Friday, January 30, 2015

RRSP Loans - what are they?

Svitlana Mazepa
UCU Branch Manager, Etobicoke.

For those who want to invest in a retirement plan to reduce taxable income but do not have the money, they can do so by getting a loan to invest in a RRSP.

RRSP loans work well for people who are unable or not disciplined enough to save regularly, but would like to continue to build their retirement plans and save on taxes. If you have accumulated a large room of unused contributions to your retirement plan, an RRSP loan will let you catch up and take advantage of the tax benefits.

The interest rate on RRSP loans is very attractive and is lower than for conventional loans, as financial institutions compete for RRSP investment deposits. Ukrainian Credit Union Limited’s interest rate on RRSP loans is tied to the value of the prime rate (P%). For more information on this, you can always visit our website

RRSP loans are open and you are allowed to redeem them at any time. The loan is paid back in regular monthly installments and is expected to be paid back within one year as borrowers usually invest at the end of each tax year. Loans in larger amounts are also possible, as well as loans for longer periods; 2, 3 or 4 years. There is one thing to keep in mind - be realistic about your budget because the loans will eventually need to be repaid. Basically, anyone can become a candidate for an RRSP loan, as long as you prove your ability to repay the loan.

Ukrainian Credit Union Limited offers life insurance, disability and critical illness insurance in the amount of your RRSP loan if personal issues complicate the loan payback. RRSP loans are a popular retirement planning strategy - tax savings when investing upfront will provide a greater return on your investment due to the accumulation of interest.

For example, on March 1, you take an RRSP loan for $5,000 for a 1-year term at 3.00% and invest it for a 58 month term at 2.75%. At 3.00%, your RRSP loan payments (loan payback and interest) will be about $423 per month over the next 12 months. Until March of next year, you would have to pay a total of $81 in interest. During the same period, your RRSP investment would make $137.50 in interest. Comparing the interest cost of your loan repayment and investment, you would make $56.50 in net profit the first year. By the end of the 58 month period, your net profit would be $620 (because you loan balance goes down with time while your invested balance (GIC) never decreases). This is in addition to tax savings that you get during the tax season.

It is also important to understand your marginal tax rate, to determine the benefits of contributing to your RRSP from a tax refund. It makes sense to contribute the amount to your RRSP that will bring your income down to the next marginal tax bracket.

For example, if you earn $45 thousand a year, you could increase your tax efficiency by making a $5,000 contribution to your RRSP therefore, reducing your income to $40 thousand, i.e. the lower tax bracket.

The main advantage of an RRSP loan is the opportunity to apply tax refunds received to your RRSP loan without any penalties, which will let you repay the loan faster. The Ukrainian Credit Union Limited provides an opportunity to delay your first payment for 90 days, this allows you to get a tax refund to cover part of your loan and then make monthly payments towards the balance of your RRSP loan.

For example, if your refund is approximately $1,300 and you use it just to repay your RRSP loan, then the annual cost of borrowing, as shown in the first example, will have dropped to about $32. Remember that a $5,000 contribution invested in your RRSP will bring additional income that is greater than the value of RRSP loan - a win-win situation.

Moreover, you can borrow $10 thousand right away to invest in your RRSP, if you have unused space for additional RRSP contributions, but only use $5 thousand towards your RRSP therefore, ½ contribution for the 2014 tax year. If your contribution to your RRSP is made in January or February 2015, then you have the opportunity to decide how to apply it, and it becomes possible to make RRSP contributions for both 2014 and 2015, without waiting till the end of the year.

Thus, with these tactics, it makes it possible to save on interest on RRSP loans that are not taxable and reduce taxable income, which will allow your RRSP investment to grow faster.

Talk today with the Ukrainian Credit Union Ukrainian Credit Union about the possibility of funding a contribution to your RRSP. Our skilled professionals will gladly help you on the same day to approve a loan and to contribute to your RRSP plan.

Svitlana Mazepa,
Branch Manager, Etobicoke
Ukrainian Credit Union Limited
416-233-1254 x 225

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