Comments on: Bad RRSP Catch-up Loan, BAD

By: wyseto

wyseto — Fri, 13 Aug 2010 22:34:34 +0000

how do you come up with 42,000 in interest cost at prime?

By: Susan Mladenovich

Susan Mladenovich — Sun, 08 Feb 2009 05:03:47 +0000

Karen, as a consultant, you should change your GST method to the quick method. As a consultant you will have few expenses and the quick method will work out in your favour. Get more information here. If you like, I can send you a simple excel sheet I set up to do the calculation.

http://www.cra-arc.gc.ca/E/pub/gp/rc4058/rc4058-e.html

By: Susan Mladenovich

Susan Mladenovich — Sat, 07 Feb 2009 17:49:45 +0000

Jasmyn, go to http://www.ey.com/GLOBAL/content.nsf/Canada/Tax_-_Calculators_-_2008_Personal_Tax which is Ernst and Young tax calculator. You can plug in your income and see what your tax liability is and also what your bracket is. But remember you also have to add in 2 x the CPP contribution to the amount owing. For 2008, the maximum was $2049 so at the maximum your additional amount would be $4050 (for each of you!). And on that site it gives you 2 figures ~ your average rate and your marginal rate. The average is simply your total tax divided by your total income. The marginal rate is a bit more confusing. Technically it is the tax you pay on the NEXT dollar you make. So if you are in the 31% tax bracket, and you add on another $1000 of income (maybe as an RRSP withdrawal or as a part-time job) you will pay $310 of tax on that income. On the flipside, if you reduce your income (RRSP contribution is the most common example) you would get 31% of the contribution as a tax reduction.

Susan

By: Susan Mladenovich

Susan Mladenovich — Sat, 07 Feb 2009 17:39:40 +0000

For those of you calling for disciplinary action for the advisor, I don’t see that the person did anything illegal or unethical. Was the advice bad? Probably. But there is also a responsibility of the individual to weigh the advice against their own situation. I am against bank advisors in general because they can only recommend their own products and as someone mentioned, they get money on both fronts, the fees from the RRSP and the interest from the loan. And the advisor is on salary so they have no stake in the success of the plan. You may want to contact a fee for service planner where you pay them by the hour. Moneysense magazine has an article about this in the current issue and they have a list of fee based planners on their website.

By: Susan Mladenovich

Susan Mladenovich — Sat, 07 Feb 2009 17:34:18 +0000

Brian, while you are correct based on the theory of these loans, what I always find infuriating about the RRSP catch up commercials is that not everyone will receive a tax refund as a result of the RRSP contribution. While at the end of the day, the figures may be the same, people are so under-educated in all matters financial that they naively trust what the advisor tells them. So the advisor tells them to borrow the money and then they show the person that at x tax bracket, you will get y dollars back. However, they don’t do the real calculations so there may not be a refund to pay back to the loan so the entire calculation by the advisor is flawed.

By: Arron

Arron — Wed, 28 Jan 2009 19:00:21 +0000

What is your view on borrowing to invest if you can spare the money for the loan?

The reason I ask, is so many people say the markets are down, and now is the time to buy. I am a government employee (stable income), and I have religiously bought RRSP’s every month for the last 5 years, with some room left to buy more RRSP’s.

Since I am in a fair tax bracket, with a good return for income tax to invest in a RSP shelter, with current low interest rates, I am good with savings (40% increased mortgage payments, kids schooling, rainy day fund), I can free up a few hundred a month to buy some stocks or funds to invest.

Our only payments is our house, and a mini van we needed for another addition to the family (ever put a couple baby seats in the back of a VW?) at 0% (I know still credit). All other debt will be gone in 3-4 months, all thanks to your jars!

“Historically” I hear this would fit the “buy low” timeframe to “sell high” in the future.

What would be your input for those who can spare a little to invest? Buckle down and save it away or pay house off faster, or borrow while interest rates and stocks/funds are down and roll the dice the stocks/funds will recover in the future?

Or am I just a sucker to all the sales pitches as well to borrow to invest?

By: Sky

Sky — Tue, 27 Jan 2009 17:47:19 +0000

I was wondering if anyone has some options for me about RRSPs.
Currently I work in the public service so I have a pension but I might not for my entire life.
I’m 26 years old. I gross over 80,000/yr so I’m in a high tax bracket.
Should I be contributing to an RRSP and get the tax breaks or does it not make since because of my current pension plan?
I just started a TFSA.

By: Marie

Marie — Sat, 24 Jan 2009 04:43:58 +0000

Jasmyn:
Your Revenue Canada package, schedule 1 (step 2) and equivalent ‘form’ for your province.
For Canada, in 2008:
If you earned (according to ‘line 27/line 260′) between $37885 and $75769 (this is the bracket range), your federal marginal tax rate would be 22%. Do the same for your province (the brackets vary by province and so do the percentages) and add the two percentages. If your province taxes you at 10%, your marginal taxe rate is 32%. Any extra dollar you make is taxed at 32% (on average you pay less).
Next federal bracket: $75769 to $123184. This is taxed at 26% by the federal.
So people want a big income with a low value on ‘line 27/line 260′. One way to do this is pension contributions (if eligible).

