RRSP Strategy to Rid Credit Card Debt
As the final days of RRSP season draw to a close (the RRSP deadline for the first 60 days contribution for the tax year 2010 is midnight March 1, 2011), we wish to outline an RRSP strategy that one can use to rid oneself of credit card debt.
The Strategy
If you have been in the workforce for several years and have a lot of RRSP contribution room, as is the case with most people in Canada, you can avail of what is known as a ‘catch –up’ loan (to catch up on all your available RRSP contribution room) that is payable in 10 years. This loan is available at an interest rate of prime + 2.5% or 5.5% currently (the prime rate is at 3%). Should you shop around, you may find loans at cheaper rates, but I am here using a rate that many institutions offer. If you take an RRSP loan of $27,500 at 5.5%, the monthly payment is $298 (more or less the minimum payment of $300 on your credit cards).
For simplicity, once the loan is approved, the investment breakdown should be as follows:
- $5,000 in an investment product that gives you extra tax credits of 30% such as the Growthworks Commercialization Fund. An investment in this vehicle gives you a tax break of 31.15% +30% = 61.15% of $5,000 or $3,057.50. (Click HERE to read more)
- $22,500 in normal investment products that will give you a tax refund of 31.15% or $7,008.75.
When you file your tax returns in April, you will get a refund of $3,057.50 + $7,008.75 = $10,066.25 or enough to retire your credit card debt of $10,000.
Also remember if you invest in Growthworks Commercialization Fund you will get extra dividends of 25% spread over 3 years or $1,250 as a bonus.
You also, at the same time, will have a nest egg of $27,500 which if invested properly will grow over the years.
For more detailed information and to customize investments to your needs and risk profile please contact Nita or Lachman Balani at lbalani2000@yahoo.ca or 416-902-3580.
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