An RRSP line of credit allows you to contribute to your RRSP—and therefore to increase your contributions—despite a temporary cash shortage.
In addition, by using your tax refund to pay off part of your line of credit, you increase your RRSP contributions while keeping the same monthly payments.
The example below illustrates how you can double your RRSP contribution and keep the same monthly payments. All you need to do is use your tax refund to pay off part of your RRSP line of credit.
|Tax Refund Not Used Particulars||Tax Refund Used to Pay Off Line of Credit Particulars|
|Interest rate on loan||6%1||4.5%2|
|Long-Term Accumulated Value|
|Value after 15 years4||$8,277||$15,864|
|Value after 20 years44||$11,609||$22,251|
1Current rate applicable on a loan of less than $5,000. Amortization period of 12 months.
2Current rate applicable (without the reduction of ½ of 1%) on a loan of $5,000 or more. Amortization period of 12 months.
3On the basis of a marginal tax rate of 48% that can vary according to your financial situation.
4On the basis of an annualized return of 7%.
*The interest rate is subject to change without notice.
*Risks of borrowing to invest: Using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines.