Should I borrow to invest?

Q. I have been making regular contributions to my RRSPs all year, however closer to the end of 2008 I got a promotion that came with a large raise.

This is great. However it does mean that I will still have to pay taxes despite the contributions I’ve made. I have been considering borrowing to invest in my RRSPs, but I have never done that before and am not sure if this is the time to start. My mortgage is the only debt that I have. Do you have some advice for me?

— Steve K.

A. The amount of taxes you will have to pay is determined to a great extent, on the amount of income you’ve earned from your employment and other sources.
For instance, your investment income could comprise interest income, dividend income or capital gains. The percentage of taxes you pay on each of these will differ.

Your accountant, or the individual or business preparing your taxes can provide you with a detailed explanation of how the taxes are calculated.

There is a possibility that you may not have to pay additional taxes, provided that your employer throughout the year has deducted enough tax at the source.

The percentage of taxes you pay is tied to your gross income. The higher the income, the higher your tax rate.

Your RRSP contribution will reduce the amount of taxable income because you are allowed to deduct that amount from your income providing there is contribution room.

The amount of contribution room available for this year would be indicated on your Notice of Assessment from the previous year.

That amount is an aggregate of 18% of your previous years earned income and any unused contribution carried forward from prior years.

If you did not utilize the maximum contribution available for the year, it will be carried forward and can be utilized at a later date.

Should you make your maximum RRSP contribution every year, an RRSP loan will not be beneficial because you will not have the contribution room available.

If, however, you have available room, the loan could be beneficial and the amount you contribute will reduce your taxable income, which will eventually reduce the taxes you pay.

Borrowing to invest right now will also give the investment a longer time to grow and compound. This is better for you in the long run.

The investment vehicles you choose will reflect the amount of growth you will acquire.

Having your mortgage as your only debt is very good. This means you have managed to eliminate or stay away from consumer debt.

Should you require an RRSP loan; the qualification will be much easier. Your bank will be of great assistance in determining how much of a loan you are qualified for.

My advice to you is to establish your overall financial goals and your time frame for investing. This will determine how and where you will invest your hard-earned income. Your banker can assist you in making these decisions.

The best time to start is right now. Visit your local bank and ask for a financial advisor who will assist you.

– Chris Alexander, MBA, BBM, PFP, FICB

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