By: Jasmyn

Jasmyn — Sat, 24 Jan 2009 02:54:28 +0000

This may be a silly question….

My husband and I are both self employed.

How do I know what “Tax Bracket” we are in?

How many tax brackets are there?

I need to learn some more about this…. google time…

By: Brian Poncelet, CFP

Brian Poncelet, CFP — Fri, 23 Jan 2009 12:45:09 +0000

The question I have (unless I missed it) is what did they do with their tax refund? Since you can’t write off the the interest, a RRSP loan should be paid off with in a year when you use the tax refund (ususally six months). The best is to avoid RRSPs loans in general, but there is a few cases where this makes sense.

The markets can through long periods of little or no return! There is lots of examples of this. Dow Jones 1929 to 1954 zero! After the bear market in the US of 1973 to 1974 (the Dow Jones lost about 50%) the market returned to 1966 levels! Treat RRSPs like a pension that must be there in the future. With GICs at a historic levels you must save much more to meet retirement goals, at 4% it will take 20 years to double your money. There is no easy answers!

In this market believe it or not, the real risk is not the market or housing prices ( the next shoe to drop) it is the job market. The key is to ask your self if I lost my job today, how long will it be to get a new job at about the same pay and benefits? With interest rates at all time lows, poor savings rates, high debts, and two wars, the unemployment picture will get much worse before it gets better. The government can only do so much spending and cutting interest rates…after that this economy will have to find a bottom and rebuild. The problem is many people think it will be a short time, but it could last for years.

regards,

Brian

By: Gail Says...

Gail Says... — Fri, 23 Jan 2009 11:46:52 +0000

Melaniesd, when you claim an RRSP deduction, you lower your taxable income. You may in fact lower it to a new bracket, in which case you’d qualify for more CTC. g

Marie, yes you are right.

Karen & Michelle, Saver Queen is correct. I recommend exactly what you suggest Karen. Figure out how much you would pay on the loan and instead of borrowing and making loan payments, make that amount your monthly RRSP contribution.

By: Melaniesd

Melaniesd — Fri, 23 Jan 2009 04:25:32 +0000

I don’t see a lot of benefit to RRSP Catch Up Loans in the current economy either. I can see the reasoning if one is in the highest tax bracket, but for most of us we will pay more interest than we will earn, so what’s the point?
I think Registered GICs are a faily good option right now. Rates still are not great (3-5%) but atleast your not going to lose your money. You can choose a 3-5 yr term, and hopefully the economy will see some improvement by the time the investment matures.

I think Gail’s advice to Marlaina is wonderful (as usual). Refinance that baby! A fixed pymt makes a huge difference when you have 3 little ones to consider and are trying to make ends meet.

Gail, why would the RRSP contribution create a higher CTC?? Or am I not understanding something?

By: Amber

Amber — Thu, 22 Jan 2009 21:46:20 +0000

We got burned by our FA and we won’t go back. There’s so much conflict of interest in the field. Plus, it didn’t take us long to figure out that she gets paid even if we lose money, so it’s not like she had any real stake in our success.

At the moment I see an even bigger problem with borrowing to invest. I know people who have been margin called, because they had big loans and the asset dropped 50% or more in the recent economic downturn. Then you`re really in trouble.

By: Marie

Marie — Thu, 22 Jan 2009 15:54:03 +0000

Karen:
I agree with Gail about RRSP loans. If you take a loan for $10000, you might get $3500 back in the spring which can be used to repay part of the $10000. That leaves you with $6500 to repay on the loan. Can that $ be repayed within 6 months? After the 6 months, put the equivalent amount directly into RRSP payments for 2009 and don’t forget to fill out your t1213-04 (see one of Gail’s previous post about bad tax return). You have to be good!
Gail:
I am assuming that the t1213-04 is ONLY good for RRSP contributions and NOT loan repayments. If I am correct, that is another advantage.

By: Karen

Karen — Thu, 22 Jan 2009 15:41:37 +0000

Thanks Saver Queen and Michelle – I am really now considering not borrowing for the RRSP and just paying the tax. Fortunately I only consulted for a few months last year, but it’s still almost $65,000 in income . While I do have expenses they won’t offset it enough and I’ll still have to pay a ton of income tax, and fortunately I have most of that money saved.

And considering the almost six-figure loss I took on my RRSP’s in the past few months, I am wary of putting a large amount of money into more RRSP’s anyway. I wish I had put most of that money into paying off my house, as the house is now worth 3 times what we paid for it 12 years ago. It would have been the better investment….ah, hindsight! All the interest I made in that time on my RRSP’s is gone, plus some of my own hard-earned cash and I probably won’t make most of it back before I retire.