RRSP Question

[Slava]

Originally Posted by darklord700

I am a bit confuse about SM now. In the simplest form, it entails borrowing at a lower rate and hope to earn at a higher rate and use the proceed to accelerate the paying down of mortgage. This is par for course and a lot of people are doing it now.

What SM brings new to the table is to increase borrowing everytime you pay down your mortgage's principle amount to turbo charge the process. That's fine as well but I just don't see how this is making the non-deductible mortgage debt tax deductible. Anyone cares to enlighten me? Thanks.

Well lets say you had principle (not tax deductible debt) $100k. You pay down $10k this year, and immediately borrow that back and invest it. That $10k is now tax deductible if its invested in something that can produce dividends/interest and you can write off the interest. The next year you do that same thing and now have $80k in non-tax deductible debt and $20k in tax deductible debt (interest only). Eventually you will carry $100k in fully tax deductible debt and nothing in the non-tax deductible side of things.

Thats a really simplified look, but in essence thats how it operates.

[GP_Matt]

Further to Slava's example, my understanding is that you were always going to invest the $10 000 each year (with cash on hand) but you run it through your mortgage first so that a portion of your mortgage becomes tax deductible.
So worrying about the interest rates is a moot point because in both examples you were going to owe $100 000 to the bank but using SM $10 000 a year becomes tax deductible.

[darklord700]

Thanks Slava and GP. I see if you have $10000 cash to invest every year. Use it to pay down the mortgage with non-deductible interest first. Re-borrow and use it to invest so that the interest is deductible. In this sense, you've converted non-deductible mortgage interest into deductible investment loan interest.

[Calgary14]

Originally Posted by darklord700

Thanks Slava and GP. I see if you have $10000 cash to invest every year. Use it to pay down the mortgage with non-deductible interest first. Re-borrow and use it to invest so that the interest is deductible. In this sense, you've converted non-deductible mortgage interest into deductible investment loan interest.

That's right, and that's essentially the point of the SM

[sa226]

I have a RRSP related question that should fit in this thread.

As I learn, I am very slowly taking over management of my own investments. Now with RBC lowering their commissions, I'm ready to take over my RRSP. I would slowly like to get away from mutual funds so I'm just wondering how monthly contributions work if they are not purchasing mutual funds.

I have bi weekly deductions from my account that goes to purchasing mutual funds within my RRSP. If I go to say index and equities, would those contributions just go into cash in the RRSP? and if they do I assume it still counts as a contribution?

Presumably with fees and commissions, you don't want to be purchasing equities bits at a time, so is it better to just make lumps sum contributions rather than bi weekly?

Thanks.

[darklord700]

Bi weekly contribution forces you to save so I'll definitely keep doing it. I would purchase low cost low volatility mutual funds particularly if your company have a broker with next to no commission bi weekly. I will then sell the MF once a year or in a block of $5K or $10K whatever the case maybe and use the proceed to buy ETFs or stocks inside of my RBC directinvesting RRSP account. This way you only pay one or few trading fees a year.

[Calgary14]

Originally Posted by sa226

I have a RRSP related question that should fit in this thread.

As I learn, I am very slowly taking over management of my own investments. Now with RBC lowering their commissions, I'm ready to take over my RRSP. I would slowly like to get away from mutual funds so I'm just wondering how monthly contributions work if they are not purchasing mutual funds.

I have bi weekly deductions from my account that goes to purchasing mutual funds within my RRSP. If I go to say index and equities, would those contributions just go into cash in the RRSP? and if they do I assume it still counts as a contribution?

Presumably with fees and commissions, you don't want to be purchasing equities bits at a time, so is it better to just make lumps sum contributions rather than bi weekly?

Thanks.

Congrats on taking over control of your portfolio. That's right, if you make contributions towards your RRSP they'll go to cash where you can then decide what to invest in. If you're just starting out I'd pay close attention to fees. My blog has a write up on this. But basically fees can kill your potential returns. I am with questrade and most trades cost around $6. All the big banks have lowered their rates to $9.99 per trade. The more you trade the bigger of an issue this is. There are no fees to make contributions so no worries there but some brokers do have a minimum balance requirement (I think it's $1000 for questrade)

Best of luck on the investing!

[Slava]

Originally Posted by fotze

I've never understood the overcontribution thing. So if my limit this year is $15k, can I contribute $17k? Does the $2k still come off your income?

Well with an over contribution things get murky. Basically if you realize that you over contributed you are going to want to withdraw the excess as soon as possible. You can make application to CRA in this case and have to explain why you over contributed and what you have done to rectify the issue. I haven't gone through that at all, but basically they may agree not to take taxes for that amount (at least that's my understanding of how this could operate) .

In other words you can contribute $15k in your scenario. You *might* be able to contribute the other $2k and get the corresponding tax break, but I couldn't comment on the probability of that working, and there is an over contribution penalty as well. Just donate more to charity or a political party if you need the tax break!

[Slava]

Originally Posted by sa226

I have a RRSP related question that should fit in this thread.

As I learn, I am very slowly taking over management of my own investments. Now with RBC lowering their commissions, I'm ready to take over my RRSP. I would slowly like to get away from mutual funds so I'm just wondering how monthly contributions work if they are not purchasing mutual funds.

I have bi weekly deductions from my account that goes to purchasing mutual funds within my RRSP. If I go to say index and equities, would those contributions just go into cash in the RRSP? and if they do I assume it still counts as a contribution?

Presumably with fees and commissions, you don't want to be purchasing equities bits at a time, so is it better to just make lumps sum contributions rather than bi weekly?

Thanks.

Originally Posted by darklord700

Bi weekly contribution forces you to save so I'll definitely keep doing it. I would purchase low cost low volatility mutual funds particularly if your company have a broker with next to no commission bi weekly. I will then sell the MF once a year or in a block of $5K or $10K whatever the case maybe and use the proceed to buy ETFs or stocks inside of my RBC directinvesting RRSP account. This way you only pay one or few trading fees a year.

I would consider a strategy like darklord has outlined. I have a number of clients where we use exactly that method.