When it makes sense to borrow for your RRSP

Loans are a part of life for most Canadians. We take out loans to pay for our cars and our homes, for vacations, furniture and TVs. And, at this time of year, as the deadline for making your 2010 Registered Retirement Savings Plan (RRSP) contribution looms, you may be asking yourself if it makes sense to make one more loan – a loan to increase your RRSP contribution.

The right answer for you depends on the overall shape of your financial life.

Let’s look at the factors you should consider.

Makes sense to borrow …

 Because contributing to your RRSP can pay off in two ways: First, you’ll increase the size of your tax refund; second, you’ll have more tax-deferred money growing inside your retirement plan. But the first rule is this: The loan must fit your budget.

 When you intend to pay off the loan within a year. Remember: Interest on an RRSP loan is not tax-deductible. Consider a series a smaller RRSP loans with payments within your budget. Longer term loans are more suitable for purchasing non-registered investments (when the interest is tax deductible).

 When size of the loan maximizes tax savings. Tax rates rise with income. More tax can often be saved by spreading RRSP deductions over more than one year. While contributions made in one year can be deducted in a future year, it does not always make sense to borrow to make an RRSP contribution if it will take several years to fully utilize the deduction. Again a series of smaller loans may produce the better financial result.

 When you use your tax refund to pay off the loan as quickly as possible.

Or maybe not …

 If you expect to be taxed at, or near, the lowest marginal rate over time. In that case, you won’t get the full tax-reduction benefit of making your maximum RRSP contribution, so the cost of taking out an RRSP loan doesn’t make sense. Instead, you might want to consider contributing to a Tax-free Savings Account (TFSA). The contribution isn’t tax deductible but money and interest inside a TFSA is tax-free and, unlike your RRSP, so are withdrawals, which can be made at any time for any purpose.

 If your increased RRSP refund is already earmarked, in whole or in part, to pay taxes you owe on other income.

 If you are unsure your income level will allow you to meet your RRSP loan obligations, which you will be required to do regardless of your income level and the performance of

your RRSP in the shorter term.

Borrowing to increase your RRSP contribution can be a useful strategy but it also comes with specific risks. Perhaps you can avoid the need to borrow next year through a Pre-Authorized

Contribution (PAC) plan that automatically deducts and saves any amount you want from your regular paycheques.

And, of course, your professional advisor can help you map out the RRSP contribution strategy that fits the overall shape of your financial life.

John Scholl , CLU (Chartered Life Underwriter),CGA, B. Mathematics,

Financial Consultant - Investors Group Financial Services Inc.

& Investors Group Insurances Services Inc.

200 - 24 Queen Street East,

Brampton, Ontario L6V 1A3

Wealth Management & Financial Planning

Phone: (905) 450-2891 X529 Toll Free: 1 (866) 799-2223 x529 Cell (416) 731-3660 Fax: (905) 450-9747

I strive to continually improve my wealth management practice to be worthy of the referrals received. I build my business one introduction at a time, and would consider it a great compliment to be introduced to one of your business associates, friends or family.

2011 Resolutions you can keep

Here’s a resolution you can take to the bank

There’s a resolution revolution is here!

Canadians everywhere have made New Year’s promises to themselves. Big promises (I resolve to quit smoking.) and not-so-big-promises (I resolve to call my aunt more often.). But here’s one promise you should make and never break: “I resolve to be financially secure.” And here are ten simple ways to make that happen:

1. Budget better

Look carefully at your income and expenses -- then set a realistic budget that includes savings.

2. Defeat debt

Keep that high-interest credit card in your pocket – or better yet, cut it into little pieces. Credit card debt is very expensive. Stay on top of your debt by paying off high interest and non-deductible debt first. Do you have mortgage insurance …. Wrong…Get quotes on a personal insurance policy instead.. it’s cheaper and your survivor is the beneficiary, not the bank.

3. Set goals

Make sure your lifestyle expectations match – and don’t exceed – your income. Be sure to set aside enough regularly to reach your goals.

4. Register yourself

Investments held within a Tax-Free Savings Account (TFSA) allows for tax-free income and an RRSP is a terrific tax-deferred savings builder. Start early, make your maximum yearly contributions and you’ll save on tax and enjoy years of tax-free growth in a TFSA and tax-sheltered compound growth in a RRSP.

5. Trim taxes

There are lots of tax deductions and tax credits – be sure you take full advantage of every one that applies to you.

6. Invest efficiently

Interest income is taxed significantly higher than dividends or capital gains – so it’s usually better to hold investments earning interest income in a TFSA or a tax-deferred RRSP and those that earn dividends or attract capital gains in your nonregistered portfolio.

7. Invest in your child’s future

A post-secondary education is expensive but necessary. Help your kids pay for it by starting a tax-deferred, compound growth Registered Education Savings Plan (RESP) eligible investments now!

8. Insure change

Your life is always changing in one way or another – that means your need for income protection and estate planning are changing, too. Be sure your insurance coverage keeps pace.

9. Assist your assets

Good asset allocation is vital to good long-term investment growth. Get steadier returns over time with the right balance of assets from the three asset categories – cash, fixed-income investments and equities.

10. Wrap it all in a plan

The tenth step to financial security is to wrap the other nine steps in a comprehensive financial plan that will get you where you want to go. Achieving financial security – now, that is a resolution you can take to the bank. Your professional advisor can help you get there.

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John Scholl , CLU (Chartered Life Underwriter),CGA, B. Mathematics,

Financial Consultant - Investors Group Financial Services Inc.

& Investors Group Insurances Services Inc.

200 - 24 Queen Street East,

Brampton, Ontario L6V 1A3

Wealth Management & Financial Planning

Phone: (905) 450-2891 X529 Toll Free: 1 (866) 799-2223 x529 Cell (416) 731-3660 Fax: (905) 450-9747

I strive to continually improve my wealth management practice to be worthy of the referrals received. I build my business one introduction at a time, and would consider it a great compliment to be introduced to one of your business associates, friends or family.