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Retirement

Got RRSP room? A loan can mean a bigger pot By Tim Cestnick

Okay, we all make questionable judgment calls sometimes. Consider Barry Cooper, a former narcotics officer in Texas, who arrested more than 800 drug criminals and has released his new DVD Never Get Busted Again. And we remember former chairman of the Canadian Broadcasting Corp., Guy Fournier, who resigned after making comments about the joys of bowel movements.

Some things deserve a little more thinking before acting. This applies to your personal finances as well. Registered retirement savings plan season is upon us, and before you decide to pass on the opportunity to contribute to your plan this year because you simply don't have the cash, consider borrowing to contribute instead. It's a questionable judgment call to delay saving for retirement.

The facts Canadians have been accumulating RRSP contribution room since 1991. It's not uncommon today to meet someone who has well over $50,000 of unused RRSP room. This unused contribution room can be carried forward indefinitely, it becomes increasingly difficult to use up that room as you fail to make RRSP contributions.

And don't forget, tax laws can change. I'm not going to suggest that the government will soon do away with RRSP carry-forwards, but it's not inconceivable that a cap could be placed on the amount of room accumulating if the government ever feels overexposed to potential RRSP deductions in the hands of Canadians. Time is also a critical factor when saving for retirement. The longer your money grows, the more you'll have later. So, it's good sense to use up your RRSP contribution room sooner than later.

The math Let's suppose that you have a little over $20,000 of unused RRSP contribution room, but haven't got the cash to contribute. Also, let's assume you have $400 a month you can devote to your retirement savings. Consider two options: (1) Contribute $400 monthly to your RRSP for the next five years, or (2) take out a fiveyear $20,000 loan to contribute to your RRSP today.

You can generally get an RRSP loan at prime rate - currently 6 per cent - if the term is a year or less and you're a good customer. For longer-term loans - say, five years - you can generally get prime rate if it's a variable-rate loan.

In our example, contributing $400 monthly to your RRSP will provide RRSP assets at the end of five years worth $28,160, assuming an 8-per-cent return annually. Add to this $13,066 in tax savings from the RRSP deductions, and growth on the tax savings, for a total value of $41,226 at the end of five years.

If, instead, you use the $400 to make the payment on a loan, at 6 per cent, from your financial institution, you'd be able to borrow $20,690 to contribute this year to your RRSP. You'd have $30,401 in the RRSP at the end of five years, assuming the same 8-per-cent return, plus $14,106 in tax savings (including the growth on those tax savings), for a total value of $44,507 at the end of five years.

Even though you can't deduct the loan interest, you're better off by $3,281 at the end of five years by borrowing up front rather than contributing each month in my example. It's also easier for most to be disciplined to make monthly loan payments than it is to contribute $400 monthly over a five-year period. The $3,281 benefit of borrowing in this example widens to over $15,000 after a 25-year period. So, speak to your financial institution about loans available.



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