marginal bracket, I'd recommend making an RRSP contribution.

MoneyGuy
Certified Financial Planner