My 2009 contribution limit is $13,116 - and I've contributed somewhere around $1,000 this year. I would like to 'catch up' and use my previous contribution room. For this exercise, I will look at the cost/benefit of borrowing $10,000 and $5,000.
ING (canada)
Currently, ING offers and RRSP loan at 4%. You can pay back this loan in 12 payments over 1 year, or wait 3 months and repay the loan in full in 9 months.
Cost to borrow $10,000
- If I took 12 months to repay the loan, the payments would be $851.50/month. I would pay a total of $217.09 in interest.
- If I choose their 9 month option, payments would be $1,140.85 and I would pay a total of $267.88.
Cost to borrow $5,000
- If I took 12 months to repay the loan, the payments would be $425.75/month. I would pay a total of $108.56 in interest.
- If I choose their 9 month option, payments would be $570.43 and I would pay a total of $133.94.
So that's what it would cost, what would I gain?
I used HSBC's online calculator to determine how much of a tax return I would get on the contribution amount, and how much the monies would be worth at retirement age.
Gain to $10,000 for 2009
- HSBC's calculator guesses that $10,000 deposited now would be worth $14,802, assuming an annual return or 4%. So, $4,802 less the cost to borrow ($217.09) results in a net increase of $4,587.91.
Gain to $5,000 for 2009
- HSBC's calculator guesses that $5,000 deposited now would be worth $7,401, assuming an annual return or 4%. So, $2,401 less the cost to borrow ($108.56) results in a net increase of $2,292.44.
Note: HSBC's calculator assumes that you would pay back the loan with any tax refund you received (which I would do), the ING calculator did not tell me how much (about) the tax refund would be - so that was not calculated into the repayment schedule.
From what I've looked into, it clearly makes financial sense to put more away sooner rather then later for retirement, and if you pay back the loan within 12 months (some of Gail Vaz-Ozlade's financial wisdom) - the cost to borrow is relatively low to the gains.
.. so what am I going to do?
As Jordan and I have some significant other goals this year (debt and house fund) - I don't think I will take out an RRSP loan this year; however, next year - look out! I believe it will be a 2011 goal to max out my retirement savings.
Since you are trying to save for a house and max out your RRSPs, have you looked into whether you can get an RRSP loan for a downpayment? There used to be a program where you could withdraw your RRSP money tax free and use it for a downpayment and then you paid it back at a certain rate, and as long as you met the deadline you didn't have to pay tax on it.
ReplyDeleteI did this in... 2007 I think and I have no regrets. I waited too long to get started with my RRSPs (early 30s) so have to catch up bigtime.
ReplyDeleteAs long as you're able to repay it within a reasonable amount of time, you always come out ahead.
@ Jenn - yes, once the money is deposited into an RRSP, first time home buyers can withdraw the money to use for the purchase of their first home. It has to be paid back within 15 years.
ReplyDelete@ Canadian - I started young, but have only ever deposited a small amount each month - that's one of the reasons i'm considering ramping things up.
Do Not Do this! I did it in early 2008 so that my tax return for 2007 would be around $6,000. This money went to pay for our wedding in 2008. it took us till 2009 October to pay it back. needless to say we lost money due to the market. and we had the interest cost. You'd be better off figuring out how much "loan" you can afford then forcing yourself to just make those "loan" payments directly towards your RRSP.
ReplyDeleteBecause we got the loan we were tapped out and couldn't contribute to our RRSPs for the past 2 years. Seriously just follow the method of pay yourself first and make automatic RRSP payments. There is no sense in borrowing from future contributions to fund the loan now and pay the bank some money for giving you the privilege of contributing now.
Something else I should blog about
regards,
Jason
Hey Jessie. My down payment fund is housed in my RRSPs (I too wanted to 'catch up' on my RRSP contributions and maxed them out back in 2007) and I will definitely be taking advantage of the First Time Home Buyer's Plan when I'm ready to buy in 3-4 years. Like Jenn suggested, maybe this would be a really good option for you too?
ReplyDeleteWhat I've always wondered about these loans is this: if you think you'll have the money to pay $851.50/ month with a total interest payment of $217.09 why wouldn't you just PRETEND you have that bill and pay that into your RRSP's now anyway? Why take out a loan and pay someone else interest you would just add to your RRSP's?
ReplyDeleteThe only way I could see these loans making sense is if your in your early-late 30's which you've clearly stated your not...so why take out these loans at all when you're doing a really good job on your own and for your age?
Jessie, I've been curios about this also, as there is quite a bit of room left in my contributions. I believe the biggest down fall from this is that while you "catch up" for this year, you can not contribute again to them until this loan is paid back. So while this year you max out, gain a large return on your taxes, and can apply that money back to the loan, you still have to pay back that loan before you can contribute. Effectively this stalls your contributions.
ReplyDeleteI'm pretty sure if you look - Jason had posted about this early on in his blog - though perhaps I've just had the privilege of hearing his discussion on this from our Gail Group meetings. (Canadian Savings) I'd look into this a little more with your goals and what not, and truly make sure you've gotten all the information on this before you go for it.
Jessie,
ReplyDeleteIt all depends what you plan to invest the RRSP money in if it will be a great return or not. I personally would never take this loan unless I was assured a larger return in my RRSP.
Look at your near-term goals and consider a TFSA.