Q&A: Borrow for RRSPs?

Question: My banker is suggesting that I use my home equity loan to purchase RRSPs. I am 62 and currently am holding approximately $100,000 in RRSPs. My home equity loan is at prime. What do you think? – M.M.

Gordon Pape answers: Whether this is a good idea depends on many factors, which I hope your banker has taken into account in making this recommendation. To begin with, you must of course have adequate contribution room available for this to be workable at all. Check your latest notice of assessment from the Canada Revenue Agency which will provide that information.

Assuming you do have the contribution room, consider your income situation and your tax bracket. To claim a $100,000 deduction in a single tax year, you obviously must have a very high income. But even if you can claim the full amount, how much of a tax refund will it generate? For example, according to Ernst & Young’s Tax Calculator the highest marginal rate for an Ontario resident (46.41%) only cuts in when taxable income reaches $120,900. So for a $100,000 RRSP contribution to generate the highest possible deduction, your taxable income before subtracting the contribution would have to be at least $220,900. If your income is less than that, the contribution will produce a reduced refund. You need to do some math to figure out exactly what the contribution will be worth in your case.

This is important because the refund should be used to immediately pay down the principal on the loan. Interest on RRSP loans is not tax deductible so there is no advantage to carrying the debt for any longer than you have to.

You also need to consider the time frame between now and your planned retirement date. How long will the money earn tax-sheltered income within the plan? Remember that as soon as you start to draw money out, it will be taxed at your marginal rate.

And finally, do you really need to do this? Have you carefully evaluated all your sources of retirement income and compared them to your anticipated expenses? If you have not, then start there. A decision of this magnitude needs to be part of an overall plan, not a one-off.

Photo ©iStockphoto.com/Nicholas Monu

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